Good evening, ladies and gentlemen. And welcome to the nLIGHT, Inc. First Quarter 2025 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call, you require immediate assistance, please press 0 for the operator. This call is being recorded on Thursday, 05/08/2025. I would now like to turn the conference over to John Marchetti, VP of Corporate Development and Head of Investor Relations. 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 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 and our earnings presentation, both of 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. Our first quarter results represent a strong start to 2025, with revenue, gross margin, and adjusted EBITDA all above the high end of our guidance range. The outperformance was primarily driven by another quarter of record defense revenue, which represented more than 63% of total sales in the quarter, up from 49% in the same quarter a year ago. Furthermore, this growth was supported by significant expansion in defense product sales, which grew more than 50% year over year. We are uniquely positioned to drive continued growth in A&D with leading high-power laser technology developed over the past two decades across the entire technology stack from chips to full laser systems, which is supported by our US manufacturing sites. Our products in A&D are also well aligned with many of the Department of Defense's most critical priorities, such as directed energy and laser sensing. During the first quarter, we delivered strong results in each of these critical markets. Directed energy lasers complement traditional kinetic defense by offering a deep magazine, low cost per engagement, and speed of flight delivery. These systems can neutralize a wide range of targets, including drones, rockets, artillery, mortars, and missiles, while also rebalancing the economics of protecting key assets. We continue to make progress on our HEL-TD program. As a reminder, this is a $171 million DoD program to develop a one-megawatt high-energy laser with a completion date expected in 2026. The shipment of critical components towards this program was a significant driver of record defense product revenue in the quarter and is expected to be a substantial contributor to growth through the remainder of the year. Our work on the Army's DEM SHORAD effort, which is programmed to develop a 50-kilowatt high-energy laser for short-range air defense, continues to progress, and…

Thank you, Scott. Total revenue in the first quarter of 2025 was $51.7 million, an increase of 16% compared to $44.5 million in the first quarter of 2024. Aerospace and defense revenue was $32.7 million in the quarter, up 50.4% year over year and 8.6% sequentially. Growth in the quarter was driven by increased defense products revenue, which increased more than 150% compared to the same quarter a year ago, primarily due to increased deliveries of components into our HEL-TD direct energy laser program. We expect A&D revenue to grow sequentially in the second quarter of 2025, and as Scott mentioned earlier, we feel increasingly confident that full-year revenue from our A&D market will grow at least 25% year over year. First quarter revenue from our commercial markets, which includes industrial and microfabrication, was $19 million, a decrease of 16.8% year over year but up 9.9% sequentially. Revenue from these markets was largely in line with expectations as industrial demand remained weak, and the quarter-over-quarter improvement in microfabrication sales was largely a result of our manufacturing partner being able to satisfy orders that had been previously unable to ship. Product revenue for the first quarter was $35.7 million, an increase of 21.5% compared to $29.4 million in the first quarter of 2024. The year-over-year increase in product sales was due to growth in defense product revenue, partially offset by a decline in commercial revenue. Development revenue of $16 million in the first quarter increased 5.4% compared to the same quarter a year ago. Total gross margin in the first quarter was 26.7%, compared to 16.8% in the first quarter of 2024. First quarter gross margin included approximately a $1.9 million benefit related to duty reclaim. Excluding the impact of this benefit, total gross margin for the first quarter would have…

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jim Ricchiuti of Needham and Company. Please go ahead.

Hi. Thanks. Good afternoon. To start off with, can you talk to us about the line of sight you have to the product sales in A&D? Looking past Q2? I mean, you've talked about the growth you're expecting in A&D for the full year. I'm just trying to get a sense as to what kind of visibility you have to product sales.

Hello? Right. Jim, can you hear me, Jim?

I can. Scott, did you get that question? Or should I repeat it?

I apologize for the audio problems. Thanks for the question, Jim. I think, as we noted in my comments, the program is certainly one of the drivers of the product revenue, and, certainly, we have visibility with respect to that program. We certainly have also, you know, increasing both orders and the funnel of opportunities and products that further contribute to our outlook to continue to improve defense broadly, but products in particular in that, you know, 50% growth in the quarter was certainly, you know, one of the highlights for the quarter.

Great. On the tariff, the issue of tariffs, help us understand where you could be impacted more? Is it in the microfabrication business? Is it, you know, relating to the production in Thailand? Maybe just in broad strokes, how should we think about that going forward, assuming the situation doesn't change or improve?

Yeah. Hi, Jim. This is Joe. I'll take that one. The area where we will be affected most, frankly, is where the input costs are coming in from China today. And that disproportionately affects our industrial fiber laser business. But, you know, remember, as we think about where we are right now, we're still sitting on some inventory and the like. And so we don't expect a big impact at all in the second quarter, you know, as we go throughout the year, depending on what the situation is and where these tariff rates ultimately shake out, you know, could have an impact in Q3 and Q4. But not talking about anything that we feel, you know, today is significant right on the order of a couple hundred basis points.

Okay. Are you more concerned in that about the potential indirect impact as it relates to just demand across some of the markets in the commercial side of the business?

Yeah. I think that's the thing that gives us pause, just how are these, you know, dramatic increases in tariffs going to affect, you know, broader markets indirectly? And, you know, that's something that, you know, we can't possibly forecast. But, you know, our business, especially with the defense business, there's a relatively, you know, more insulated impact. Thank you.

Your next question comes from Greg Palm of Craig Hallum. Please go ahead.

Yeah. Thanks. I had some issues joining. So if you've already talked about some of this stuff, apologies. But, you know, you kept your A&D outlook the same, but I think you mentioned you're increasingly confident. So I guess what, you know, what's changed in the last couple of months, and what would you need to happen or see for you to actually increase the full-year guide at some point this year?

Yeah. Good. Thanks, Greg. Sorry about the audio problems. And good question. You know, we continue to see traction in not only the US but also international markets for direct energy and our other applications. So I think that's, you know, a theme that we will continue to provide more information as we can, you know, release more information there. But, you know, as we just talked about, the tariffs certainly add, you know, some degree of uncertainty in the global environment, and it's just hard to determine what that's going to be. Again, it's not something that is going to directly affect us as much as perhaps others. But it certainly is a question mark in terms of how the overall economy continues to progress.

Can you address what the tariff-related risk is specifically for A&D? I know you mentioned that the input cost in China on the, I think, more on the sort of the industrial fiber laser business. But is that something that impacts everything?

Yeah. I mean, you know, we think about certainly where we buy our products and certainly we don't have significant push there from kind of, but do our suppliers have secondary exposure. Right? That's where you just, it's difficult to fully address how those tariffs are gonna flow through, you know, the broader supply chains. It's more of that.

Okay. And just to be clear, I mean, whether it's you or some of your suppliers, I mean, are there secondary sources outside of China if the current tariff rate sticks? Like, what's everybody doing to mitigate it to mitigate that risk?

Well, I mean, we're, as we talked about in our comments, certainly, we're pleased that we have our operations running in Thailand. Things like that, certainly, we're doing, others are doing. And I think probably every management team out there is scrambling to try to figure out what to do. But I do think that, you know, we have relatively limited exposure, especially with our A&D business.

Okay. I guess, lastly, just can you address the line of credit? I mean, without tapping that, you would've ended the quarter with close to a hundred million of cash. I mean, that seems like a pretty good buffer to me even with all these uncertainties. So maybe you can give a little bit more color there.

Yeah, Greg. Yep. It's fairly simple. We are expecting that the business is gonna grow in the second half of the year. We've talked about the 25% increase year over year in defense. In our remarks, we talked about we're getting more confident about that. We wanna make sure that we are thinking about allocating capital appropriately. We've got a really attractive credit line. You know, the economy, the world's a little bit bumpy right now. To be able to, you know, leverage that credit line to fund some of that working capital that gives us the ability to continue to do all the other things we're doing in the business is why we drew on it.

I mean, is there a certain level of cash that you want on the balance sheet as a buffer no matter what? I mean, is there a certain number that you're sort of looking at?

There's no magic number. I think we talk a lot internally about being more than adequately capitalized at around a hundred million dollars. But again, you have quarters in which you are going to need to invest in working capital or in CapEx that we wanna try to make sure that we are funding that appropriately.

Yep. Okay. Alright. I know it's probably been a while since I've said it, but congrats on the quarter. It was a pretty impressive result.

Appreciate it, Greg. Thank you. Thank you.

Your next question comes from Ruben Roy of Stifel. Please go ahead.

Hey, guys. I also had some issues joining, but I guess the upside is I've got conference call music in my head for a few hours. So go ahead. I guess the did you talk about it's great to hear, by the way, and congrats on your continued visibility and execution around A&D. Did you give an update on the commercial markets in terms of full year? Has that changed kind of from the way you were looking at that business last quarter? I think you said maybe down 15% to 20%, a little of the, you know, those were the, I think, the guidelines. But any update there? Joe?

No, Ruben. That's still where we think we are. We had a little bit of a better quarter this quarter, particularly in the microfabric business as we were able to catch up with some pent-up demand to certain customers. So saw a little bit of a better quarter in micro, but the general themes that we have been talking about in the broader commercial businesses are still the same. And then on top of that, we've got some incremental risk from demand related to tariffs and the like. But broadly speaking, no real change here.

Okay. Thanks. And then just to follow-up on the tariff discussion. Some companies and obviously, there's a lot of moving parts here and uncertainty in been changing pretty rapidly. But a lot of companies have been telling us that they potentially could pass through some costs. It doesn't sound like that's, you know, an outcome that you guys are thinking, that would be appropriate for your business. Is that, you know, correct? And if so, again, you know, are there some remedies or, you know, should we be thinking about, you know, some level of gross margin impact given that there are some tariffs and costs going up, I mean, even if we kind of stay steady state, you know, from here into the second half?

Yeah, Ruben. It's a very complex topic, obviously. Certainly, there are places where we can pass on costs and to mitigate. There's areas where we can shift production to mitigate. There's even some regulatory, you know, aspects of the A&D market where we can mitigate. So it's a complex set of topics that we're trying to grapple with, and who knows what the assumption should be for where these tariffs will land. I think the broad outlook that we have, as Joe said, is that we don't see near term any dramatic effect on the business. Longer term, just depends on how long they last and how it affects the broader economy. So that just gives us, you know, some pause about, you know, uncertainty in the world. But I don't think there's anything we can really comment on that's specific in terms of outlook. Joe, do you want to add anything?

No. The only thing I would add, Ruben, is that it caused us to think to widen our margin range a little bit, but it's simply to account for some of that level of uncertainty, not more than that.

Okay. Got it. And the last question, any update on funded and unfunded backlog progression there? You know, as you got through Q1?

Yeah. No, Ruben. No major update. I think we're not in the position, you know, today where we're gonna provide that update quarter over quarter. So, but I would say that as we continue to execute on the program, we still have the right level of, you know, funded backlog plus the unfunded portion. And then as Scott talked about, our activity around responding to proposals continues to increase and be at healthy levels. So generally speaking, we are pleased with the direction of the defense business in terms of backlog execution and the development of the pipeline.

Helpful. Thank you, Joe.

Thank you, Ruben.

Your next question comes from Troy Jensen of Cantor Fitzgerald. Please go ahead.

Okay. First, I'm still laughing at Greg's comment, but congrats on the good results here.

Hey, Troy.

Hey. For Joe, is it Joe Fried? Yeah. I heard you say $1.9 million. We're talking about the cost of goods sold. Did I hear that it's an adjustment to get kind of a one-time event?

Yeah. That's the way to think about it. I wouldn't say it's so much one-time, Troy. It was just, obviously, in light of what's going on in the world with tariffs. Right? We took a really hard look at opportunities this quarter, and we were able to effectively reclaim duties that were paid, and it had a nice benefit to margin during the quarter. We will continue to reclaim duties, but we don't expect it to be quite at that level as we move forward here in the near term. Now as tariffs continue, either continue, they go up, they change, that will have an impact on what that duty reclaim number is. But we wanted to make sure that we called that out specifically to give you a sense for what normalized gross margin would be. And so that had an impact, call it 500 basis points or so.

Alright. Can you kind of maybe talk us through what you think gross margins could look like here in the middle of the year?

Yeah. I think we expect gross margins to continue to expand. If you look at the midpoint of the guidance, right, our products gross margin is about 30%. That's a slight expansion from where we were in Q1. In Q1, the margin did what we hoped it would do as we drove higher volumes. Our mix improved as we shipped more A&D product. We recovered in microfab, and we saw some benefit from duty reclaim. As we look to the second quarter, right, it's up a couple hundred basis points. Some of that is continued growth in A&D. Right? As we talked about, we don't expect, you know, to see the same revenue expansion in microfab. Microfab has pretty good margins. So we think as we continue to drive higher volumes, we'll get better absorption. The mix of business is at the right levels that we would expect directionally, our margins to continue to progress and get better as we move throughout the year.

Alright. Perfect. And just maybe to follow-up on Greg's question too about the line of credit. Is there any government customers that require you to have healthier balance sheets? Is that any chance and the reason why you do this too?

No. No. Not at all.

Okay. Alright. Perfect, guys. Alright. Well, good luck going forward.

Thank you. Thanks, Troy.

As a reminder, if you wish to ask a question, please press star followed by the number one. Next question comes from Mark Miller of Benchmark. Please go ahead.

Thank you for the question. Just what we're hearing today and previous, it sounds like the second half will be somewhat stronger than the first half. And can you, is that a good assumption?

Mark, simply put, yes. It's a good assumption. We expect the second half to be better than the first.

One of your competitors reported healthy results in additive manufacturing applications. I'm just wondering how additive business is going for you.

We've been making good progress in additive, but we are focused on customers in the US and Europe. And that's an area where there's more limited growth in the market relative to, you know, the markets in some other countries.

Thank you.

Thank you, ladies and gentlemen. That concludes our question and answer session. I will now turn the conference back over to John Marchetti.

Thank you, everyone, for joining us this afternoon and for your continued interest in nLIGHT, Inc. We will be participating in several investor conferences this quarter. We look forward to speaking with you during those events and throughout the quarter. Have a great afternoon.

This concludes today's conference. Thank you for attending. You may now disconnect your line.