nLIGHT, Inc. (LASR) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to nLIGHT's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to John Marchetti. John, please go ahead.

Good afternoon, everyone. Thank you for joining us today to discuss nLIGHT's Second Quarter 2026 Earnings Results. I'm John Marchetti, nLIGHT's VP of Corporate Development and the Head of Investor Relations. And 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 statements related to our financial projections and plans for our business, our growth opportunities and demand for our products, the impact of export controls and related supply chain challenges on our product manufacturing and delivery and our mitigation strategies to address such supply chain challenges. These forward-looking statements are subject to risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in today's earnings release as well as other risks and uncertainties described from time to time in our SEC filings, including, without limitation, our most recent annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q. We undertake no obligation to update any forward-looking statement, except as required by law. During the call, we will also 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 press release and in 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.

Thank you, John. Q2 represented another strong quarter of execution for nLIGHT with revenue, gross margin and adjusted EBITDA at or above our expectations. Our second quarter revenue was a record $83 million and grew 34% year-over-year, driven by record products revenue of $59 million, which grew 45% year-over-year. Adjusted EBITDA in the quarter was a solid $11 million, and we generated a record $21 million in cash from operations. During the second quarter, we saw increased demand for our solutions across both defense and advanced manufacturing markets. Our pipeline of new opportunities in directed energy significantly expanded with the recent award of the Department of War's Joint Laser Weapon System contract. Our laser sensing and advanced manufacturing opportunities also continue to grow, providing us with a broad base of new and existing programs and customers that we expect will continue to provide long-term growth opportunities for nLIGHT. Directed energy is an increasingly important priority for the U.S. and our allies, driven by the need for highly scalable, low-cost per shot solutions to counter a rapidly evolving threat environment. Our focus remains on supporting customers across a broad range of power levels and mission profiles, and we are increasingly engaged not only as a laser supplier, but also as a system-level partner. nLIGHT’s high-energy lasers are differentiated across 3 key dimensions: power, brightness and atmospheric correction. We believe all are essential to the successful deployment of directed energy laser weapons. And it's across all 3 dimensions where we believe our HADES family of directed energy products outperforms competing solutions. HADES can scale from tens of kilowatts to 1 megawatt of power while maintaining exceptional beam quality. When combined with our proprietary atmospheric correction technology, HADES provides defense customers with an operational solution capable of neutralizing a wide range of threats. Designed to be low SWaP, HADES can be delivered in a variety of form factors, enabling rapid deployment across a broad range of military platforms and battlefield environments. HADES was instrumental in helping us win the recent Joint Laser Weapon System, or JLWS award, a new multiyear DoW agreement with a contract ceiling of over $600 million. Under JLWS, nLIGHT will develop, integrate and deliver multiple high-energy laser weapon systems that build on the successful delivery of our 300-kilowatt high-energy HELSI-1 laser and our 50-kilowatt high-energy DE M-SHORAD laser. nLIGHT will leverage its proprietary coherent beam combination and atmosphere correction technology and its vertically integrated manufacturing to deliver modular containerized systems that can be integrated across a variety of platforms and rapidly deployed in theater. With increasing U.S. defense prioritization of directed energy lasers and planned demonstrations of operational systems expected as early as 2028, JLWS represents a critical step forward building production-ready laser weapon systems at scale. We also continue to make progress with existing directed energy programs in the second quarter. Our work on the production of our 1-megawatt CBC high energy laser as part of HELSI-2 continues to go well, and we remain on track for this program. Importantly, this laser is based on the same architecture that we use across our HADES portfolio of CBC lasers, demonstrating the scalability of the platform to deliver solutions that address a wide range of mission scenarios. We are making steady progress on the U.S. Navy's HELCAP program for anti-ship cruise missile defense, where we are integrating our 300-kilowatt CBC laser that we delivered under the HELSI-1 program with a proprietary advanced beam control system that incorporates our adaptive optics for atmospheric correction. We believe this work will continue to accelerate the development and deployment of future multi-hundred kilowatt systems over the coming years. We also continue to see increased interest in our defense products outside of directed energy. In the second quarter, we delivered strong growth in our products for kinetic weapons, which remains an important growth driver within our defense markets. These products are delivered into long-standing programs of record and are in high demand due to global restocking efforts as well as new mission applications where the use case for weapons is expanding. Within the space domain, we see accelerating need for both our laser sensing and advanced manufacturing products. Our high-energy pulse lasers are being designed into several new programs that are in the early stages of adoption across the commercial and defense markets. And we have a growing pipeline of customers using our commercial fiber lasers with our proprietary dynamic beam shaping technology in the launch ammunition markets as well. In summary, I'm extremely encouraged by the growing pipeline of opportunities across our entire portfolio of defense and advanced manufacturing solutions and demand for our products remains strong. Our strategy remains consistent. Leverage our vertically integrated technology platform, execute with discipline on existing programs and invest to accelerate and support long-term growth and value creation. We believe this approach positions nLIGHT to succeed across the multiyear opportunities that remain ahead of us. Let me now turn the call over to Joe to discuss our second quarter financial results.

Thank you, Scott. We had a strong second quarter with record product revenue and solid execution. Demand for our products across both our space and defense and our advanced manufacturing markets continue to accelerate, and our pipeline of new opportunities continues to build. Further, our focus on working capital management and targeted CapEx enabled us to generate record operating cash flow in the quarter while positioning ourselves for long-term growth. Turning to the results. Total revenue in the second quarter was $82.6 million, an increase of 34% compared to $61.7 million in the second quarter of 2025 and up 3% compared to the prior quarter. Aerospace and defense revenue was a record $57.3 million in the quarter, up 41% year-over-year. A&D growth was driven by record A&D product revenue, which grew 72% year-over-year and 3% sequentially. Development revenue of $23.2 million grew 11% year-over-year and 5% compared to the prior quarter. The year-over-year and sequential growth in our revenue from the aerospace and defense market was primarily driven by continued progress in our HELSI-2 program, growth in our munitions program and execution across multiple other directed energy and laser sensing programs. Second quarter revenue from our commercial markets, which include industrial and microfabrication, was $25.3 million, an increase of 20% year-over-year and 1% compared to the prior quarter. Revenue from our microfabrication markets was $13.3 million. Revenue of $12 million from our industrial markets benefited from increased demand for our additive manufacturing products and an increase in sales associated with last time buys of our cutting and welding products. As we previously announced, we are exiting our legacy cutting and welding markets, and we do not expect to generate material revenue from these markets in the second half of the year. Total gross margin in the second quarter was 31.1% compared to 29.9% in the second quarter of 2025 and 33.1% last quarter. On a non-GAAP basis, which excludes stock-based compensation, total gross margin in the second quarter was 32.6%, up from 30.9% in the same period last year and 34.4% last quarter. Products gross margin in the second quarter was 41.2% compared to 38.5% in the second quarter of 2025 and 43.6% last quarter. The year-over-year increase in products gross margin was primarily driven by sales mix and the positive impact of higher production volumes on fixed manufacturing costs. Products gross margins were at the high end of our guidance range, but down sequentially on higher manufacturing spend, partially offset by increased volumes. Non-GAAP products gross margin in the quarter was 42.4% compared to 40% in the second quarter of 2025 and 44.6% last quarter. Development gross margin was 5.6% compared to 13.1% in the same quarter a year ago and 5.1% last quarter. The variability in development gross margin is primarily the result of contract mix and the timing of program deliverables in any given quarter. Non-GAAP development gross margin in the quarter was 7.5% compared to 13.1% in the same period a year ago and 7.2% last quarter. Moving down the income statement. GAAP operating expenses were $29.3 million in the second quarter compared to $22.7 million in the second quarter of 2025 and $27.2 million in the prior quarter. The year-over-year increase in GAAP operating expenses is primarily due to higher stock-based compensation. Non-GAAP operating expenses were $19.5 million in the quarter, up from $16.8 million in the second quarter of 2025 and $17.1 million last quarter. The increase in non-GAAP operating expenses was primarily due to higher employee compensation expenses and an increase in R&D material spend. We expect non-GAAP OpEx to remain in the $17 million to $19 million per quarter range in the second half of 2026. GAAP net loss in the second quarter of 2026 was $1.3 million or $0.02 per share compared to a net loss of $3.6 million or $0.07 per share in the same quarter a year ago and positive net income of $645,000 or $0.01 per diluted share last quarter. On a non-GAAP basis, net income for the second quarter was $9.6 million or $0.15 per diluted share compared to $2.9 million or $0.06 per diluted share in the second quarter of 2025 and $11.8 million or $0.20 per diluted share last quarter. Adjusted EBITDA for the second quarter was $10.7 million compared to $5.6 million in the same quarter last year and $13.8 million in the first quarter of 2026. Turning to the balance sheet. We ended the second quarter with total cash, cash equivalents, restricted cash and investments of $330.8 million. During the second quarter, we repaid the $20 million that we had previously drawn down on our $40 million line of credit, and we generated a record $20.7 million in cash from operations during the quarter. Turning to guidance. Based on the information available today, we expect revenue for the third quarter of 2026 to be in the range of $63 million to $73 million. The midpoint of $68 million includes approximately $43 million of product revenue and $25 million of development revenue. Please note that our revenue guidance for the third quarter excludes approximately $17 million of product revenue that we would have expected to ship in the third quarter but is now expected to be delivered in future quarters. We are currently experiencing challenges in getting some parts and materials from certain Chinese suppliers. While these materials do not represent a large portion of the overall bill of material of our products, delays in sourcing these materials, which primarily affect our commercial products, will not allow us to fully satisfy our customer demand in the third quarter. Overall gross margin in the third quarter is expected to be in the range of 24% to 30%, with product gross margin in the range of 34% to 40% and development gross margin of approximately 8%. The expected sequential decline in products gross margin is largely driven by the lower expected product volumes. As we've mentioned previously, as a vertically integrated manufacturing business, gross margin is largely dependent on production volumes and absorption of fixed manufacturing costs. We expect adjusted EBITDA for the third quarter of 2026 to be in the range of $1 million to $7 million. With that, I will turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from the line of Jonathan Siegmann with Stifel.

Congratulations on strong results. Could you maybe talk a little bit about how the JLWS award rolls into '26 and '27? I realize you may not give exact numbers on that, but maybe you can square that with the headwind that you might see from HELSI-2.

Jon, the JLWS award will start to contribute revenue in the current quarter. We will run into the fourth quarter and then really start to ramp up in 2027. But the second half of the year will be just really the initial stages of the program.

And its contribution in '27, how should we think about how much of that helps relative to the headwind you might see with HELSI-2?

Actually, I'll characterize it as it will be a nice replacement and then some relative to the HELSI-2 program. So a couple of quarters ago, there was some concern that the HELSI-2 program was going to fall off, and we knew it would trail off. But with the award, the win with JLWS will more than make up for that as we get into 2027.

Your next question comes from the line of Louie DiPalma with William Blair.

From a technology standpoint, how is the prototype for the Joint Laser Weapon System that you're developing different from the HELSI-2 prototype and your HADES platform?

Louie, this is Scott. Thanks for the question. The program that we just won, JLWS is a -- as Joe just mentioned, is a continuation extension transition, if you will, for the work we've done on HELSI to demonstrate the technology. JLWS is a program that's focused on transitioning that into products at, again, the high power levels. So it builds on what we've done with HELSI. It builds on the HADES product family and continues to both expand our product line and at various power levels.

Okay. And I guess from a high level, related to HELSI-2 and JLWS and HADES, what would you estimate is the projected time line on when some of the laser systems will be fielded at scale?

Yes, that will depend on how the U.S. budgets, in particular, progress, and we're seeing continued expansion and interest in those programs. But we don't anticipate that there will be a program of record over the next year. We do anticipate that we will see increasing interest and increasing demand. And we will transition to initial prototypes for the higher power levels in the coming couple of years. And from there, it goes to a low rate production set of opportunities, and it will scale from there.

Great. And one final question. As you know, the missile industry is in the midst of a dynamic period with multiyear agreements established for many of the top 15 programs. Should this have a positive impact on your sensing business? And is there the potential for you to be incorporated as a second supplier on some of these missile programs that you aren't involved in today?

Yes. Good question, Louis. The short answer is yes. I think the restocking that we are seeing of traditional kinetic munitions, particularly on the missile side, will be a benefit to nLIGHT. If you go back over the last 18 months, for example, we announced a $25 million award just roughly 18 months ago. We followed up at the end of last year with a $50 million award for -- both of those awards were for roughly the same period of performance. So we are seeing in certain programs, our -- just the number of units continue to grow and our content continue to grow. We expect that to continue here in the coming years. And then the second part of your question is it is part of our plan from a sensing perspective to expand the number of opportunities that we have with missiles in particular. Now as you know, that gestation period is and can be long, but it's certainly something that is in the plan for us.

Your next question comes from the line of Jim Ricchiuti with Needham & Company.

I was hoping to better understand the supply chain situation. I wonder if you could elaborate on the component or material that is creating that shortfall in the Q3 guide because otherwise, it would sound like your Q3 product guide would be significantly better and overall revenue much higher. I'm trying to get a better sense as to when this could be resolved, what some of the challenges are.

Good, Jim. This is Scott. I appreciate the question, and you're exactly right. Q2 was a record quarter, and we've got very strong demand across the board. And we would have guided higher had it not been for the supply chain challenges that we're seeing. And those challenges come from what appears to be China increasing scrutiny on dual-use products for defense tech products. And the particular commodity that I would highlight would be optics, these are not specialized components. They're materials where China has built out an outsized portion of the overall supply chain over time. And we're seeing delays in the ability to get some of those components that's affecting Q3. In terms of the outlook, I'll let Joe chime in a little further to expand upon that.

Jim, your observation was absolutely right. We have a very strong demand in the third quarter, and we wanted to try to quantify that and give you some direction to give you a sense that we would have expected that, but we do expect that demand is still there. The forecast is still strong. Backlog is strong. Our ability to execute on that backlog in the fourth quarter is still a little bit of a question mark for us at this point.

Well, again, if the supply is coming out of China and do you have -- it sounds like they control a fair amount of the supply chain for this material. So what's the risk that this just ends up going on for more than a few quarters, I guess, trying to get a sense as to how -- and I assume this is affecting more of your defense business. Is that right?

Jim, good question. No, the actual impact of it is more on the commercial side of the business and the products that we build. As Scott said, this is largely related to the dual-use nature of our products. As you know, we've spent a lot of time over the last couple of years derisking and moving manufacturing out of China. Our revenue base has certainly moved out of China. A good bit of our supply chain has moved out of China. So from an overall percentage of the bill of materials, we're not talking about a lot of the BOM, but it doesn't take more than just a couple of components for us to complete the build. So we could see that this could resolve itself quite quickly or it will take months to quarters depending on what the particular mitigation strategy is, right?

Your next question comes from the line of Greg Palm with Craig-Hallum.

Yes. I'm going to, I guess, follow up on that because my very next question was going to be what is your current mitigation strategy? I mean, can you find these components outside of China? Presumably, you're already trying, but just give us some sense on what the availability is at this point.

Yes, Greg, it's Scott here. Again, we have been derisking China for some time now. We've shifted our focus to markets outside of China. We've moved our manufacturing out of China. But it does take time on the supply chain side to requalify, redesign some of these complex lasers. And so we're in the midst, and we've been working on this on -- working with our existing supply chain partners. We're evaluating and qualifying new partners. And where we can, we're evaluating redesign of our products to provide more flexibility for the future. So those are some of the themes that we're focused on here. And this is something we've talked about, but it's something that has even greater focus now.

Okay. And I just want to be clear, I think you said it mostly impacts commercial. Is there any chance that this could or would impact anything in defense and specifically, for instance, the ramp-up or potential contribution of JLWS?

Yes. As Joe said, this is mostly commercial. It's part of our dual-use strategy. But there's some exposure here, even if it's indirect to our defense products. The majority of our defense supply chain is domestic. But we do use some of our own commercial items, which do have exposure to some of these Chinese components that go into our defense products. And in terms of the implications for JLWS, I think I would just put that in that context. This is a fairly small number of products, but it is something that we're working through.

And Greg, just to be clear, the initial work that we are going to do on JLWS will largely be unaffected by the supply chain issue. So for us right now, that program is all systems go.

Yes. And just to be clear, you're referring to the $44 million, is that what you call the initial work?