Good afternoon, and welcome to nLIGHT Second Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this conference 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'm 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 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 Scott.

Thank you, Joe. Second quarter revenue of $50.5 million was at the upper end of our guidance range and grew 13% compared to our first quarter. We had a strong quarter in aerospace and defense, which grew 26% sequentially. Our commercial business, which includes our industrial and microfabrication end markets, increased approximately 1% from the first quarter. Overall gross margins improved to approximately 24% in the second quarter and products gross margin expanded to approximately 30%, slightly above the top end of our guidance range. We ended the quarter with cash equivalents and investments of $115 million with no debt. Aerospace and defense remains a significant growth opportunity for our business, and we had a strong quarter in both directed energy and laser sensing. In directed energy, we continue to see strong interest in our solutions. Ongoing military operations in the Middle East and Ukraine highlight the increasing need for advanced, cost-effective defensive weapons technology. We believe directed energy lasers will be a critical part of the U.S. and foreign allies' layered defense strategy as they offer a significant operating cost advantage compared to traditional kinetic weapons and a deep magazine. During the quarter, we had strong execution on multiple high-visibility, strategically important domestic directed energy programs. We continue to make good progress in our HELSI-2 program, which is a multiyear DoD-funded $171 million program to develop a 1-megawatt laser, with completion expected sometime in 2026. Another critical 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 missile defense. On this program, nLIGHT is responsible for delivering a 50-kilowatt high-energy laser to a prime contractor in the first half of 2025. nLIGHT's vertical integration from semiconductor chip through beam-combined laser is a unique and critical differentiator for us in…

Thank you, Scott. Total revenue in the second quarter of 2024 was $50.5 million, an increase of 13% compared to the prior quarter but down 5% compared to the second quarter of 2023. Products revenue was $34.5 million, an increase of 17% compared to the prior quarter but down 13% compared to the second quarter of 2023. Development revenue was $16.1 million, an increase of 6% compared to the prior quarter and up 17% compared to the second quarter of 2023. In aerospace and defense, second quarter revenue of $27.4 million, which represented 54% of total revenue, increased 26% compared to the prior quarter and 12% compared to the second quarter of 2023.A&D products revenue grew 5% year-over-year and 72% quarter-over-quarter primarily due to strong execution against the new $25 million contract Scott mentioned earlier. In industrial, second quarter revenue of $12.9 million, which represented 26% of total revenue, increased 8% compared to the prior quarter but decreased 22% compared to the second quarter of 2023. While sales of programmable lasers into the cutting market increased year-over-year, sales of non-programmable lasers decreased in revenue from a key additive customer last year did not repeat during the second quarter. In microfabrication, second quarter revenue of $10.2 million, which represented 20% of total revenue, decreased 5% compared to the prior quarter and 16% compared to the second quarter of 2023.Turning to gross margin, total gross margin in the second quarter was 24%, which was above the guidance range compared to 17% in the prior quarter and 23% in the second quarter of 2023. Products gross margin was 30% compared to 21% in the prior quarter and 29% in the second quarter of 2023. Products gross margin in the second quarter was positively impacted by favorable sales mix, pricing and certain contracts completed…

[Operator Instructions] The first question today is from Greg Palm with Craig-Hallum Capital Group. Please go ahead, Mr. Palm. Your line is open on our end. Perhaps it's muted on yours.

Can you guys hear me now?

Yes, we can.

All right. Awesome. Sorry about that. Congrats guys on the progress here. Maybe just a little bit of sort of high-level overview of kind of how you're seeing the lay of the land right now by segment. It sounds like a little bit of visibility in microfab. But what are you seeing across segments? And specifically, as it relates to the quarter, the upside towards the high end of the guidance range, was that driven by A&D? Is that a fair characterization?

Yes, I think you summarized it well, Greg. This is Scott. Yes, we described a bit of the visibility in micro. But yes, I think I'd highlight that A&D up 26%, even more significantly up in products. And as we've been talking about, we're seeing traction in not only the new applications in directed energy but also our existing programs of records. So yes, that's certainly one of the highlights from the quarter.

And Scott, I think you mentioned in the end of your prepared remarks, profitable growth for fiscal '25. I know in past calls, you've been targeting year-over-year revenue growth in fiscal '24. Do you still feel comfortable with that? It implies still a pretty big ramp-up in Q4 relative to your outlook, your guide in Q3, but just kind of curious to get your thoughts on the sequential progress in the second half.

Yes, Greg, this is Joe. I'll take that one. So obviously, the midpoint of our guidance is up again relative to the second quarter. And we continue to affect the second half of the year, not much has changed since we talked a quarter ago, so we do still expect the second half to be higher than the first half. I think what we said about the year is that we were optimistic that we had an opportunity to grow full year over 2023. Last year, we did about $210 million, plus or minus. We still feel that's a reasonably good directional range, that being said, we don't have great visibility to that level of detail in the sort of outside of 1 quarter forward. But generally, nothing has changed. We're still optimistic that business momentum is picking up going into the second half, certainly, on the defense side, we're seeing a little bit more stabilization on the commercial side, and we're setting ourselves up well for growth in 2025 and beyond.

Yes. Okay. That's helpful. And if I could ask one more on margins. So revenue from laser products looks to be up, I don't know, around 15% sequentially from Q2, but gross margin expected to be really flat or even down slightly at the midpoint. I'm guessing that's just mix related but surprised that gross margin guidance wouldn't be a little bit better just given the higher level of revenue contribution.

Yes. No, very fair point, Greg. So I'll provide a little bit of color. In the second quarter, what we had, we did have better mix. And we had a couple of deals that ended up contributing to margin that was better than we expected, probably to the tune of a couple of hundred basis points. So if you were to back out those sort of onetime-ish bumps that we got in the second quarter, you'd see a more normalized flow-through from the second quarter to the midpoint of the third quarter guidance. I think the one thing that we are pleased about is that we've worked pretty hard to keep our manufacturing expenses low and our absorption high as the revenue continues to grow. So I feel good, even absent that couple of hundred basis point tailwind in the second quarter, that we're in a much better spot to continue to grow gross margins as the top line, particularly the product top line, expands.

The next question is from Keith Housum with Northcoast Research. Please go ahead.

Good afternoon, gentlemen. Scott, perhaps provide a little bit more context or color around the EOS announcement in terms of like perhaps contribution it will have to you guys, and where do you think that would benefit? Obviously, it's nice to have a second big partner in that space.

Good. Keith, I think I got all the questions around the EOS announcement. As you may know, EOS is one of the oldest companies in the additive space and one of the clear leaders in laser additive manufacturing. And we've been working with them for some time. And it was an announcement that reflects the strength of our Corona AFX technology to be a key enabler of the next-generation products in this space. And we had a very good conference at the RAPID conference recently, and there's a lot of continued progress on integrating our current lasers and developing the road map for future lasers into their road map. And we're looking forward to announcing more in the coming quarters. Notably, the big trade show in additive is in Frankfurt later this year. But yes, it reflects their understanding of the road map to integrate the beam shaping technology that we have.

Okay. So we expect this expanded relationship to be additive, I guess, no pun intended, of course, to the existing contribution it currently makes to your business.

Indeed. And it is not a relationship that is exclusive that prevents us from working with others, but it does reflect the integrated work we're doing to support their road map.

Great. Appreciate it. If I can get a second one here. Your success in China this quarter, I guess, is a marked difference versus perhaps other competitors, certainly, in the industrial space and in the laser space. Is there something unique to the success you're seeing in China this quarter versus others?

No, Keith, I mean overall revenue in China is such a small part of our business, right? We've served the China microfabrication market for a really long time, right? There's a lot of SKUs, and we just saw slightly better ordering patterns and delivery of revenue this quarter but on a relatively on a small number, there's not a lot of sort of meaningful read-through there for us.

Next question is from Mark Miller with The Benchmark Company. Please go ahead.

In terms of your existing backlog, what does the margin profile look like? Does it look like similar to what you've been reporting? You had higher 6-kilowatt sales in the last quarter, which helped you with the margins, I assume. I'm just wondering about the backlog. What does it look like from a margin perspective?

Yes. Thanks, Mark. So certainly, on the commercial side, as you can see from the numbers, we're skewing towards higher power sales on the fiber laser or the industrial side. And most of that revenue at this point is really on the programmable fiber laser side. So that's good, and that's additive from a gross margin perspective. And then our microfabrication business, which I think in our prepared remarks we talked about seeing some better demand and customer forecast, and so that will also benefit the overall margins.

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

Yes. Thank you, everyone, for joining this afternoon and for your continued interest in nLIGHT. We look forward to speaking with you during the quarter. Have a great afternoon.

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