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spk03: Good afternoon and welcome to NLight's second quarter 2024 earnings conference call. All participants will be in 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 your telephone keypad. 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 Joseph Corso, Chief Financial Officer. Please go ahead.
spk05: 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, some of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filing. 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 in the investor relations section of our website. I will now turn the call over to Scott.
spk04: Thank you, Joe. Second quarter revenue of $50.5 million was at the upper end of our guidance range and grew 13% compared to our first quarter. We had a strong quarter in aerospace and defense, which grew 26% sequentially. Our commercial business, which includes our industrial and microfabrication end markets, increased approximately 1% from the first quarter. Overall gross margins improved to approximately 24% in the second quarter, and products gross margin expanded to approximately 30%, slightly above the top end of our guidance range, we ended the quarter with cash equivalents and investments of $115 million with no debt. Aerospace and defense remains a significant growth opportunity for our business, and we had a strong quarter in both directed energy and laser sensing. In directed energy, we continue to see strong interest in our solutions. Ongoing military operations in the Middle East and Ukraine highlight the increasing need for advanced cost-effective defensive weapons technology. We believe directed energy lasers will be a critical part of the US and foreign allies layered defense strategy, as they offer a significant operating cost advantage compared to traditional kinetic weapons and a deep magazine. During the quarter, we had strong execution on multiple high visibility, strategically important domestic directed energy programs. We continue to make good progress in our healthy tube program, which is a multi-year DoD funded $171 million program to develop a one megawatt laser. with completion expected sometime in 2026. Another critical program for Enlight is the Army's DEM short effort, which is to develop a 50 kilowatt high energy laser for short range air missile defense. On this program, Enlight is responsible for delivering a 50 kilowatt high energy laser to a prime contractor in the first half of 2025. Enlight's vertical integration from semiconductor chip through beam combined laser is a unique and critical differentiator for us in this market. We design, manufacture, and integrate the most critical components of the high energy lasers we deliver to the direct energy market. Our vertically integrated approach to the direct energy market enables us to design and manufacture decisions at the component and subsystem level that optimizes system level performance at an attractive cost point. Moreover, it allows us to address this market at every level of vertical integration. Today, we have generated revenue at nearly every level of vertical integration which makes us an ideal supplier to the US government, other prime contractors, and foreign allies. In the second half of 2024, we expect to finalize the design and begin to manufacture some of the most critical hardware components of our beam combined lasers. We also have strong quarter in laser sensing. As a reminder, laser sensing products use lasers for object detection, measurement, and inspection, and are used in a wide range of lands, sea, air, and space applications. Our laser sensing products include missile guidance, proximity detection, range finding, and countermeasures. And we've been incorporated into several significant and long running defense programs. In the second quarter, we signed a new $25 million contract for an existing long running missile program that incorporates one of our laser sensing products. Enlight has been a long-term supplier to this program, which our customer expects to continue to expand in the coming years. We've also continued to make excellent progress on a handful of classified programs. In one of these programs, we shipped our first EMD, or Engineering and Manufacturing Development Unit. The EMD phase is focused on developing, building, testing, and evaluating solutions to ensure they meet all the operational requirements, and is a precursor to initial low-rate production, or LREP. Our customer's forecast suggests that LREP will start sometime in the latter half of 2025, And we expect this program, as well as other programs like this one, to contribute significantly to our defense products revenue well into the future. Turning to our commercial markets. In microfabrication, we provide high-brightness, high-power semiconductor lasers to many of the world's leading diode pulse solid-state laser vendors, which are used across a wide range of applications. Over the last several quarters, our overall revenue for microfabrication has been in the $10 to $11 million range. which is below the $14 million average quarterly run rate in the prior several years. In the second quarter, while microfabrication was down 5% sequentially, we begin to see signs of renewed demand. During COVID, our customers built significant inventory to mitigate pervasive supply chain challenges. We believe we are finally at the point at which we are seeing more stable inventory levels and an increase in overall broad-based demand for semiconductor lasers. In industrial, we serve three end markets, cutting, welding, and additive manufacturing markets, each which have their own opportunities and risks. In cutting, which represents the largest portion of our industrial business today, the industry and our business continue to shift towards higher power solutions. Our revenue in cutting is comprised primarily of our innovative high-power programmable lasers, which continue to be adopted by our leading customers. We continue to innovate our product offerings to meet our customers' most critical pain points, As we've discussed in prior quarters, Chinese laser suppliers have increased their market share in standard lasers as machine tool customers are adopting a bifurcated strategy using Chinese suppliers. In welding, we are focused on solving our customers' most critical pain points in the EV and battery markets. In the second quarter, we released several new products at the Battery Show in Europe. The first, we call APT, is an automatic parameter tuning software for the process monitoring market. This product reduces the time it takes to implement process monitoring solutions into a welding line. We also released a product called WeldForm, which combines spatial and temporal controls to optimize the melt pool, reducing deleterious defects such as spatter and porosity. Lastly, we released ProcessGuard, which integrates process monitoring capabilities within the laser itself, further simplifying the integration into a factory line, improving reliability, and significantly lowering cost Process Guard is the first product that we've introduced that fully integrates in-light laser technology and plasma process monitoring technology. Although welding remains a small part of our business today, our new product introductions address many of our customers' key pain points and have been well received to date. In additive manufacturing, we work closely with many strategic customers that are focused on driving broader adoption of metal 3D printing technologies to multiple end markets. One of the most critical challenges facing the additive manufacturing industry is to reduce the overall build time of a part as shorter build times directly translate into a lower cost per part produced by that machine. In the second quarter, we announced a collaboration agreement with one of our customers, EOS, an industry leader in additive manufacturing. Enlight and EOS each possess a complementary set of technologies, and we believe that by working together, we can optimize the additive manufacturing light engine. Inlight's programmable beam shaping laser, Corona AFX, offers seven different beam profiles from a single laser, ranging from an 85 micron spot for printing high precision features and contouring smooth surfaces to a 210 micron ring profile for faster printing of bulk material, improved mechanical properties, and reduced soot and spatter. Inlight Corona AFX lasers deliver printing speeds of up to three times faster for steel and aluminum alloys compared to a standard 400-watt laser process. The flexibility and performance gains of Enlight's beam-shaping laser technology is expected to drive significant productivity gains and thus lower cost per part for EOS's metal 3D printing systems. In summary, we've made good progress in multiple defense and commercial end markets, and we continue to expect strong growth in the second half of the year compared with the first half. Moreover, we remain very well positioned for profitable growth in 2025 and beyond. With that, I'll turn the call over to Joe to discuss our second quarter financial results.
spk05: Thank you, Scott. Total revenue in the second quarter of 2024 was $50.5 million, an increase of 13% compared to the prior quarter, but down 5% compared to the second quarter of 2023. Product revenue was $34.5 million, an increase of 17% compared to the prior quarter, but down 13% compared to the second quarter of 2023. Development revenue was $16.1 million, an increase of 6% compared to the prior quarter, and up 17% compared to the second quarter of 2023. In aerospace and defense, second quarter revenue of $27.4 million, which represented 54% of total revenue, increased 26% compared to the prior quarter, and 12% compared to the second quarter of 2023. A&D products revenue grew 5% year over year and 72% quarter over quarter, primarily due to strong execution against the new $25 million contract Scott mentioned earlier. In industrial, second quarter revenue of $12.9 million, which represented 26% of total revenue, increased 8% compared to the prior quarter, but decreased 22% compared to the second quarter of 2023. While sales of programmable lasers into the cutting market increased year over year, sales of non-programmable lasers decreased, and revenue from a key additive customer last year did not repeat during the second quarter. In microfabrication, second quarter revenue of $10.2 million, which represented 20% of total revenue, decreased 5% compared to the prior quarter and 16% compared to the second quarter of 2023. Turning to gross margin. Total gross margin in the second quarter was 24%, which was above the guidance range compared to 17% in the prior quarter and 23% in the second quarter of 2023. Product gross margin was 30% compared to 21% in the prior quarter and 29% in the second quarter of 2023. Product gross margin in the second quarter was positively impacted by favorable sales mix, pricing, and certain contracts completed during the period with higher than expected margins. The positive impact of sales mix and pricing was partially offset by the decrease in production volumes and lower absorption of our fixed manufacturing costs compared to the second quarter last year. As discussed previously, product gross margin is expected to improve as overall production volumes increase relative to our fixed manufacturing costs. Development gross margin was 9%. compared to 9% in the prior quarter and 6% in the second quarter of 2023. The improvement in development gross margin for the second quarter of 2024 compared to the prior year is the result of new development contracts awarded in the second half of 2023. Non-GAAP operating expenses were $18 million in the second quarter of 2024 compared to $17.2 million in the prior quarter and $16.6 million in the second quarter of 2023. The overall increase in non-GAAP operating expenses were driven by higher salaries, research and development projects, incentive compensation, and reserves on accounts receivable. Adjusted EBITDA for the second quarter of 2024 was a loss of $1.6 million compared to a loss of $4.9 million in the prior quarter and approximately break even in the second quarter of 2023. Net loss on a GAAP basis was $11.7 million or 25 cents per diluted share. compared with a GAAP net loss in the prior quarter of $13.8 million, or $0.29 per diluted share, and $8.8 million, or $0.19 per diluted share in the second quarter of 2023. Net loss on a non-GAAP basis was $4.6 million, or $0.10 per diluted share, compared with a non-GAAP net loss in the prior quarter of $8.2 million, or $0.17 per diluted share. and $900,000 or two cents per diluted share in the second quarter of 2023. Turning now to the balance sheet. Our balance sheet remains strong as we ended the second quarter with total cash, cash equivalents, restricted cash and investments of approximately $115 million and no debt. Total cash and investments have increased by $1.7 million since the end of 2023. and cash provided by operating activities year-to-date through the second quarter of 2024 are $7.1 million compared to a use of cash of $3.5 million for the comparable period of 2023. Capital expenditures through the second quarter of 2024 are $3.7 million compared to $1.6 million for the first quarter of 2023. Inventory remained relatively flat during the quarter at approximately $53 million. Days of inventory was 123 days compared to 144 days in the second quarter of 2023. Accounts receivable increased approximately $4.6 million to $32.2 million due to an increase in revenue and the timing of customer payments. As noted last quarter, we received an earlier customer payment of approximately $5 million at the end of the first quarter. Average day sales outstanding for the second quarter of 2023. 24 were 53 days compared to 68 days for the first quarter of 2024 and 70 days for the second quarter of 2023. As noted last quarter, maintaining a strong balance sheet remains a key focus of the company. Spend control coupled with working capital management and CapEx investment has enabled us to maintain a balance sheet that we believe will enable us to achieve our long-term growth objectives. Turning to guidance. Based on the information available today, we expect continued sequential revenue growth for the third quarter of 2024 in the range of $53 to $58 million. The midpoint of approximately $55.5 million includes $39.5 million of product revenue and $16 million of development revenue. Turning to gross margin. Third quarter 2024 products gross margin is expected to be in the range of 28 to 32%. and development gross margin to be approximately 8%, resulting in an overall gross margin range of 22 to 26%. Finally, we expect adjusted EBITDA for the third quarter to be in the range of negative two to positive $1 million. We continue to see breakeven adjusted EBITDA with quarterly revenues in the 55 to $60 million range. With that, I will turn the call over to the operator for questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 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 our roster. The first question today is from Greg Palm with Craig Hallam Capital Group. Please go ahead. Mr. Palm, your line is open on our end. Perhaps it's muted on yours.
spk01: Can you guys hear me now?
spk03: Yes, we can.
spk01: All right, awesome. Sorry about that. Thanks for taking the questions, and congrats, guys, on the progress here. Maybe just a little bit of a... sort of high-level overview of, you know, kind of how you're seeing the lay of the land right now by segment. It sounds like maybe a little bit of visibility in microfab, but what are you seeing across segments and specifically as it relates to, you know, the quarter was, you know, the upside towards the high end of the guidance range. Was that driven by A&D? Is that a fair characterization?
spk04: Yeah, I think you summarized it well, Greg. This is Scott. Yeah, we described a bit of the visibility in micro, but yeah, I think I'd highlight the A&D up 26%, even more significantly up in products. And as we've been talking about, we're seeing traction in not only you know, the new applications in directed energy, but also our existing programs or records. So, yeah, that's certainly one of the highlights from the quarter.
spk01: And, Scott, I think you mentioned in the end of your prepared remarks, you know, profitable growth for fiscal 25. I know in past calls you've been, you know, targeting, you know, year-over-year revenue growth in fiscal 24. Do you still feel comfortable with that? It implies still a pretty big ramp up in Q4 relative to your outlook or your guide in Q3, but just kind of curious to get your thoughts on the sequential progress in the second half.
spk05: Yeah, Greg, this is Joe. I'll take that one. So obviously the midpoint of our guidance is up again relative to the second quarter. And we continue to expect the second half of the year. Not much has changed since we talked a quarter ago. So we do still expect the second half to be higher than the first half. I think what we said about the year. is that we were optimistic that we had an opportunity to grow full year over 2023. Last year, we did about $210 million. You know, plus or minus, we still feel like that's a, you know, reasonably good directional range. That being said, we don't have great visibility to that level of detail in this sort of outside of one quarter forward. So, But generally, nothing has changed. We're still optimistic that, you know, business momentum is picking up going into the second half. Certainly on the defense side, we're seeing a little bit more stabilization on the commercial side, and we're setting ourselves up well for growth in 2025 and beyond.
spk01: Yep. Okay. That's helpful. If I could ask one more on margins. Revenue from laser products looks to be up around 15% sequentially from Q2, but gross margin expected to be really flat or even down slightly at the midpoint. I'm guessing that's just mix-related, but surprised that gross margin guidance wouldn't be a little bit better just given the higher level of revenue contribution.
spk05: Yeah, no, very, very fair point, Greg. So I'll provide a little bit of color in the second quarter, what we had, we did have better mix and we had a couple of, of deals that ended up contributing to margin that was better than we expected. And so, um, you know, probably to the tune of a couple hundred basis points. So if you were to back out those sort of one time-ish, um, bumps that we got in the second quarter, you'd see a more normalized flow through from the second quarter to the midpoint of the third quarter guidance. I think the one thing that we are pleased about is that we've worked you know, pretty hard to keep our manufacturing expenses low and our absorption high as the revenue continues to grow. So, you know, I feel good even absent, you know, that couple hundred basis point tailwind in the second quarter that, you know, we're in a much better spot to continue to grow gross margins as the top line, particularly the product top line expands.
spk01: Understood. Okay, I will leave it there. Thanks, and best of luck.
spk04: Thank you, Greg. Thanks, Greg.
spk03: Again, if you have a question, please press star, then 1. The next question is from Keith Howsam with North Coast Research. Please go ahead.
spk02: Good afternoon, gentlemen. Scott, perhaps provide a little bit more context or color around the EOS announcement in terms of, like, perhaps contribution it will have to you guys, and where do you think it will benefit? Obviously, it's nice to have a second, you know, big partner in that space.
spk04: Good. Keith, I think I got all the questions around the EOS announcement. As you may know, EOS is one of the oldest companies in the additive space and one of the clear leaders in laser additive manufacturing. And, you know, we've been working with them for some time. And, you know, it was an announcement that reflects the strength of our Krona AFX technology to, you know, be a key enabler of the next generation products in this space. And we had a very good conference at the Rapid Conference recently. And, you know, there's a lot of continued progress on integrating our current lasers and developing the roadmap for future lasers into their roadmap. And we're looking forward to announcing more in the coming quarters, notably, you know, the big trade show in additive is in Frankfurt later this year. But yeah, it reflects their understanding of the roadmap to integrate the beam shaping technology that we have.
spk02: So we expect this expanded relationship to be additive, I guess, no pun intended, of course, to the existing relationship, to the existing contribution they currently make to your business.
spk04: Indeed. And it is not a relationship that is exclusive that prevents us from working with others, but it does reflect the integrated work we're doing to support their roadmap.
spk02: Great. Thanks. Appreciate it. If I can get a second one here, you know, your success in China this quarter, I guess, is, you know, a marked difference versus, you know, perhaps other competitors, you know, certainly industrial space and either in the laser space. Is there something unique to the success you're seeing in China, you know, this quarter versus others?
spk05: No, Keith, I mean, you know, overall, overall revenue in, in, in China is sort of it's such a small part of our business, right? We've, We've served the China microfabrication market for a really long time, right? There's a lot of skews and we just saw, you know, slightly better ordering patterns and delivery of revenue this quarter. But on a relatively small, you know, on a small number, you know, there's not a lot of sort of meaningful read through there for us.
spk03: Great.
spk05: Thank you. Appreciate it.
spk03: The next question is from Mark Miller with the Benchmark Company. Please go ahead.
spk00: In terms of your existing backlog, what does the margin profile look like? Does it look like similar to what you've been reporting? You had higher six kilowatt sales in the last quarter, which would be with margins, I assume. I'm just wondering about the backlog. What does it look like from a margin perspective?
spk05: Yeah, thanks, Mark. So certainly on the commercial side, as you can see from the numbers, we're skewing towards higher power sales on the fiber laser, the industrial side. And most of that revenue at this point is really on the programmable fiber laser side. So that's good. And that's additive from a gross margin perspective. And then our microfabrication business, which I think in our prepared marks we talked about, seeing some better demand and customer forecasts. And so that will also benefit the overall margins.
spk00: Thank you.
spk05: Thank you.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Joe Corso for any closing remarks.
spk05: Yeah, thank you, everyone, for joining this afternoon and for your continued interest in Enlight. We look forward to speaking with you during the quarter. Have a great afternoon.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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