Good afternoon and welcome to the nLIGHT Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there’ll be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jason Willey, nLIGHT’s Senior Director of Investor Relations and Corporate Development. Please go ahead.

Thank you and good afternoon, everyone. As the operator said, I am Jason Willey, nLIGHT's Senior Director of Investor Relations and Corporate Development. 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 360-567-4890, or jason.willey@nlight.net. A copy of today's earnings press release is available on our website at www.nlight.net. In addition, you can access an archived version of today's call from our website. In today's call, our discussion will contain forward-looking statements, including statements about financial projections, future business growth, trends and related factors, prospects for expanding and penetrating addressable markets, and our strategic focus and objectives. 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. We undertake no obligation to update publicly any forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these non-GAAP financial measures against the most directly-comparable GAAP financial measures in our earnings release, which can be found on the Investor Relations section of our website. I would also like to note that members of nLIGHT’s senior management will be attending several investor conferences in the coming weeks including the Raymond James Institutional Investor Conference in Orlando on March fourth and the Susquehanna Technology Conference on March 12th in New York. I will now turn the call over to Scott for a brief comment before Ran goes through the financials and outlook. Scott will then discuss trends at each of our end markets. We will then be glad to take your questions.

Thank you Jason and good afternoon everyone. 2018 was a transformative year for nLIGHT. In April we completed our initial public offering which not only solidified our financial position but also raised nLIGHT's profile with customers across the globe. In 2018 we grew revenue by 38%, improved gross margin by 300 basis points, and expanded EBITDA by over 60%. We also made significant additions to our product portfolio which greatly expanded our ability to serve customers in each of our end markets. We started nLIGHT almost two decades ago with the vision that rapid evolution in semiconductor laser technology would open up new market opportunities. With significant innovation across our product portfolio we are even more enthusiastic about this vision today. Before providing an update on each of our end markets I will turn the call over to Ran for details on our financial performance in the fourth quarter and the full year.

Thank you Scott and good afternoon everyone. 2018 was a record year for nLIGHT. Revenues reached 191 million up 38% year-over-year. Gross margin improved by over 300 basis points to 35% and we delivered adjusted EBITDA of 30 million or 16% of revenues. We saw strong growth across each of our end market and geographies regions during 2018 and we believe we continue to grow faster than the industry in each of the core markets we serve. Focusing on results in the fourth quarter, revenues were 46.2 million up 23% year-over-year. During Q4 sales to industrial end markets were 17 million representing 38% of total revenue and up 7.1% year-over-year. Sales to micro fabrication end markets were 19 million or 41% of total revenues and up 26% year-over-year. Aerospace and defense sales were 9.6 million or 21% of total revenues and grew 60% compared with the fourth quarter of 2017. On geographic basis sales to China were 15 million in the fourth quarter of 2018 or 32% of total revenues, up 5% compared with Q4 2017. Sales in North America was 18 million representing 39% of total revenues and growing 22% year-over-year. Rest of the world sales were 13 million up 54% percent compared with the fourth quarter of 2017 and was 29% of total revenues. Gross margin was 35.8% in the fourth quarter an improvement of 300 basis points year-over-year. The improvement was driven by higher volume and favorable end markets mix partially offset by more aggressive price activity in the Chinese industrial end market. The Chinese industrial end market represented less than 20% of the overall revenues during the fourth quarter and approximately 25% of total revenue for the full year of 2018. The impact of recently implemented U.S. China tariff on Q4 2018 gross margin was approximately…

Thank you Ran, 2018 was a continuation of the strong business momentum we experienced over the past five years. Our outperformance relative to the overall high power laser industry is not tied to one end market or geographic region. The foundation of our core semiconductor laser technology and our continued innovation in fiber lasers has driven outperformance in the industrial, micro fabrication, and aerospace and defense markets. But we are not immune to short-term market fluctuations, we are focused on driving the penetration of our products across existing and new customers in each of these three end markets. In the industrial market we dramatically expanded our fiber laser offerings in 2018 which enabled us to grow revenue 46% for the full year and 7% year-over-year in the fourth quarter. As we enter 2019 the availability of an expanded portfolio of high power fiber lasers and Corona opens access to new customers and new segments of the market. We are excited today to announce that we have shipped our first 12 KW fiber lasers. Our new higher power fiber lasers provide not only improved power but come at a reduced cost structure as we integrate our latest semiconductor lasers in a smaller form factor. We can see increasing interest from customers in high powered fiber laser solutions and we expect volumes for our portfolio of high power offerings to steadily ramp in 2019. During Q4 approximately 27% of our fiber laser sales were at 6 KW and above which is up 90% from the comparable period in 2017. Sales in the 2 KW to 5 KW range were over 50% of fiber laser sales in Q4 2018 up 20% from Q4 2017 levels. In September 2018 we officially launched Corona our all fiber programmable fiber laser. Corona offers customers an approach…

[Operator Instructions]. The first question comes from Patrick Ho with Stifel. Please go ahead.

Thank you very much and congrats for a very nice 2018. Scott maybe first off on the industrial side of things, given lot of the changing dynamics in the market environment today and some of the growth prospects you're looking for with your new products, you talked about how adoption usually takes about a year from one product server is introduced. As you look forward with the new products in second half of 2019 do you believe they'll be driven by the transition from the existing customers taking the new products or do you see a bump up or step up in new customers who are adopting the new products?

Okay, thanks Patrick. Certainly seeing growth from current customers but more substantial growth we believe will come from new customers around the globe. We continue to expand our sales in all geographies and all the sectors however we are seeing more rapid growth outside of China. We saw that in 2018 and we expect that to continue in 2019.

Great and then maybe as my follow-up question for Ran, in terms of I think gross margins are understood with some of the market dynamics today and some of the pressures you're facing but as you look at the operating expense line which you guys have managed very well over the past year or so, how do you look at OPEX and especially R&D for your next generation of new products, how do you expect that I guess line item to progress as 2019 goes on and when I'm looking at it as revenues grow do you expect the percentage to stay the same and OPEX moving up on an absolute dollar basis or is there an opportunity for OPEX as a percentage to come down as revenues ramp?

Sure, so in terms of OPEX if you recall from day one when we did the, when we put the midterm model we talked about that we are aiming to spend roughly 10% from revenue in R&D and roughly 12% from revenue on SG&A. However as we have -- this is for them call it mid long term. However, when we have an opportunity here and there to invest more in R&D we will do so and it could be that we will invest in the near future slightly higher than 10%. Definitely this year at the end of 2018 it was a very good example when we had some investment in new product Corona 12 KW everything that you are seeing right now that could get into the market. The investment in R&D was higher than 10% but definitely when we will grow the business we will go to that level of target that we put -- again 10% from R&D roughly plus or minus 12% on SG&A.

Great, Thank you very much.

Thank you Patrick.

Operator next question please.

[Operator Instructions]. Pardon me, sorry for the delay. The next question comes from Tom Diffely with D.A. Davidson. Please go ahead.

Yes, good afternoon. Hopefully you could remind us what your expectations are for normal seasonality here in the first quarter and then is it quite a bit different between your differing interest segments?

Yeah, we would not go to -- Tom, we would not go to the different segment in terms of the guidance for Q1 but however what we all think in Q1 in terms of seasonality, yeah, it is definitely the same trend that we saw last year. As I mentioned in my opening remarks the trend at least fully in revenue that what we are seeing right now this year will be similar trend again. Will be similar to what we saw last year, the second half would be expected to be higher than the first half. You need to understand given everything that I'm saying our limited visibility specifically in China, specifically this quarter after the Chinese New Year I'm sure that by the end of this quarter we'll know better. But we don't see that in terms of the seasonality if you will any differences versus last year or the year before.

Alright, that's helpful. And then Scott when you look at the move to the higher power with your customers is it -- the customers, are they using higher power for the same application or is this driven by new applications for your higher power tools?

Well, certainly the largest market for those high powered lasers today is in the cutting market and there what we're seeing are customers migrating to say thicker metal. And so our high powered fiber lasers are out cutting very thick metal today. Over time we will certainly see other opportunities in welding and other new applications but today cutting is where we see that and largely being driven by thicker metal.

Okay, that makes sense. And then finally when you look at your aerospace business it seems like a lot of that is driven by the semiconductor moves at this point. Are there plans to move to more of a complete system sale to that market or is that going to be more of a components market for a while?

Yeah good, in aerospace and defense largely what we sell there today are components both the semiconductor lasers and other components. And as we continue to progress there will be higher levels of integration. I wouldn't call it a system play. I think certainly the defense primes have a role that is very different from ours but certainly we'll see higher levels of integration.

Okay, that's helpful. Thank you.

The next question comes from David Ryzhik with Susquehanna Financial Group. Please go ahead.

Thanks for taking the question. So you've noted some constructive signs out of China, are these actually orders in the pipeline or -- in terms with customers? And if you can provide a little more context around what customers are saying, are they waiting for the tariff situation to be resolved or are they waiting for some stimulus measures to kick in? And I had a follow up.

Very good, yes. Certainly we are seeing increase in orders. And so that is certainly positive. However, the visibility is still limited due to the uncertainties around trade issues. And you know in China and frankly around the world we're seeing people waiting for more certainty around those issues. So we are seeing some positive improvement but everybody is waiting for resolution.

Okay, thanks. And welding typically hasn't been a market that you focused on too much but with Corona have you seen an increase in demand from welding customers and anyway to size how much of an opportunity this can become within welding for nLIGHT?

Good question. We certainly are seeing increased interest and it is due to Corona and our higher power fiber lasers. However, your point is valid, this has not been a key focus for us to date. Well being again requires -- generally requires further integration into those applications and so it has been a relatively lower priority for us. Over time we will be investing more there and we're confident that Corona creates further differentiation in that space. And it is a large addressable market, it's a different market from say the cutting market, it is a much more fragmented set of end applications. But we see strong opportunities for continued growth there ranging from industrial automotive to electric vehicle to various more refined applications. So looking ahead we'll be talking more about that.

Great, thanks Scott.

The next question comes from Jim Ricchiuti with Needham and Company. Please go ahead.

Hi, good afternoon. I'm not trying to pin you down with respect to forecasting the quarter by vertical but I'm just trying to get a sense, you've given us some color about visibility in the industrial market being limited. If I think about that midpoint of your guidance what kind of visibility do you have in the micro fabrication and the aerospace and defense verticals?

Obviously, hi Jim, obviously good question. Obviously the visibility that we have in aerospace defense by definition it is much, much better than definitely in this time it is much, much better than the industrial end market. And in micro fabrication it is better than the industrial end market in China, no question. By the way those fundamentals in the business have nothing changed here. Specifically on the industrial end market you know the visibility usually in Q1 it is low due to the Chinese New Year and currently as Scott mentioned with the trade world and everything else that is going on the visibility is even lower than that.

So that range of revenues that you're providing in your Q1 guidance much of that variability is it safe to say boils down to the industrial segment of the business?

This is correct.

Okay, and you alluded to the customer reception for Corona exceeding expectations and I'm wondering if you can talk a little bit about either which verticals, which applications and which geographic regions are you seeing the strongest reception to the technology?

Good, thanks Jim. We're seeing a strong interest in Corona across all of our industrial end markets. However the near-term design wins are focused on the cutting market and largely larger companies typically outside of China. What we're seeing is that the benefits of Corona are exceeding our expectations, they're allowing our customers to differentiate and in various applications provide a substantial advantage over their current approaches. And that's leading to a more rapid design win process for us and right now it's generally in cutting and outside of China.

And last question and I'll jump back in the queue. You may have given it and I may have missed it but did you talk at all about customer concentration in the quarter?

For Q4 or for the guidance?

Well, for Q4 and if you want to provide some color with respect to the Q1 outlook for your large customers that's fine?

Yeah, so we didn't provide customer concentration in Q4 and it was not significantly different versus what we showed in the previous quarter. And as you can imagine I will not comment on customer concentration in Q1.

But around -- is it 110% customer, is that...

Close to that, yes.

Okay, thank you.

The next question comes from and please pardon me if I mispronounce this, Brian Gesuale with Raymond James. Please go ahead.

Hey guys, thanks for taking my question. Wanted to maybe explore the defense business a little bit, it really outperformed expectations in 2018, grew 60%. I think many were thinking it might be a 15% or 20% grower at the start of the year, can you maybe just give us a little bit of color on how we should think of the rate of growth as it progresses in 2019?

Yeah, good Brian. We did grow faster than we had expected in 2018 and that 60% growth certainly speaks to the migration towards higher power lasers particularly in directed energy. We do not expect that same growth rate in 2019. However, again I think that does speak to this long-term growth prospect and the adoption of lasers for those applications is becoming clear. And we do expect that it will continue to grow in the coming years.

Okay, great and then just a follow up, I was wondering if Ran if you can maybe help us out as we shape our gross margin thoughts for the year, sounds like seasonality volume picks up second half to first half, the e24i, imagine helps on the cost basis, new products begin to penetrate the mix at an increasing rate. Can you maybe just think of how we might think of a progression of gross margins, I know you are not very precise but just a little bit of help there?

The full 2019, sure, so let me remind you how we managed to improve I think significantly the margin in the last, specifically in the last two years. If you again just as a reminder if you look at the margin improvements between 2016 to 2017 it was 900 basis points and between 2017 to 2018 it was 300 basis points which I believe is very impressive. Where it is coming from, it's coming from mainly three areas and as we grow the business definitely we will get a better utilization of fixed costs. And so this is the first point, secondly we are investing a lot in cost reduction, in automation which help us to reduce the cost. But not less important those new product that we are talking about higher power, better technology, i.e. Corona for example it's coming with a better margin. In 2019 when going forward Q1 the revenue is due to the seasonality is low so we are not getting those benefits that I just talk about and similarly those new products that will not significantly impact the margin in Q1, the 12 KW, the Corona. But as we move forward with the year and as we continue to grow the business and as we continue to introduce those new products to the market we will see some margin improvement.

Okay, great, is this -- just a quick follow up on that. I mean if we see volumes bringing in $50 million to $55 million a quarter or even a little bit higher I mean is this something where we can approach or actually top the gross margins that we saw periodically last year or is it just the pricing environment and the macro is just not going to support that even on the higher volumes?

It is a little bit difficult to say. There are so many things that impact the margin on a quarterly basis and that's why it's difficult to say on a quarterly basis. There is mix between different products, there is a mix between different geographies, there is many things that impact the margin. However, and this is what is really important to understand, the trend that we saw in the last two years conceptually as we continue to grow the business and we as we continue to introduce those new products to the market definitely we will see a margin improvement.

Great, thanks a lot guys.

The next question comes from Andrew DeGasperi with Berenberg. Please go ahead.

Thanks for taking my question. I guess the first -- now that you have these super high powered lasers 10 KW and over, are your sales efforts a little different relative to the mid power lasers?

Well, I think the customers that can use the high power lasers are a fairly limited set of customers. So no dramatic change in our sales structure or efforts but the customers that are capable of using that high power are more limited.

Got it and I guess with regards to Chinese New Year I know there's been some commentary that because it's earlier there was a little bit of a pull forward of orders, are you seeing something like that happening and the reason why you have low visibility is because right now things are a little quiet or is there some other reasons based on your historical -- that you have noticed historically?

Yeah, relative to our many years of working through Chinese New Year there is always a lot of -- well there's less visibility around Chinese New Year in general. As you come into it customers tend to buy less and it takes a couple weeks after New Years to provide that visibility. So that's sort of a general seasonal trend in the China industrial market. You know amplifying that this year is the trade dispute and with the deadline that sort of was overlaid on top of Chinese New Year so you've got that exacerbating that uncertainty. Again as I said before we have seen some positive trends in the first quarter, we are hesitant to amplify those because the visibility is limited due to those trade issues.

Right, and then my last question on the second half view that it should be stronger, do you see that across all three segments or is it really mostly on the industrial side or is there some kind of assumption baked in on a resolution of this trade dispute?

Yeah good, on the last question we're assuming things don't get worse in our plans. We're not expecting that there's a glorious resolution that could provide some upside but that's what we're assuming in our base plans and in those base plans we do have visibility into continued adoption of our new products in all three end markets and that's where the second half perspective comes from.

Great, thanks.

The next question comes from Greg Palm with Craig-Hallum. Please go ahead.

Yeah, thanks. I'm curious if you would characterize your Q1 guidance as maybe overly conservative just based on the lack of visibility, I'm just trying to get a sense if you've changed at all the way you're thinking about the near-term based on this uncertainty out there or if it really is just kind of basket [ph] at this point?

Yeah, so this Ran. No, the answer is no. It's not over pessimistic and it is not over optimistic. This is what we see right now, this is what we see right now and again with the limited visibility that we have. Usually we wait another two weeks, three weeks and get more information from the Chinese New Year we would be better off but we are doing this call right now. And based on what we are seeing right now that's the best information that we can provide to our investors at this point.

Understood, and just remind us orders that you receive now or maybe in the coming weeks are those still could be recognized as revenue this quarter or would that be more of a Q2 event and I guess I am specifically referring to some of the industrial China product?

Sure, we are specifically in the industrial end market, we will get orders in March that we will deliver at the end of the quarter, no question about it.

Yup, okay. And I guess just hopping one last one for me on the gross margin guidance, I'm just trying to sort of figure out impacts from mix, from negative pricing and just additional costs from tariffs, any way to break that out specifically?

Yes, so let me try to compare it year-over-year instead of the previous quarter or like in the previous quarter if you prefer. But year-over-year first of all you need to take into consideration the tariff impact which is 150 basis points. We already talked about it, we already quantified it. Secondly you know there is a new product that we just introduced to the market. Again Corona 12 KW that will give us a better margin later on but will not impact significantly the margin for Q1. And lastly yes, there was an impact of the pricing. We talked about in the last two quarters that is what we saw at least at the end of last year. It's most significant price pressure in the industrial end market in China and some of that we see in Q1 definitely.

Okay, fair enough, I will hop back in the queue. Thanks.

Thank you.

The next question comes from Jed Dorsheimer with Canaccord Genuity. Please go ahead.

Hi, thanks for taking my question, just two quick ones. I guess as you look at the introduction of the 12 I'm just wondering on that particular product given that the same is -- there is fewer competitors in that market what would revenues have been if you had had that for the whole year, just to give a healthy perspective on what that might be for next year, thanks?

Okay good. Can't really speculate on the particular estimates there but certainly I think your question is spot on to the fact that it is very difficult scaling power to those levels in a real industrial product. And we see very limited competition in that space. Really, only see one other competitor in that space that has real products. So we're seeing a shift to higher power and we're seeing limited competition there. So we are excited about the growth prospects there in 2019.

Got it, thanks. And then in the micro side of the business what's the -- why aren't you seeing a faster uptake versus mechanical specifically with VS for example, is it just a CAPEX and company is looking to leverage fully depreciated equipment or is there just not a cycle happening right now, I'm just curious in terms of or is it a technology issue in terms of the lasers?

Yes, not a technology issue. We're seeing increased penetration of lasers in a wide range of different applications in micro. So, with our new products we're launching and with what we're seeing in the applications we are confident that there will be continued growth in that space. Having said that there are end market cycles there and some of those markets are softer right now. But over time we anticipate continued displacement of mechanical and other processes in the micro fabrication space.

Got it, thanks. I'll jump back in the queue.

[Operator Instructions]. The next question comes from Mark Miller with The Benchmark Company. Please go ahead.

Thank you for the question. The industrial sales declined -- sequentially declined, was that driven primarily by pricing or was it also units?

Give me just one second. The industrials end the market if you compare quarter-to-quarter Q4 2017 to Q4 2018 there is actually an increase of 7%.

But sales were down sequentially, that's what I was talking about?

Sequentially, I am sorry. Yes, you are right, it is mainly coming, the industrial end market is mainly coming from China and there was some reduction yes in revenue in China in the industrial end markets that we see unit end flights reduction as well, yes.

So both.

Both sequentially.

Okay, your guidance for the current quarter, is the decline in revenue spread across all three segments or concentrated in industrial?

We will not split the guidance by end markets.

Thank you.

The next question is a follow up from David Ryzhik with Susquehanna Financial Group. Please go ahead.

Hi, thanks so much for taking the follow up. Just wanted to drill down a little bit on the pricing environment, maybe you can comment on how it's changed since you updated us three months ago and does it remain confined to that 1 to 4 KW market or have you seen pricing begin to creep up outside of that segment, thanks?

Yeah, what we described previously was that the changes in prices mid last year we've seen relatively stable environment since then. Certainly over time we certainly anticipate continued price reductions that will continue to open up new markets for us. But in the past quarter we haven't seen significant changes with prices.

Great, and just one quick follow for Ran. There was a pickup in DSO in Q4 should we expect this to normalize in 1Q?

Yes, and they were normalized. The Q4 revenue was back end loaded and as a result of the day it went up. If you recall we talked about 40 days as the days of accounts receivable which will go down in Q1. Go back to normal.

Okay, thanks again.

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

Thank you everyone for your participation and continued interest in nLIGHT and we look forward to speaking with you over the coming weeks. Have a good rest of your day.

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