nLIGHT, Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

[Operator:]

Good day, and welcome to the nLIGHT Fourth Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Joseph Corso, Vice President, Corporate Development and Investor Relations. Please go ahead, sir.

[Joseph Corso:]

Thank you, and good afternoon, everyone. As the operator said, I am Joe Corso, nLIGHT’s Vice President of Corporate Development and Investor Relations. Scott Keeney, Chief Executive Officer of nLIGHT; and Ran Bareket, Chief Financial Officer, will be the speakers on today’s call. If you have any questions after the call, please direct them to me at [e-mail]. A copy of today’s earnings press release and earnings slide presentation are available on the Investor Relations section of our website at investors.nlight.net. In addition, you can access an archived version of today’s call from our website.

[Scott Keeney:]

Thank you, Joe. Starting on Slide 3. 2020 was a year, I will not forget. We started the year with the hope of a global manufacturing recovery after a difficult 2019. But early in the year, we faced the profound uncertainty of the COVID-19 pandemic. Throughout the year, our global team met the unprecedented challenges of this crisis, and we not only were able to operate safely, but we also ended the year with record revenue. In 2020, we generated $223 million of revenue, which was an increase of 26% over 2019 and in line with our long-term historical compound annual growth rate of 23%. We exited Q4 with 50% growth over Q4 2019. And while our future growth will be subject to global macroeconomic factors, we believe over the long run, that our strategy will enable us to meet or exceed our historical long-term revenue compound annual growth rate of greater than 20%. Turning to Slide 4. Breaking down revenue by end market, I will begin with aerospace and defense. 2020 marked the fourth consecutive year of annual growth in our aerospace and defense business. We grew 2020 revenues 36% on an organic basis, and we grew 102% year-over-year when including the $31.8 million contribution from Nutronics. We have been serving the aerospace and defense market since we founded nLIGHT 2 decades ago, and we view ourselves as a dual-use technology company. We have a long history of supplying mission-critical lasers into long-running programs and our work in directed energy represents an important long-term opportunity.

[Ran Bareket:]

Thank you, Scott, and good afternoon, everyone. Beginning on Slide 9. nLIGHT delivered record organic and inorganic revenue for both full year 2020 and in the fourth quarter. Full year 2020 revenue of $222.8 million was up 26% year-over-year and up 10% when adjusting for the $31.8 million contribution from Nutronics. Total revenue includes $184.8 million of product revenue and $37.9 million of development revenue. Fourth quarter revenue of $65.7 million was above the high end of our outlook, up 53% year-over-year and up 72% on an organic basis when adjusting for the $12.5 million contribution from Nutronics. Total revenue includes $51.7 million of product revenue and $14 million of development revenue. For year 2020, gross margin was 26.6% compared with 29.6% in the full year of 2019. Product gross margin was 30.6% for full year 2020 compared to 29.9% in the full year of 2019. Gross margin was 29.9% in the first quarter compared with 23.3% in the comparable period of 2019. Product gross margin was 35.9% in the fourth quarter compared to 24% in the fourth quarter of 2019. Turning to Slide 10 to provide more detail into our gross margins. It is important to remember that nLIGHT reports its revenue and gross margin in 2 segments

[Scott Keeney:]

Thank you, Ran. We continue to believe in the long-term growth opportunities for semiconductor and fiber lasers and that we are well positioned to outgrow the broader market. We believe that the market growth will be driven by 2 key factors

[Operator:]

And the first question will come from John Marchetti with Stifel.

[John Marchetti:]

Scott take a moment and just talk through maybe -- in the deck, you gave the breakdown by the different power levels. And it looked like high-power was a little bit weaker, where the strength really came through at the low-power end. And if you could just provide a little bit of color around some of the dynamics there, I would appreciate that.

[Scott Keeney:]

Sure, John, it’s Scott. No problem. So yes, we didn’t emphasize the power here because it gets a little more complex. The bottom line is our growth outside of China was swamping the growth in the high power. So as you recall, in China, there’s a tendency to use relatively higher power fiber lasers for cutting; whereas in the global industrial customers outside of China, there’s less focus on the extreme high powers and more focus on the high-performance and notably the programmability that we provide. So as we grow outside of China, that brings that average down. We continue to see, nevertheless, a general expansion in high-power both in China and the rest of the world. It’s just that the relative levels between the 2 are different today.

[John Marchetti:]

Got it. Okay. And then just on the margin side, Ran, if I can. When I think about your guidance for next quarter coming off of the 36% or so that you did non-GAAP and product gross margin in this last quarter. Is that largely a function of mix? How do I think about that step down from the 36% in this most quarter to sort of a midpoint of 32%, given the outlook. Is it volume driven? Is it mix driven? Just curious for some color there?

[Ran Bareket:]

It is -- sure. It is both. It is volume-driven, and it’s a mix driven.

[Operator:]

The next question will come from Greg Palm with Craig-Hallum Capital.

[Greg Palm:]

Nice results. Maybe just starting off, would love to get your kind of thoughts on an order commentary thus far for Q1. I mean, any areas of strength, either by segment or geography that you want to call out?

[Scott Keeney:]

Yes. Thanks, Greg. Scott here. Yes, nothing really calling out right now. We’ve continued to see improvements in microfab. We’ve really seen improvements throughout 2020 in all areas. As we said, the growth through the year, it was accelerating through the year. So we’ve seen that to continue. You always have Q1, the Chinese New Year uncertainty. I think underneath that, as you may know, this year in China, there’s far less travel, which probably will shorten and reduce the impact of Chinese New Year this year, but you never know until you’re on the other side of that. So in general, throughout 2020, we saw acceleration in all of our markets and certainly heading into this year with the promise of a vaccine, certainly anticipating continued strength.

[Greg Palm:]

Okay. Maybe if I could expand upon that last answer I mean, I know you don’t typically give full year guidance. But just in terms of the cadence of how the year might shake out, I mean, going back a few years, I recall sort of Q1 starting off as the low point in building throughout the year. The last 2, I think, have been a little bit unique with all the puts and takes. Maybe just remind us kind of how you’re thinking about seasonal trends this year.

[Scott Keeney:]

Yes. Let me remind you, typically, Q1 in the industrial market is the softest because of Chinese New Year. And then conversely, Q2 tends to be one of the more dramatic growth quarters as we come out of Chinese New Year. And you fold in some other cycles around microfabrication and upgrades and whatnot, it gets a little more complex there. But that’s, to the extent there is a cadence, that’s typically what we’ve seen. You layer in, each segment has different dynamics in aerospace and defense. We’re working on the government budget cycle. So there’s a little bit there. But the first order, I think, it’s that Q1 softer, Q2 stronger because of industrial, it’s probably the most pronounced sort of trend we typically see.

[Operator:]

The next question will come from Jim Ricchiuti with Needham & Company.

[Jim Ricchiuti:]

I just wondering if you could expand a little bit about the strength you’re seeing in industrial outside of China for some of the programmable lasers. Where is that -- maybe you could talk a little bit, Scott, about the key applications where you’re getting traction?

[Scott Keeney:]

Absolutely, Jim. Let’s see a few things. All 3 segments are important. I’ll start with cutting. In cutting, it’s a market that we had smaller share to date. It’s a market where the design in -- it’s a long process to get designed in. And we’ve worked through that over the last really 5 years. And the introduction of our programmable fiber lasers, I think, has been instrumental in our design wins there. So we’ve continued to make progress in that market with key larger customers. I think as we look ahead this year, Jim, I think the big trade show there, at least in the U.S. would be fab tech, and then Europe will follow thereafter. And so there’ll be more information later this year. But we continue to make traction because of our programmability. Similarly, in the welding markets, it’s a very different set of markets, much more fragmented. But I’d say the high level there is to think about the EV from battery through new OEMs, and we’ve got some good design wins there. But much more fragmented markets. There aren’t as big design wins tend not to be as large. And then finally, in additive manufacturing in Q4, we launched our AFX product, which is our programmable fiber laser for that market. And we’ve been working in that space for many years now. I think that product launch has exceeded our expectations. And I think we’re really demonstrating some really pretty fundamental advantages in that market. It’s the smallest of the 3 markets, but it is one that is starting to inflect, where the productivity that we’re seeing is such that attitude is going beyond the really niche applications and into some really important higher volume applications. So continue to make traction there. So really all those markets, that’s a short summary of what we see going on.

[Jim Ricchiuti:]

That’s helpful, Scott. And just on the microfabrication business. Well, let me back up a second. And again, not looking for guidance necessarily beyond Q1. But can you characterize the visibility in the industrial business and microfabrication business, looking out beyond the quarter, just to give us a sense as to what you’re seeing. For instance, are you seeing any pickup as a result of the stronger smartphone cycle in microfabrication? Or is that still a relatively small part of the business?

[Scott Keeney:]

Yes. Good, Jim. So in terms of visibility, just kind of high-level again. In some sense, defense, we have the best visibility, the longest term sort of outlook. Probably industrial is second, although it is much more limited. And then finally, microfabrication is probably the least visibility. We have indications of where things are going. But because that market is so fragmented, and we’re also back in the channel, we focus on the semiconductor laser that goes into other lasers that go into the systems go to that market. It’s more difficult to get a very clear read on what we see. Having said that, we are seeing pickup. And yes, we believe that part of that is driven by 5G new consumer electronics that are using lasers in new ways. But again, it’s a broad based market. And we’ve talked a little bit about medical in the past. That’s an area where we see some continued expansion in that space. And then going forward, we continue to see that market proliferating and opening up quite a large number of new applications.

[Jim Ricchiuti:]

What was that growth that you saw in Q4, that 15% in the microfabrication, was that more or less in line with your expectations?

[Scott Keeney:]

Oh, boy, I think -- in Q4, I think it was a bit better than we were expecting certainly for Q4, but not out of line with our expectations.

[Operator:]

The next question will come from Jed Dorsheimer with Canaccord Genuity.

[Jed Dorsheimer:]

Congrats on the quarter. First one, just on the upstream. I’m curious on the manufacturing, what the wavelength range is across your product offering from a materials perspective, not frequency doubling?

[Scott Keeney:]

Yes. Good, Jed. So we, boy, go down to -- it’s pretty niche at 600-odd nanometers, really niche. And then at the opposite extreme, again, really niche would be just under 2-micron wavelength. So we do have a very broad range of wavelengths that we cover. We do a little bit in the blue, actually. But again, really pretty niche today. The vast majority of what we do is, well, around 1 micron for most of the applications.

[Jed Dorsheimer:]

Got it. And do you think -- the reason that I’m asking is just with the aerospace and defense business, kind of being a focus area and particularly around directed energy, do you see that as being the area in terms of potential expansion on the upstream? Or do you think -- or from a wavelength perspective, it will be tight around that range that you have?

[Scott Keeney:]

Yes. Good. So in -- generally, in defense and particularly in defense -- in directed energy, it’s generally around 1 micron. There are applications for longer wavelengths, the "eye-safe" wavelengths of 1,500 nanometers or so. So there are some applications there, but by and large, the directed energy applications are around 1 micron. You do get to other wavelengths for other applications, and you quickly get into some classified applications. But the volume today and likely in the future is around 1 micron.

[Jed Dorsheimer:]

Got it. And so on the eye-safe, that would require indium phosphide if you’re not using it a doubling? Or is -- are you able to achieve that with some other material?

[Scott Keeney:]

Yes. There’s sort of at least 2 ways to guess there, Jed. One is with indium phosphide semiconductor lasers, and we have been a leader in that space for quite a long time. So we do that directly with our own semiconductor lasers. The other -- one other way to get there is through -- well, through fiber lasers with different rare earths. So thulium is one example of that. erbium would be another. And so you can pump those fiber lasers at, let’s call it, more typical semiconductor laser wavelengths to get those longer wavelengths for these applications.

[Jed Dorsheimer:]

Got it. One last question around here. With some of the changes going on from an industry perspective and the discussion around sort of the benefits of the vertical integration that you have, do you think that there’s going to be -- that there’s a greater need from pull from the end application further downstream or not?

[Scott Keeney:]

Well, let’s see. Obviously, a lot going on and hard to speculate on what outcomes will be. But I think philosophically, what we believe is that there are 2 things that matter at the fundamental level. One is that, that focus matters a lot and no pun intended with lasers. We are solely focused on high-power well, semiconductor base lasers, directly semiconductor lasers and fiber lasers pump by the semiconductor lasers. We’re solely focused on that high-power market. And that means there are a whole set of technologies and indeed sort of business systems that are associated with that focus. That’s all we do. That’s point 1. Point 2 is that we do think that, that vertical integration to do that is important. And that was a core thesis for why we acquired Nutronics was that we believe that the vertical integration was required really to optimize from the chip through the beam combination be control in this case, and to really make sure that there were no sort of breaks in that value chain to optimize across that. And we do believe firmly in really both those principles. And so we’ll see how the industry evolves with what’s going on. But that’s really -- that’s core to what we believe is critical.

[Operator:]

The next question will come from Tom Diffely with D.A. Davidson.

[Tom Diffely:]

First, Ran, with regards to your guidance on the advanced development part of the business being down as well. Is there normal seasonality in the defense business? Or is that just kind of quarterly lumpiness that we’re looking at?

[Ran Bareket:]

No, it’s quarterly lumpiness. There is no seasonality with the defense in general.

[Tom Diffely:]

Okay. Great. And then Scott, kind of similar to what Jim was asking earlier. When you look at your semi-laser business versus your fiber laser business, which one do you think is a bigger component of growth in 2021?

[Scott Keeney:]

For ‘21 and really beyond what we’re focused on is the industrial market for those global players and the vast majority of that is going to be driven by fiber lasers. Similarly, the directed energy application in defense will also be driven by fiber lasers. Important to remember that the semiconductor laser is critical technology in there. So there’s really important product development that we’re working on that supports that, but the end product for those 2 key growth areas are fiber lasers.

[Tom Diffely:]

Okay. And then -- and the final question then related to that, has the margin structure for you between fiber lasers and semi lasers come down?

[Scott Keeney:]

I don’t want to dodge the question because -- but it is very complex. We don’t break out the margin across their -- there are certain fiber laser categories that have much higher margins and there’s some that -- where it’s more commoditized and lower margins. So there’s dispersion across really both those and we’re showing continued improvement in our margins over the past few quarters, and we anticipate to continue to make improvements in product margins. Having said that, our primary focus is on continued growth and adoption in those key markets we’re talking about. And as we’ve talked about before, that product margin is a little less meaningful when it comes to, especially the R&D revenue associated with direct energy right now.

[Tom Diffely:]

Okay. I should ask, any impact from the unexpected snowstorm in the area?

[Scott Keeney:]

Yes, a little bit. Yes, we had one snow and ice here in the Portland region. Luckily, we had power on the Washington side, but a few of our employees on the Portland side are still struggling a little bit. But -- Yes, we’re getting by it.

[Operator:]

The next question will come from Paretosh Misra with Berenberg Capital Markets.

[Paretosh Misra:]

Great. So just curious if you could provide any color on your order book as to what you’re seeing? And how is it versus this time last year?

[Scott Keeney:]

Yes. We don’t really -- we do not break out our bookings. I will say that we did see continued acceleration in our markets throughout the year across all of the markets, and we’re getting good visibility. But it’s always difficult in Q1 with Chinese new years, as I’ve said before, to have much longer term visibility. But I will say this, there’s a strong funnel of opportunities across all of the markets that we serve, and we continue to make traction in all of them.

[Paretosh Misra:]

Got it. And then maybe if I could ask one more. Any sense you could -- you have -- how big is the automotive business for you? I’m guessing it’s all within the industrial. And within that, any thoughts on the electric battery business, like how big is that for you right now?

[Scott Keeney:]

Yes. Good. On a sort of relative basis, our exposure to automotive is relatively modest. We are relatively less penetrated into the automotive exposure. But we do have some exposure. Obviously, there’s some through cutting, but probably there’s more through the welding set of applications. And indeed, as you alluded to, it’s really the EV space that has opened up more opportunities for us. And it goes from the battery manufacturers, notably in Korea, Asia, China, to the new OEMs around the world that are developing new cars, new car parts that are using our lasers for both cutting and for welding. And again, as I mentioned, it’s a pretty fragmented market. I think we have significant room to continue to grow in that space. It’s a market that is expanding. It is opening up a number of new applications for lasers. And it’s a market that our products are well positioned for in a number of those key markets, and we have room to continue to grow.

[Operator:]

Our next question will come from Mark Miller with The Benchmark Company.

[Mark Miller:]

Yes. I was just wondering in terms of the breakout of fiber laser sales, how did they do above 6 kilowatts was that stronger this quarter or weaker?

[Scott Keeney:]

Yes. We did break out, Mark, the detail, you can find it out there. And this quarter, on a relative basis, the above 6-kilowatt was a little lower. I think -- yes. I mean -- sorry, Ran, do you want to jump in the numbers?

[Ran Bareket:]

Yes. Mark, it was, it was 47% this quarter versus 58% in Q3 or 54% in Q2.

[Scott Keeney:]

Yes. So as I said, and we saw that really across the industry, too, it’s interesting. You can note that. And as I mentioned before, Mark, as we grow in the global -- in China, there’s a tendency to use higher power fiber lasers on a relative basis over the rest of the world. As we go into the rest of the world, that average would be dampened a bit. But we do see the continued trend to higher power across the globe.

[Mark Miller:]

In terms of the Chinese market at the lower -- and has that situation stabilized in terms of pricing?

[Scott Keeney:]

We don’t see dramatic changes there. I think we have seen some of the lower power players in that space struggle and hard to know where a few of them have gone. So the level of -- the number of competitors there, certainly, we don’t see that expanding. And we don’t see dramatic changes in that market.

[Mark Miller:]

Just a couple of housekeeping issues. Your tax rate has been jumping around. What should we estimate for 2021?

[Ran Bareket:]

So on a quarterly basis, you should estimate roughly $200,000 to $300,000 expense a quarter.

[Mark Miller:]

Okay. And stock-based compensation, that’s going to be around -- it’s been lower this quarter, it’s going to be around $5 million or $6 million. Is that a good estimate?

[Ran Bareket:]

No. This quarter, it was around $9 million, and that estimate should remain for 2021 as well.

[Mark Miller:]

So, it will be $9 million in the first quarter of this year also?

[Ran Bareket:]

Roughly.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Joseph Corso for any closing remarks. Please go ahead, sir.

[Joseph Corso:]

Yes. We’d like to thank everybody for joining the call today and the interest in nLIGHT, and we look forward to speaking with you all during the quarter. Have a great afternoon.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.