nLIGHT, Inc. (LASR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the nLIGHT Inc. Fourth Quarter and Year-End 2024 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Thursday, February 27, 2025. I would now like to turn the conference over to John Marchetti. Please go ahead.

Thank you, and good afternoon, everyone. I'm John Marchetti, nLIGHT's VP of Corporate Development and the 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 fine. Our results may differ materially from these projected on today's call, and we undertake no obligation to update publicly any forward-looking statements, 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 nLIGHT's Chairman and CEO, Scott Keeney. Scott?

Thank you, John. 2024 was a transformative year for nLIGHT. Revenue from aerospace and defense grew to more than 60% of our total sales by the end of the year and has become the primary growth driver for us going forward. Our aerospace and defense markets grew 20% year-over-year to a record $110 million, and we saw significant growth in both our Advanced Development revenue as well as our defense product sales. In addition, our backlog increased by more than 50% year-over-year in 2024 to a record $167 million as we continue to qualify new opportunities in both directed energy and laser sensing. At nLIGHT, our work in defense remains aligned with the Department of Defense's most critical priorities such as direct to energy and laser sensing. In directed energy, interest in our high-energy laser systems and components continue to grow as ongoing military operations in the Middle East and Ukraine highlight the increasing need for advanced cost-effective defensive weapons technology. For layered defense strategies, directed energy lasers complement traditional kinetic defenses by offering a deep magazine, low cost per engagement and speed of light delivery. Addressing a wide range of targets, including drones, rocket, artillery motors and missiles with directed industry lasers reduces the reliance on costly low inventory traditional weapons against low-cost threats, thereby rebalancing the economics of protecting key assets. NLIGHT has led the world in the development of high-power lasers for directed energy for over 2 decades and recently demonstrated a 300-kilowatt high-brightness laser. nLIGHT lasers are built in the U.S., incorporating patented and proprietary technologies across the company's entire technology stack from semiconductor lasers to high-power fiber amplifiers, beam combined lasers and beam directors. We have generated revenue at nearly every level of vertical integration in the directed energy market, and we have established ourselves as the most comprehensive supplier to the U.S. government, other prime contractors and foreign allies. We are making significant progress on our HELSI-2 program, which as a reminder, is a multiyear DoD-funded $171 million program to develop a 1-megawatt high-energy laser with a completion date expected in 2026. We began shipping components towards this program in the second half of 2024, and we expect to accelerate those shipments throughout 2025. Another critical directed energy program for nLIGHT is the Army's DE M-SHORAD effort, which is to develop a 50-kilowatt high-energy laser for short-range air defense. On this program, nLIGHT is delivering a 50-kilowatt high-energy laser to a prime contractor. And during the second half of 2024, we finalized the design and delivered the majority of the most critical hardware components of this beam combined laser. The success we have achieved to date in both of these key programs reinforces the importance of our vertical integration strategy in the directed energy market where we leverage our entire technology stack to deliver the highest demonstrated performance and most cost effective high-energy lasers. Last month, the President signed an executive order to build the Iron Dome for America. The Executive Order directs implementation of a next-generation missile defense shield for the United States against ballistic, hypersonic, advanced cruise missiles and other next-generation aerial attacks. Within the executive order, non-kinetic missile defense capabilities were specifically highlighted as an area for development. With a mandate to build these systems in the United States, we believe we are uniquely positioned to benefit from this effort over the coming years. And it's not just the U.S. Military, which sees the potential benefits of directed energy systems. In October of last year, Israel's Ministry of Defense announced that it would spend over $500 million towards Iron Beam, an Israeli ground-based laser system for defense against aerial threats, including rockets, mortars, drones and missiles, with the delivery of the initial units of the weapon system scheduled in this calendar year. Israel's announcement is another example of how directed energy is increasingly being viewed as a critical part of a layered defense strategy. We also continue to gain momentum in our laser sensing markets in 2024. Our laser sensing products include missile guidance, proximity detection, range finding and countermeasures and have been incorporated into several significant and long-running defense programs, all of which remain key defense parties under the current administration. During 2024, we announced a new $25 million contract from an existing long-running missile program, and we began shipping against this award in the third quarter of last year. We've also continued to make excellent progress in a handful of classified programs. In one of these, we shipped our first EMD or Engineering and Manufacturing Development units. The EMD phase is focused on building, testing and qualifying the solutions to ensure it meets all operational requirements. Our customers' forecast suggests that the low rate initial production should start for this program in the latter half of 2025. Our growing pipeline of both directed energy programs and laser sensing opportunities gives us confidence that we can grow our revenue in aerospace and defense by at least 25% in 2025. Turning to our commercial markets. 2024 was another challenging year for our commercial markets, with revenue down 25% year-over-year as a growing number of our customers face increasing competition from China and global manufacturing demand remained muted. And with these headwinds expected to continue in 2025, I wanted to spend a few minutes on the strategic importance of these legacy markets for the future success of nLIGHT. First, let me start with our semiconductor fab. As many of you know, we design and manufacture our own gallium arsenide chips here in Vancouver, Washington. These chips or laser diodes are the foundational building blocks for nearly all the work we do in lasers. With over 25 years of chip-level innovation, decisions made at this level enable us to lead the world in demonstrated power for high-energy lasers for directed energy and other defense applications. Second, if the commercial application of these lasers that have enabled us to bring key learnings into our defense work, ensuring that our lasers are not only the highest performing, but also the most cost-effective. Many of the competitors we see today in our defense markets are defense contractors, not laser manufacturers. We believe that it is the application of our technology at scale with thousands of high-power laser systems shipped to customers that truly differentiates our high-energy lasers for defense. We have a demonstrated track record of designing and manufacturing these systems, of delivering cost-effective field maintenance programs to keep these lasers operational at optimal levels and a history of commercial innovation, both in terms of performance and cost that we believe will be increasingly important to the success of these systems in the future. Lastly, we see opportunities for growth, particularly longer term in metal additive manufacturing. Increasingly, we are seeing growing interest from the aerospace and defense markets as they look to metal additive manufacturing to accelerate prototyping time lines and build resiliency into their supply chains with domestic capabilities for existing and future programs. In the emerging market for hypersonics, another key focus area for the Department of Defense, we see an expanding list of new companies and new programs, leveraging metal additive manufacturing to design, prototype and manufacture next-generation munitions and unmanned aerial vehicles. We believe that one of the most critical challenges facing the additive manufacturing industry is to reduce the overall build time and overall cost per part. To address this industry-wide pain point, nLIGHT continues to introduce new products and increase the printing speed and flexibility of additive manufacturing tools. Our Corona AFX dynamic beam shaping technology allows for high resolution printing for fine detailed features while also offering faster build rates utilizing stable ring-mode power, making it the most versatile and efficient laser available to the additive manufacturing market. As these and other additive manufacturing opportunities mature over the next several years, we expect that our commercial lasers associated with this market will return to growth. In summary, 2024 was an important year for nLIGHT as revenue from Aerospace and Defense grew to more than 60% of our total sales by the end of the year and established itself as the primary growth driver for our business going forward. We completed the last leg of our manufacturing transition out of China and now are operationally set to support the growth expected in our defense business. As we look forward to 2025, I expect it to be a year of growth for nLIGHT. While many of the headwinds in our commercial markets are expected to persist throughout the year, I'm optimistic about growth in aerospace and defense that it's well aligned with the key priorities for the Department of Defense. With good visibility, a large and growing backlog and a solid balance sheet, I expect that the significant progress that we made last year to accelerate, with revenue growth of 25% or more expected in aerospace and defense markets as many of the programs previously announced continued to ramp. I'd like to thank all of the nLIGHT employees for their hard work and execution over the past year. They continue to deliver great results for our customers and are the critical driver of building a successful and enduring the high-energy laser technology company. With that, I'll turn the call over to Joe to discuss our fourth quarter and full year financial results.

Thank you, Scott. Turning to the fourth quarter and full year financial results. Total revenue in the fourth quarter was $47.4 million, a decrease of 9% compared to $51.9 million in the fourth quarter of 2023. Product revenue for the fourth quarter was $31.7 million compared to $37.9 million in the fourth quarter of 2023. The decrease in product revenue was partially offset by a 12% year-over-year increase in development revenue to $15.7 million. As noted in our January preannouncement, the shortfall in fourth quarter revenue relative to the midpoint of guidance was primarily due to a continued weakness in our industrial markets, execution challenges in microfabrication and the timing of delivery of a limited number of defense products. For the year, total revenue was $198.5 million, a decrease of 5% compared to $209.9 million in 2023 due to declines in our microfabrication and industrial markets. These declines were partially offset by strong growth in our aerospace and defense markets. Revenue from the aerospace and defense market increased 20% year-over-year to a record $109.5 million. A&D products revenue increased by 25% year-over-year to $47.7 million and A&D development revenue increased by 16% year-over-year to $51.9 million. Total gross margin in the fourth quarter was 2% compared to 19% in the fourth quarter of 2023. Fourth quarter total gross margin was negatively impacted by nonroutine charges of approximately $6 million related primarily to inventory reserves on products for the industrial market. Adjusting for these nonroutine charges, total gross margin for the fourth quarter would have been approximately 15%, which is still slightly below the bottom end of guidance due to lower-than-expected product sales and production volumes. Product gross margin in the fourth quarter was 1% compared to 22% in the fourth quarter of 2023. Adjusting for nonroutine charges, product gross margin would have been approximately 20%. Development gross margin was 6% in the fourth quarter compared to 9% in the fourth quarter of 2023. For the year, total gross margin was 17% compared to 22% in 2023. Product gross margin was 21% in 2024 compared to 27% in 2023. The decrease in product gross margins in 2024 compared to 2023 was driven by the impact of lower sales and production volumes on fixed manufacturing costs due to the decrease in overall customer demand and inventory charges in the fourth quarter of 2024 previously discussed, offset partially by positive changes in sales mix. Development gross margin was 7% in both years. Non-GAAP operating expenses were $17.7 million for the fourth quarter compared to $17.4 million in the fourth quarter of 2023. GAAP operating expenses in the fourth quarter were $27.6 million and included restructuring charges of $4.3 million, primarily related to severance costs from our decision to shut down manufacturing operations in China. Full year 2024 non-GAAP operating expenses were $71.2 million compared to $67.2 million in 2023. The year-over-year increase in non-GAAP operating expenses were driven by increases in employee compensation costs spending on research and development projects and approximately $2.3 million of bad debt charges for customers in the industrial market. We continually review the appropriate level of operating expenses for our business, and we believe our current level of OpEx is sufficient to support our long-term growth objectives. Adjusted EBITDA for the fourth quarter was a loss of $11.3 million, including the nonroutine charges discussed previously compared to $3.3 million in the fourth quarter of 2023. GAAP net loss for the fourth quarter was $25 million or $0.51 per share compared to a net loss of $13.2 million or $0.28 per share for the fourth quarter of 2023. Turning now to the balance sheet. We ended 2024 with a total cash, cash even restricted cash and investments of $100.9 million and no debt compared to $113.1 million at the end of 2023. Inventory decreased to $40.8 million at the end of 2024 compared to $52.1 million at the end of 2023. Turning now to guidance. Before discussing Q1 guidance, I'd like to reiterate that nLIGHT is planning for meaningful growth in our A&D markets in 2025. Supporting our growth expectations is approximately $399 million of funded and unfunded backlog as of December 31, 2024. Funded backlog of $167 million is 55% higher than it was at December 31, 2023, and we are working under contract with over $230 million of incremental aggregate value. Although execution challenges remain, given the highly technical nature of our defense work and while we can't control the specific timing of government programs, we are exceptionally well aligned with many of the DoD's highest priority programs that we expect to support growth in 2025 and beyond. With respect to the first quarter of 2025, based on the information available today, we expect revenue to be in the range of $45 million to $51 million. The midpoint of $48 million includes approximately $33 million of product revenue and $15 million of development revenue. Turning to gross margin. First quarter 2025, the product gross margin is expected to be in the range of 16% to 20% and development gross margin to be approximately 8%, resulting in a total gross margin range of 13% to 17%. As we mentioned previously, as a vertically integrated manufacturing business, gross margin is largely dependent on production volumes and the absorption of fixed manufacturing costs. Finally, we expect adjusted EBITDA for the first quarter of 2025 to be in the range of approximately negative $6 million to negative $3 million. And we continue to expect breakeven adjusted EBITDA with quarterly revenue in the $55 million to $60 million range. With that, I will turn the call over to the operator for questions.

[Operator Instructions] We have your first question comes from Jim with Needham & Company.

A couple of questions. First, just given the backlog, you obviously have a fairly strong line of sight on the A&D business. How should we think about the revenues over the course of the year, particularly in light of some of the challenges you experienced in Q4, which I'm assuming is behind you with respect to fulfilling some of the shipments with key customers?

Yes. Jim, thanks for the question. So I think that in Scott's script, we talked about having confidence that our A&D markets should be up at least 25% over 2023. I think as we've talked about in the past, the quarterly trajectory of that sometimes is a little bit more difficult to predict, but I think it's a reasonable approach to think as we move through the year, revenue from the A&D market will increase. As we talked about on our preannouncement, there are timing challenges, right, around delivering some of those products. But as we highlighted with the backlog, we don't have very much in terms of go get for 2025. So we feel really good about the way that the year is starting to look.

Got it. And I apologize, I joined the call a little bit late, and you may have provided some update, but where do you stand with the handoff to the contract manufacturing partner in Thailand? I guess what I'm asking is if the demand doesn't change in this area of the business, does having that behind you -- what does that do for gross margins in that part of the business, I guess, is what I'm asking?

Yes. I think, Jim, frankly, there will be some improvement in gross margins. Obviously, as we are working through the execution and the improvement and the transition back to a more full capacity, that's got a little bit of an impact on our gross margin. So there will be some lift in gross margins due to that. But I think what will be the bigger driver for gross margins is really just ramping volumes, right? That has been our story for quite some time with product revenues at these current levels. It's just -- it's difficult to have meaningful margin expansion. But as we work through those issues, it will be -- margins will improve for sure.

Your next question comes from Greg Palm with Craig-Hallum Capital Group.

Can we start with just a bit more in terms of the assumptions that's packed into the Q1 guide? So for instance, does it assume that kind of $4 million shortfall from Q4 is fully recognized in Q1. Are there any other inventory reserves that need to be taken in Q1? Just a little bit more color on kind of how you're thinking about that specifically.

Sure, Greg. So no, the guide in Q1 to the midpoint doesn't assume that we've had a lot of that Q4 revenue rolls over into Q1. It's more natural in terms of the revenue demand and growth that we'll see in the first quarter. I think trajectory wise, as we said earlier in the call, we expect the defense business to grow and the commercial business to decline in the first quarter sequentially. In terms of gross margin, we don't -- we're not anticipating any unusual or nonrecurring-type cost of goods issues that we saw in the fourth quarter. So it's getting back to a more normalized operating environment from a gross margin perspective.

Okay. So I think what I just heard was versus the $17 million in commercial revenue for Q4, you're expecting that to actually decline sequentially in Q1?

Yes, I don't think we're going to have -- I mean we're not guiding specifically by market, but directionally, yes, we don't really see much growth in the commercial side of the business. And so as we think about that sequential movement of revenue we do see a little bit of softening of the commercial revenue in the first quarter.

Okay. I mean that implies a pretty soft run rate, I mean, how should we think about, I mean, knowing that you didn't guide for that for the year. But how should we think about the sort of the remainder of the year?

Yes. I think in the commercial business, as we've talked about, we don't have the same level of visibility that we do in the defense business. So some of it is just trying to read the tea leaves and do our best to understand our customers' forecast and the broader macro demand environment. As we think about the overall year, what we are planning for with some range of error bars is somewhere in the 15% to 20% down on a calendar '24 versus a calendar 2023. Now could it be better than that? Yes, absolutely. Could it be a little worse than that? It could. But I think what you should take away from this comment is we don't expect the commercial business in 2024 to drive any level of outsized growth, right? I mean we're managing it as best as we can, but the growth in 2024 is really going to come from the A&D business.

Yes. Okay. That makes sense. And then just last one on maybe industrial, specifically. I'm curious if tariff implementation occurs at maybe a broader scale? I mean, is that enough to stem some of the negative Chinese competitive impacts that have maybe evolved here over the last few quarters? I'm just curious to get your thoughts around kind of overall pricing for that and maybe overall competition relative to where we were at this point last year?

Yes, Greg. I mean it's hard to predict where things are going to land with respect to tariffs, but certainly directionally, everything else being equal that could be beneficial. It's not something that we are expecting and relying on. But yes, certainly, directionally, that could be beneficial. It just depends on the particulars of how they're implemented.

Next question comes from Troy Jensen with Cantor Fitzgerald.

Maybe a couple for you, Joe. Just first of all, the funded backlog, can you confirm it, was $167 million? I think it was up 55% year-over-year, but...

Yes, that's right, $167 million.

And then is it all shippable in 2025?

It's all shippable in 2025 and 2026. So that's funded backlog over the next 2 years.

Perfect. All right. And then I just want to go through it again, you said there's these opportunities you're working on in the pipeline is $230 million of total defense type opportunities that are in the pipeline? Could you go over that one, please?

Yes. No, that's correct. So what we've got is we are working on contracts that, in aggregate, have about $399 million of total value, right? Now $167 million of that $399 million is firm funded backlog that we expect to execute during calendar '25 and calendar '26. The balance of that $232 million, that is really some funded backlog that will roll into 2027 as well as a big portion. The bigger portion, though, is the portions of those contracts that are not yet funded. We expect a big piece of that to be funded, but we want to be very clear around what is funded and what is not funded. But in either case, we feel very good about what we're working against.

And Troy, just to build on that. You mentioned pipeline, what Joe is describing is funded and unfunded contracts. Pipeline goes beyond that. There are opportunities that go well beyond what we're talking about here.

Right. I'd Imagine. And then the Trump initiative that you highlighted, that would be new in the pipeline, too, right?

Exactly right. That's one example of many.

Okay, Perfect. And then my last question, just one more for Joe. Just a big restructuring charge this quarter. Can you just talk about OpEx? Absolutely, do you think it's going to tee to decline sequentially for a couple of quarters, given the restructuring you've been doing? Or do we assume that March quarter OpEx is greater than the December quarter?

Yes. And I think that the current OpEx levels are about where we expect to be, Troy. I think it's important to recourse, we don't believe that we need to meaningfully increase our operating expenses even over the next couple of years, right? Now there will be quarterly fluctuations as some quarters have more materials than other quarters. But when you think about the number of FTEs that are in our plan in the first quarter, no real difference than where we are post restructuring, right? So I don't see the OpEx moving all that much, right? That Q1 '25 implied number is reasonable.

Next question comes from Rodney McFall with North Coast Research.

I'm on today for Keith Housum. So I'm just curious, how much longer do you guys think it will take for you guys to get some of the kinks worked out as far as manufacturing amps for the A&D business? And just curious if you're seeing any further uptake in those products from your customers?

Good. Very good question. The amps part of the business is a very important part of the business. We have leading performance in the fiber amplifiers that go into the directed energy systems both in the U.S. and with our allies. There are current products that are released to manufacturing that those kinks you referred to, there's -- we're well into manufacturing with a more mature product there. The products that we are using for the megawatt program is a next-generation product that is being transferred to manufacturing right now, and we're making progress there. We were just below what we had expected in the quarter there, but that is proceeding well, and we do see opportunities to expand that business significantly.

Got it. Got it. And then I'm just kind of curious, I know you mentioned the executive order signed by President Trump recently to bring Iron Dome to U.S. I know it's very early in that process. But I'm just kind of curious if you have any ideas of like the scale of that project and maybe what it can mean for nLIGHT? Just any sort of color there would be would be helpful, and maybe it's like a time line.

Yes, it's a fairly broad-based set of initiatives for defense, both kinetic and non-kinetic applications. The funding numbers we've seen are very, very big. And there's a broad range of different approaches that are being considered. We are actively engaged with a number of them right now. The time frame, while there are some of the programs that go out further, there is an emphasis on the near term. And so there'll be more information in the coming months on that. But it is large. It is separate from some of the cuts that are being discussed. It is a clear priority and key players in DoD right now are working through how to prioritize that, and we're deeply engaged there.

[Operator Instructions] Your next question comes from Mark Miller with Benchmark.

So what we've heard today, it sounds like that the current administration, there's really been no change in your existing programs and you have this opportunity with the Iron Dome. Is that a good summary?

Well put, Mark. I think certainly, there's a lot of uncertainty around a whole host of factors. And certainly, we need to be thoughtful about that. But I think directionally, in our business, our exposure is in areas where there is significant continuation and new efforts underway.

Okay. In terms of our existing backlog, I assume there's a high percentage of that is defense. Can you give us an estimate of what percent of that is aerospace and defense related? And also, if you can comment on the margin profile in your backlog?

Yes. The vast majority of it is A&D-related, Mark. And I would tell you that generally, the backlog on the product side carries very nice products gross margin. Some of that backlog, obviously, is in the development side of the business, and that is pretty typical for us in that kind of mid- to high single digits margin that we've experienced over the last couple of years.

Okay. If you would get equipment orders for the Stryker program, when do you think that could come? Could that be second half of next year?

Yes. I do think that the opportunities will be contingent upon the performance of our initial deliveries. But yes, I think there are opportunities in the next 2 years, for sure.

There are no further questions. Please continue.

So thanks, everybody, for joining us this afternoon. And I did want to highlight that we will be participating in a couple of investor conferences over the next few weeks. We'll be at the 46th Annual Raymond James Institutional Investor Conference on Tuesday, March 4, and we'll be participating at the Cantor Fitzgerald Global Technology Conference on Wednesday, March 12. So we look forward to catching up with a lot of you over the next couple of weeks. Thank you very much.

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