Good day, and welcome to the nLIGHT Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will 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 Joseph Corso, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone. I am Joe Corso, nLIGHT's Chief Financial Officer. With me today is Scott Keeney, nLIGHT's Chairman and CEO. Today's discussion will contain forward-looking statements, including financial projections and plans for our business, some of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call and we undertake no obligation to update publicly any forward-looking statement, except as required by law. During the call, we will be discussing certain non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release, which can be found on the Investor Relations section of our website. I will now turn the call over to Scott.

Thank you, Joe. In the third quarter, revenue of $50.6 million was above the midpoint of the guidance range. Products gross margin of approximately 24% was below the guidance range, but continued operating expense discipline enabled us to report adjusted EBITDA within the guidance range. As we have discussed in prior calls, we continue to prudently manage working capital and capital expenditures, which enabled us to increase our cash and marketable securities spend by approximately $10 million during the quarter. Our balance sheet remains strong and we ended the quarter with approximately $112 million of cash, cash equivalents, marketable securities with no outstanding debt, which positions us well to execute our long-term growth objectives. We also made significant progress in several growth areas during the quarter. In Aerospace and Defense, we announced today that we have been awarded additional options on our previously announced HELSI-2 contract, bringing the total value of the award to nLIGHT to $171 million, which we expect to execute over the next three years. In addition, we made excellent progress on one of our laser sensing programs, which offers attractive long-term revenue opportunities. In industrial, we secured design wins with multiple global metal additive manufacturing customers and began shipping lasers to a significant customer in the EV battery industry. Operationally, we continue to transition our manufacturing from Shanghai to the U.S. and to a contract manufacturer in Thailand. We continue to mature our U.S.-based automation processes and significantly increase our volume with a contract manufacture for semiconductor lasers assembly. I will provide a brief update on each of these three initiatives. In Aerospace and Defense, revenue declined 6% year over year to $19 million, representing 38% of total revenue. As discussed, a moment ago, we are excited about today's announcement regarding our HELSI-2 contract. As a…

Thank you, Scott. As Scott mentioned earlier, nLIGHT generated revenue toward the upper end of guidance and adjusted EBITDA within the range. Although current revenue levels and a significant manufacturing transition, can lead to variability in quarterly gross margins, our vertically-integrated business model is well suited to support our growing pipeline of opportunities in Defense and Industrial. At the same time, we have been carefully managing operating expenses, working capital, and CapEx, which has enabled us to increase our balance sheet cash and equivalents to approximately $112 million, as of the end of the quarter. Turning to the third quarter results. Total revenue for the third quarter of 2023 was $50.6 million near the top-end of guidance compared to $60.1 million for the third quarter of 2022. Product revenue was $38.1 million compared to $48 million for the third quarter of 2022. Gross margin was 20%, compared to 22% for the third quarter of 2022. Product gross margin was 24%, compared to 26% for the comparable period of 2022. Product gross margin in the third quarter was negatively impacted by lower production volumes and manufacturing variances, which were positively offset by lower overall manufacturing spending. Development gross margin was 7%, which was consistent with guidance in the third quarter of 2022. Non-GAAP operating expenses were $16 million, a decrease of $3.3 million compared to $19.3 million for the third quarter of 2022. The decrease in operating expenses was driven by a decline in employee compensation costs, primarily due to lower headcount and decreased incentive compensation, decreases in R&D project spending, and higher administrative costs allocated to development projects. On a GAAP basis, operating expenses were $22.5 million a decrease of $4 million compared to $26.5 million for the third quarter of 2022. Net loss on a non-GAAP basis was $4.9…

[Operator Instructions]. The first question comes from Jim Ricchiuti from Needham & Company. Please go ahead.

Hi, good afternoon. Scott, I think I heard you mention programs of record several times, and I'm wondering if you could help us in terms of -- who to look out over the next two years. What kind of opportunity is there for programs of record that could be awarded, say, in the next 12 months, that potentially could impact your defense business over the ‘24 ‘25 timeframe?

Yeah, in my commentary, I was referring to programs record for our existing business. And there are large programs record for programs we have today and some new areas that are outside of directed energy. Those are large programs and there is further upside in those programs. And so as soon as we have information that we can share, that we will do so. And I presume you were also alluding to directed energy? Yes, in directed energy. There are no large programs of record today. There are significant development programs, and we have been successful in winning those programs both in the US and internationally across the full vertical integration from the semiconductor through the high-energy laser. In our plans to continue to grow, we have not built in the assumption of programs of record in the near term. We do think there are opportunities for that, but those specific programs record will be contingent upon the success of the demonstrations over the next 12 months to 24 months. I hope that helps, Jim.

It does. And there's obviously been a lot of press there's been talk about Lockheed and the work they're doing in this area, and I think a lot of people have also focused, unfortunately, on what's happening in the mid-East with Israel and the potential for directed energy to be applied in those areas as well. I mean, I wonder if you could talk a little bit more about what you're seeing in the market today. I mean, for instance, I'd be curious if this award that you announced today was the size of this about as expected was the timeline about as expected? So again, and there's things I know you can't speak to, but maybe you could help us frame -- help frame what's going on out there in terms of the activity level and where you're seeing it.

Absolutely, Jim. I think, this award was something, certainly when we started HELSI-1, our goal was to win HELSI-2. And there was risk associated with our ability to execute and risk associated with budget, et cetera. And so, we are excited to have won this award. And it is a significant program. It's arguably one of the most important programs in DoD. So, over the last few quarters, that's certainly what we were expecting. But certainly, when we kicked this off, it was something that we were striving for. I think, what we're seeing is significant funding to develop lasers in the U.S. and abroad. And that continues, that is expanding. I think, there is a fair amount of noise out there about what's going on around the world. Obviously, what's going in Israel is -- it's a very difficult situation. I will say that we are engaged with all of the key players in Israel. And again, we have technology from the semiconductor all the way through to the laser high-energy laser. And we're supporting our partners there as they work 24/7 right now. And as there's information that we can share, certainly we'll do so.

And that's helpful. And if I could just ask one final question, more it relates to the commercial business, then I'll jump back in the queue. If you -- if we think about the commercial business and you look at areas that you potentially are seeing a change in demand one way or the other, say versus the last three months or earlier this year, where are you seeing the greater changes in terms of demand? Either way, either direction.

Yes, good. I think that the significant change that we continue to see is an additive manufacturing, form next is the big trade show that occurs every year, and its next week in Frankfurt. We'll be announcing several new products. There'll be a number of important presentations. And we have disclosed our strategy there in the past around using the Corona AFX technology to allow for higher productivity tools. We are seeing that be deployed. We're getting design wins, and so that is the area of the industrial market where we see significant growth opportunities. It takes time for that to show up in our quarterly revenue. But the design win activity is going well there.

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

I guess maybe just one follow-up, obviously, can congrats on the sort of expansion of HELSI here, but can you provide a little bit more background? I don't know if there were, was were always options associated with this contract that you were expecting to win and I'm not sure if it was dependent on some event or some demonstration. And then just to be clear, are there additional options outside of this that can still be won or is this with this specific contract?

Good. Thanks, Greg. This was contingent upon success in HELSI-1. And as we had previously announced, we exceeded the goals for that program for a 300-kilowatt class laser. And there were two awards. It was nLIGHT and Lockheed for this program. And this is to develop a much higher-power laser. And there are other programs that will expand this area, and complement, what we are doing here. So, no, this isn't the only opportunity that we are working on. There are other ones that we are working on the parallel state. And subsequently, there are other opportunities also.

Okay. But are there additional, I guess, are there additional options within HELSI-2? Or was this said in terms of additional options that could be one specific with this contract?

Greg, for the contract for HELSI-2, this is the contract. There are no, known options that that we are working on for this contract. But their other contracts that are related, and we will continue to expand the work going on in in directed energy lasers.

Yes. Understood. That makes sense. Thanks for clearing that up. I think I heard you mention or maybe you alluded to increased competition from some of the Chinese players outside of China. And we know how competitive, China has gotten. And so maybe you can just go into detail a little bit of what you are seeing? What regions specifically? I am guessing you were alluding it to cutting, but any other sort of commentary along those lines would be helpful.

Sure, Greg. Those comments -- specifics behind those comments are related to primarily cutting. And in terms of geographies, where we see greater competition, might be in places like, South Korea, somewhat in certain areas of Europe, some parts of the U.S. And it is not a dramatic change. We expect to continue to see competition. And we wanted to note that, indeed, that's what we have seen play out over the last year or so.

Okay. I mean, is there a greater concern that what has evolved or occurred in China specifically over the last three, four, five years that, that could become a bigger issue outside of China, whether it be in the U.S. or Europe or other parts of Asia? Or are you just trying to frame it up as, something that's maybe a little bit of a risk, but you don't think the same sort of long-term event will happen outside of that region specifically?

It is really mostly the latter Greg. Just trying to be, exhaustive in our comments of what we see going on out there. We continue to launch new products that continue to enhance, the productivity of what we are doing. And certainly, the customers that we work with are certainly interested in making sure that, they have got high quality, that they have got reliable supply chain, and I think those factors that are certainly critical for these tools where the lasers is a really big part of the productivity and the bomb of those tools. So, it is something we're noting. But it's not something that we feel like we need to highlight a whole lot more than them.

[Operator Instructions]. Your next question comes from Ruben Roy from Stifle. Please go ahead.

Scott, I had a similar question to Jim. So, I hope we're not repeating ourselves here, but it did have to do with the timing of the extension and Kress on that. It's great to see. But just wondering if you give us a little more detail in this sort of was that based on, I think you mentioned milestones continuing to be hit on the program but the $86 million contract that was announced in May, I think, some of the milestones around that we're expected to commence this quarter. So maybe you can give us an update on has that started have there been pullins on that for any reason? And then just around this idea of three-year timeline to execute on sort of these contracts. I don't think I've heard that timeline before. So maybe if you could give us more detail on what the milestones might be or anything you could kind of talk about for that three-year timeline. That'd be helpful. Thank you.

This we have kicked off the program. We are making good progress. We're on track. It is challenging. This is the highest power laser that's ever been demonstrated. But we are on track and that laser is fundamentally focused on proving out these power levels. This laser then will be used for further demonstrations. So, it's not a program of record. But over the next couple of years, we will continue to scale the power and then that laser will be used for various demonstrations. And as soon as we have information we can share on exactly where those will be we will do so.

And then it's great to see all the work and success you're having at the higher energy area, but I think over the last several weeks, we've heard a lot about sort of potential use cases for lower energy, and I say lower energy, 20-kilowatt, 30-kilowatt, 50 kilowatt lasers using some defense applications. And I'm wondering as you think about and talk about some of these additional areas that you're seeing some discussions in activity and et cetera are there those areas that we should be thinking about as potential contributors to revenue incrementally over the next couple years?

We are engaged across the spectrum from low power, medium power, high-power. We're also engaged across, the stack of technology from the pumps, the fiber lasers, and the integrated full high-energy lasers. And so yes, there are opportunities at the low water power levels in particular internationally. There are a number of programs and we have been designed into a number of different programs around the world in that space. And so once again, it's an area where there's a lot of information flowing out there. And as we're able to clarify further, certainly will do so. I highlighted the work we're doing in Israel previously, but we're also doing work with our allies elsewhere around the world. And so, we do see activity there and as soon as we're able to provide more clarity on that certainly look forward to getting that out to you all.

Great. Last question for me is sort of more near term and thinking about the guidance, I don't have my notes in front of me from last quarter unfortunately, but I think you did mention Scott, just sort of the sort of guidelines are on magnitude of what the supply constraints might mean. And I'm wondering if any of that has changed and as you think about, I think you mentioned on today's call that some of that should start to roll out in terms of growth into ‘24. Should we expect some of that revenue of the supply constrain fee start to show up in Q1, or do you think it's going to take longer to start to see kind of the revenue that you've missed out on to show up into the model?

We have Joe take that on the specifics. Joe?

Yes, Ruben, thanks for the question. Think the biggest issues that we've had in this supply chain near-term both in the third quarter in terms of the results and the Q4 guide. We do expect mostly to resolve themselves by the end of the year. There were sort of specific suppliers and components that have presented some challenges for us. We don't expect that to continue into 2024. So, in those cases, there will be a push, right? I mean, we will still build those products, particularly around the defense products. They'll just likely be pushed into the very early part of Q1 2024 is what we are planning for and also part of the reason for the kind of flattish guide, right from Q3 to Q4.

No further questions at this time. I'll now hand the conference back over to Joseph Corso for any closing remarks.

Great. Thanks for everyone for joining today and we look forward to speaking with you over the course of the quarter. Have a nice evening.

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