Good afternoon. Welcome to the 27th Annual Needham Growth Conference. Our next presentation will be fireside from nLIGHT. Joining us for the session is the company's CEO, Scott Keeney, CFO, Joe Corso. My name is Jim Ricchiuti, Senior Analyst in the Equity Research Department here at Needham, covering industrial technology stocks. Thanks, both of you, for joining us. Look, as many in the audience know, the company updated their Q4 guidance after the market close, which we'll tackle first, and let me turn it over to you, Joe, if you want to go through some of the details on that, or Scott, however you want to handle it in terms of the announcement. Let me start first. Sure. Good. So we've wanted to get the announcement out. I think this conference, in some sense, creates the opportunity to get news out and be as clear as we can. And certainly, the last quarter was not what we had hoped for. It was a bit disappointing. We're about $4 million less, below the midpoint. And just want to hit this squarely right up front. You can break that into really two segments. There's the defense piece, I'll come back and talk about, and then a commercial piece. And they're roughly 50/50 of that $4 million. The commercial piece then can be broken into two components. The first one is in the industrial market. It was a relatively small change from what we had expected, but continued change in the end markets in industrial fiber lasers. And I think maybe we'll come back and talk about this further. I think it wasn't a significant driver for the quarter, but I do think that from an overall perspective, that is a structural change we see in the global economy in industrial equipment. So we can come back and talk about that. The second piece of the commercial side, why we were down, is that we have transferred our manufacturing from our site in China to our contract manufacturer in Thailand. And we're pleased with the progress and the support from our CM. These are complex lasers that there's a broad range of SKUs, so it's high mix, low volume. And we knew that was a challenge going into this, that it takes a lot of work to transfer that kind of production. And there are some gaps in the processes that we've transferred. So we have our engineers in Thailand supporting that manufacturing transfer, and that's ongoing. That was the second piece of the commercial. On the defense side, which was roughly half of that miss, that is substantially what we're doing there is we are building our high-power lasers for directed energy. And the good news is they're working very well. We've got leading technology there. And we're starting to ramp up production of those lasers, and we are in production, and it's qualified. We weren't able to get as many lasers out as we anticipated due to a whole host of details there. There's no fundamental issues there. We do have state-of-the-art lasers. And the demand there is there's no change there. It just moves to the next quarter. So those are really the key factors for the quarter. We'll talk about that maybe more as we talk about the overall business. But I just want to get that out really clearly. What's going on in the business for the quarter? Joe, do you want to add anything to that? The only thing that I would add is that we also have taken the opportunity in the fourth quarter to right-size some of the activities that we had in the industrial side of our business. We completed the final exit of manufacturing in Shanghai. And so as we look to the earnings release in late February, you'll see some of that come through. And so our gross margin and Adjusted EBITDA will be below the ranges that we provided. But once you sort of isolate those non-recurring things that happen in the quarter, the margin and profitability scaled with the revenue as we had expected. The question I'm going to start with is just to better understand what happened in the quarter on the defense side. Just stop me if it's something you want me to ask. No, that's good. But the slower ramp, was that internal to nLIGHT? Yes. It was. OK. So then the question becomes, any repercussions from that as it relates to customers? No. This is a program. The key program is a program that we're developing, a megawatt-class directed energy laser. We've got the highest power laser in the world right now at 350 kilowatts. We're scaling up to one megawatt. This is a funded program to deliver that in 2026. And so this production is related to that. It's moving forward, and we're on track. Just the number of units that we had hoped to ship out in Q4 were lower. OK. Is there anything that you can help us with in terms of appreciating how that could recover, and whether this is a short-term blip or an ongoing challenge that you just have to deal with? I'm not sure. It's between the two. No, it's OK, Jim. Yeah, there's not a fundamental issue here. We actually are shipping out, and we have qualified the highest power fiber lasers that go into this megawatt-class laser. And we are ramping that production. And so over the coming quarters, we will continue to ramp that. And we fully expect to be able to fulfill those shipments for that end customer. And maybe just to go back to the press release, and correct me if I don't have the wording exactly right, but when you talk about execution issues in microfabrication, that. That's the CM. CM. Understood. And we're not blaming the CM. I just want to be really clear about that, right? It's our ability to help the CM build on our equipment. OK. How does that resolve itself in the near term? Yeah, that is, and frankly, this is, again, something that you see in our industry where you have high mix, low volume, with processes that can be kind of fussy. There are a lot of hand assembly that goes in some of these products, right? So we have engineers in Thailand right now training, enhancing processes there. So it's an ongoing process that we've seen before. OK. And I promise this last question as it relates to the pre-announcement, but you gave some color as to EBITDA. And so what I guess I'm asking, I mean, is there a way to think about gross margins if these conditions, and when I say conditions, I mean the softness in the industrial market. And we don't know how the defense business is scaling. I'm just trying to get a better sense as to where things could end up. Going forward, Jim, or just in the fourth quarter? Sorry. Yeah. Maybe you could, Joe, to help us speak to the quarter, any unusual things that you cited, some that impacted gross margins. They become less of an issue going forward? Correct. Yeah, so I don't think there's any structural change the way that we're thinking about improving gross margin and gross profit dollars as we move forward. We think that when you look at the revenue, the improvement in product revenue comes with pretty attractive variable margins. So as we drive incremental revenue, we still expect that plus or minus 50% of that revenue to fall through to the gross margin line. And so no change based on what we had happen here in Q4. Let's go into that story more deeply on the defense side. So the defense business covers two main areas. Is that fair? Correct. Directed Energy and laser sensing. Correct. OK. Maybe help us, help the audience in terms of the revenue you're generating from the development side and just the work you're doing in directed energy. And then we'll talk about laser sensing as well. Yeah, very good. Perhaps I'll just step back to give a little bit of history too. So our business, frankly, has always been. We started the company 25 years ago. Dual-use technology strategy has been core to who we are from the start. We've had a mix of aerospace and defense and commercial revenue that has adjusted over time. In the distant past, it was maybe 60/40, 60% commercial, 40% defense. There was a big ramp in the commercial market, notably the industrial fiber laser market, that from like 2010. We went public in 2018. I think when we went public in 2018, our business was roughly 80% commercial and less than 20% aerospace and defense. Industrial really had ramped at that point. Subsequent to that, the industrial market has changed in ways that we anticipated some of them. I'd like to say we anticipated we were ahead of the curve on some things, but it's been more extreme than we expected, and that is that in China, there's been huge investments in building out capabilities and capacity, and I would argue that there's excess capacity across a whole range of different industrial categories, and that has led to dramatic changes in those markets, not only in China, but the rest of the world, so fortunately for us, we're very strong in aerospace and defense, and we have continued to develop our core technology in that space, and it's grown very nicely into markets, directed energy, and in sensing, and we can talk a little bit more about that, but then another cut on that business is development revenue and product revenue, so we have long-term programs where we're shipping products for programs of record in both those markets. But we also have development contracts. And those are critical for developing new technology and also developing these new opportunities. And so we have a mix of those also. And what we see now is the product side is ramping up as those development programs are transitioning to production. And Joe, you want to comment on what we're saying about the numbers there? Yeah, I mean, I think that the nice thing about having that dual-use business is we are able to leverage the IP that we have on the product side and satisfy a number of the material requirements of that development program with nLIGHT developed technology. So both of those thrusts from a revenue perspective are important to the company's financials. If we talk about the defense business and these two buckets, main buckets, talk to us about what differentiates nLIGHT in both areas? Yes, let me explain them first. Directed energy, we're using high-power lasers that are known as continuous wave. You're turning them on to effectively damage or degrade something. When you're cutting a piece of metal, you're working centimeters away, and you're using that laser light to cut through the metal. In directed energy weapon systems, you're using that laser at a long distance to damage or degrade something. Sensing is a high-performance laser, but it's a different type of laser. It's a pulsed laser that is using that laser light, in most cases, to measure those distances. It could be as simple as a laser rangefinder or a more complex LiDAR system. And so you should think about that space as one in which you're using a light source to supplement, say, a radar system. You're getting information that is different and complements those radar systems. They're mission-critical systems. The end applications are all the ones I know are classified. You really can't talk about it, but I can talk about the general space that we're playing there. They're critical lasers that then are used often in legacy platforms that are out there and upgrade those platforms with enhanced capabilities. So those are the two end markets that we serve in defense. There's more than that, but those are the two kind of fundamental categories. With respect to our position in both those markets, in directed energy, we've got the leading lasers in the world in terms of performance, whether you're talking about power or efficiency or beam quality. And we are supplying customers around the world in that space. So we've been clear and public about our work supporting Israel, supporting other countries in Asia, in Europe in that space. Then also in the U.S., we have key programs. The HELSI program is scaling to a megawatt. The DE M-SHORAD is the Army program. There's a number of other programs that are out there. And we've got the leading technology in that space. And I think that comes from the fact that we've been doing this for the better part of 25 years. And we've been developing the core technology in this space. And then we're focused on it. This is a core part of who we are as a company. It's not just a sidelight. On the sensing side, it's a similar story. We've developed this technology over years. We've been in this space for a long time. I think that space is ramping up faster than we had expected due to some of these programs that are coming along right now where we're doing the development work. They will transition to production over the next one-to-two years. Scott, to what extent do you cross paths maybe with some of the bigger defense primes? The primes? Yeah. Yeah. Directed energy. To first order, the typical U.S. defense primes are customers for us. In the past, the defense primes backward integrated and did some technology in-house. I think there's less and less of that. So there has been some overlap where there's been some competitor overlap. But to first order, all the primes are fundamentally customers for us to do that integration. I think it's worth reminding people of some of the recent wins in the programs you're able to talk about. You alluded to a couple. Yeah. Yeah, so the programs, just to reiterate, this HELSI program, High Energy Laser Scaling Initiative, is a very big one. It's a megawatt-class laser. That's a development program. But that development is leading to products that we are using for other programs. Army DE M-SHORAD is another one that we have announced. Yeah, the other ones, I always want to make sure I'm clear about which ones we've announced. Those are probably the two. Yeah. There are others that we're doing. Just be clear about that. And then internationally, we're working very closely with. And everything that we're hearing out in the market, I think everyone can appreciate the obvious reasons why the Defense Department is looking for a solution to this issue. But is there some level of what is the level of urgency to, if in any way, accelerate this? For Directed Energy? Yeah. Yeah. So in directed energy, Israel is a good example of the urgency. And I think the key point I want to make here, too, is that lasers, I don't want to be the parochial laser guy that says lasers do everything better than everything else. In many cases, that's true. But in this case, we complement other kinetic systems generally, right? So in Israel, Iron Dome and Iron Beam are really good examples of what's going on. And I think we'll be seeing more information coming out of Israel over this year on exactly that. But maybe to just make it really clear to everybody, I'll give you one example. If you look at what's going on in the Red Sea right now, the U.S. is using, call it, million-dollar-class missiles to defend against incoming threats that are, call it, tens of K cost. Those economics obviously don't work very well. I think publicly there's been a release of something like $1.5 billion that's been spent over the last year to defend those ships. Now, when you're defending, you're going to do that if that's all you've got. You've got a billion-dollar-class ship, right? In the near term, that's what you've got to do. In this case, the Navy is very eager to find a solution that works not only on the economics, but also on the depth of the magazine. If you're on a DDG destroyer, you have a certain number of missiles. When they're used, you have to go back to port. You have to reload. That is a big issue, too. I hope that gives you a sense of the kind of pressure that is going on. There's much more than that. But I do think, and I would highlight what's going on in Israel as both very impressive, what I see going on in Israel with the key companies in Israel. And I think over the next year, I think we'll all have a much better understanding of why this is so important. Just to talk a couple of other questions on the defense business, is that laser sensing business concentrated more with U.S.? Correct. OK, and then, Joe, maybe you could address how we should think about the margin profile of the defense business in the longer term, I guess. Yeah. I think in a word, the margin profile of the defense business as we move forward is going to be attractive, right? It's above our current, meaningfully above our current corporate average. And as we look at one metric that we like to look at is what are we selling in terms of dollars per watt produced. The dollars per watt produced where we're selling at is much higher in the defense business than it is in many of our other businesses, particularly in the industrial fiber laser business. And so as the defense business grows, we expect that to be accretive to our overall corporate gross margins. One way that we will drive the gross margin, first and foremost, is volume, right? We have today the infrastructure, whether that's the OpEx levels today or the overhead that we've got in place to meaningfully increase the overall revenue that's coming out of our factories without having to invest much in either OpEx or overhead. So much of that variable profit will flow right down to the gross margin and to the EBITDA margin level. The other thing I want to spend a minute talking about is the difference between the two segments that we report in today. So we report in two segments, the laser products and advanced development. The laser product segment is your traditional, you sell a product, there's a standard margin on it, and there's operating expenses associated with it. And you can look at an operating income. On the development, the advanced development segment, almost all of the costs associated with that revenue are embedded up in the cost of goods sold line. So the typical margin in advanced development is in the, just call it the mid to high single digits, very low double digits. But that's actually a reasonably good profit for EBIT or operating income because there are very few costs that are above and beyond what are in the cost of goods line. So from an EBIT perspective, the development business that we are doing is accretive to the company's overall EBIT and an important component of what we are doing as we're moving forward. Shift to the commercial business, to the credit of the company. I think early on, you began to pivot from China on both sides of the industrial business with the actual assembly work had been done in Shanghai. So maybe just to frame it, tell us what does China now represent and what was it in terms of revenues? That's the first question. And then we'll talk a little bit more about what you've done on the manufacturing side. Yeah, and we've been talking about this for a while, Jim, haven't we? So we went public in 2018. And maybe another way to cut the business is that roughly 40%, the quarter we went public, 40% of our revenue was China. The China industrial market was the biggest market in the world. We were very well positioned. We had our own operations in Shanghai. We were one of the few companies that really had that up and running really well. So that was good from an end market standpoint at that point in time. In addition to that, we had manufacturing in China. And if you look at our overall revenue, maybe something like 70% or so of our revenue was tied ultimately to some part of what we were doing in China. And great execution by the team in China and the supply chain there, too. But I was fortunate. I have a very strong board of directors. And one of my board members is Gary Locke, the former Ambassador to China and former Secretary of Commerce, who is deeply engaged with what's going on there. And we had discussions at that time about how things might evolve in China. And we made a decision to focus on growing outside of China. So 2018, go public, 40% China revenue last quarter. Plus or minus 5%. Yeah, less than that. Yeah, and then manufacturing exposure going from 70% to a very low number, so we made a decision to pivot, and that's been painful. That has not been easy, and frankly, just Q4 was another example of that. Our team in China could manage this high mix, low volume, because you put labor on it, right? You just manage this process. As you transfer to a CM, you have to build a different process, right? So that's an example of the pain you go through there, but I think it was the right decision. I think that we are very well positioned for the growth that we see ahead without the exposure that we had to China in the past. On the industrial side of the business, the three main applications—cutting, welding, additive manufacturing—you're certainly not the only one that's seeing weakness in those areas. Maybe spend a moment on the opportunities for your technology in these three areas. Good. I'll quickly bookend it to say cutting is probably where we've seen the most negative changes due to capacity in China. Additive is where we see the biggest opportunities for growth. Then quickly welding is sort of in between there. Although once again, with welding, electric vehicle welding is a big part of it. And companies like CATL are a big part of this. And as you probably saw, that CATL was put on the defense list last week. So it gets really complex. So to focus on the bookends, cutting is an application that has been around for a while. It's mature. We've got some leading technology in that space. But it is a market where we've seen massive excess capacity from China that affected the market in China. But then over the last year, I think one of the outcomes from 2024 that affected not only lasers, but also many other industrial categories was that excess capacity being exported around the world. In the past, leading companies, say in the U.S., really didn't seriously look at buying machine tools built in China. That changed in 2024. Pricing is far below what our customers, like a company like Mazak, the leading machine tool company, Japanese machine tool company. And so they're seeing competition from Chinese machine tool builders. And then on top of that, their customers in the U.S. are shifting manufacturing to places like Mexico. And then you're seeing even more competition there. So we've talked about this. I think as we step back and look back on 2024, it wasn't the only inflection point. But that trend continued. And so cutting is a market that I think is that much more challenged due to that excess capacity from China. Conversely, I think additive manufacturing is a market that does have very real opportunities for growth. We have leading technology in that space. We have a laser that allows us to shape the beam to dramatically improve the productivity of those tools. And it is a market that has gone through just unrelated challenges. One of our key customers, a company called Velo3D, went through a series of financial challenges. And we had great success with Velo3D. All the SpaceX rocket engines are built with our lasers with Velo3D. Some really great examples. But due to other reasons, Velo3D had some challenges in 2024. We are getting good design wins with the other leading players in that space. And I do see growth in that market. It's a market also that I think is less susceptible to lower cost systems coming out of China. I think many of these applications are very sensitive applications where that's different than, say, the cutting market. Additive is an area. We see it's a bright spot. Moving to microfabrication, a market where there's competition. But is it fair to say the biggest issue there is just a wide variety of applications, but it's just soft market conditions? Or are you seeing changes in the competitive environment? In China, we see changes in the competitive environment. But yeah, to first order for us, we noted the execution issues with our transfer manufacturing. We see real softness in markets there. As we have the issue on the CM side behind us and we start looking forward, could the margin profile on the microfabrication portion of the business get back to historical levels with better demand? I guess is the question I'm asking. For margin in micro? Yeah. Yeah. I'm not sure we really break it out in that detail, but. That historically has had good margins. Right? The IO business? Yeah. And maybe let me try this first, Jim. I think the high level way to think about our business is we're a semiconductor fab. We start there. And we've got a fixed cost kind of business, right? So we have been very clear that sort of $55 million is sort of the break-even level for the fixed cost we've got today. And we've got the capacity to ramp up well beyond that. As you do that, the flow-through is substantial, right? And so the key issue for us is getting that volume back up primarily through growth in the defense business. Yeah, and mix plays a part in that break-even. It does. Right? But Joe is in. Yeah. If we think about that, what you've said about break-even, it doesn't vary at all versus what has happened. It's still going to come down to mix. Correct. It's still $55-$60 million is the revenue level for adjusted EBITDA break-even. And the delta between the $55 and $60 really is both what is the mix within the product and what is the mix between product and development. But we're still confident in that number. Joe, you may want to just remind the audience what the balance sheet looked like at the end of Q3. Yeah. So end of Q3, the company had just over $100 million of cash. We had no debt. We've got ample liquidity for us to achieve our growth objectives. We've got a $40 million untapped credit line today. We own outright a really attractive building in Camas, Washington, which is our headquarters. And it's one thing that we've improved pretty significantly over the last couple of years, right? We've taken down our inventory. Our turns metrics have gone up. Our cash flow conversion has gone down. And so as we continue to really push the envelope on the technology that we're developing, I think what we're also doing is aspiring to be a world-class manufacturing company at the same time, and so we feel good about that dimension over the last couple of years. Probably worth noting, too, the cash position has been relatively stable. Yeah. Yeah. Anything you'd want to leave with investors as we think about nLIGHT and the growth prospects over the next two to three years? Yeah. I think in summary, look, I'm here today to make sure that we're communicating as clearly as we can on quarter is disappointing us. I don't want to sugarcoat that. That's clear. However, underneath that, I think what we see going on in the key areas where we see growth in those two areas in aerospace and defense in particular, we're seeing significant progress there, both in terms of what we're doing and in terms of the demand pull on the other side. And so in future presentations, we'll continue to enhance our disclosures on what's going on there. But what I want to leave you with is those are the two key bets that we've made. And nLIGHT is mission-critical for those applications. And we'll be talking more about it in the future. Would you take? Yeah, sure. Just for the industry, not nLIGHT specifically, where do we stand in our cutting-edge defense technology versus the Chinese? I mean, the Russians? I mean, are we OK? Ooh. I can't say in this room. I don't know. I think that it's a fairly bipartisan issue, but I think the U.S. government needs to do a better job of assessing that topic. I think people are not as clear as they should be on that topic, especially with respect in both. Lasers are unique, actually, because lasers are both China and Russia. Most technology is China, and yeah, I think we need to be more sensitive to how progress is being made in those countries. Is that too cryptic, or is that? It's really? It's a big issue. How about that? We'll go through it. Yeah. But I think it's also one that the government is starting to take and address a little bit more seriously. I mean, nLIGHT is sort of a beneficiary of that, right, as a non-traditional defense contractor. I think we clearly have some really interesting and a really interesting industrial base in the U.S. And so contract vehicles and funding for companies like nLIGHT and others, right, we are really trying to start to push the envelope of what started in the industrial domain, which is nLIGHT's a clear example of a dual-use technology company. And having the opportunity to leverage that into the DOD market is, frankly, for us, we think an exciting driver of the growth, Jim, that you were mentioning before. And for investors, I think one thing that I don't think investors have been as sensitive to this issue, I think. If you were long, I don't know, CATL recently, right, you probably got a wake-up call. I think that's something that will be important for investors to be looking at more broadly, too, because these linkages are profound. Hot war versus cold war, does that affect your defense business? You don't answer? You know. I think that what's fairly interesting that if you talk to we have a woman on our board. Her name is Camille Nichols. She was a two-star general. One of the things that she would say, right, is the modernization of the DOD, like deterrence is a big deal, right? And so I think deterrence is clearly used in a Cold War. But now that we are certainly seeing the world get hotter and Scott talk about, at a minimum, the economic asymmetry that's happening, you use the Red Sea as an example, when you're looking at companies like what nLIGHT is doing from a technology perspective, right, the let's just use lasers as a cost per shot is going down. There's a real economic play there. So I do think that there are, unfortunately, right, both of those situations can drive business for nLIGHT. Maybe not to be too philosophical, but the difference between the two, it's pretty blurry. There's proxies around the world right now that lever off of maybe the Cold War at some point, right? I think we have time for one more. Sorry, we have two. Two extraordinary situations that are exceedingly odd. Yeah. A few more, a couple more than that. Yeah. Good. We have time for, I think, one more. Good. I think Israel has said that they're going to start production of the Iron Dome this year. I think their quarter or something like that. Correct. Would that be the near-term production of the defense deal you have? No. Or is that would be even more near-term than that? I'm talking about production. I'm not talking about. Yeah, yeah, yeah, yeah. Your fundamental question is spot on. It is the second half of this year. Richard, do you want to answer? Yeah. It's the first unit. And it transfers production through next year. We're in that supply chain. We are a key supplier to Elbit here for this. And yes, that is the first big, important directed energy program in the world. It's actually not the first one. There's smaller ones that are out there today. But that's the first key one. That's the one that should really impact your revenue most in near-term. Yeah. We supply a component into that. So the exposure there is modest. So no, it's not the biggest driver of our revenue. But I think it's a very important catalyst to this market. And I personally believe, we'll put pressure on Elbit here, that it will be successful. There is success. There will be more success there. And that will be a catalyst for the rest of the world. Is there another program that would be more impactful to your revenue-wise in that next year, or no? Yes. Yeah. It may not be production like that, but it'd be lower. Yeah. I think we're going to have to leave it there. Good. Appreciate you taking the time, everybody. Thank you.