nLIGHT, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. nLIGHT designs and manufactures high-power semiconductor and fiber lasers, serving industrial, microfabrication, and aerospace and defense markets through its Laser Products and Advanced Development segments. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $50.6m | $60.1m | $158.0m | $185.4m |
| Gross profit / margin | $9.9m / 19.6% | $13.5m / 22.4% | $36.3m / 23.0% | $45.0m / 24.3% |
| Operating loss | $12.5m | $13.0m | $32.4m | $31.6m |
| Net loss | $11.9m | $13.0m | $28.4m | $31.9m |
| Basic and diluted loss per share | $0.26 | $0.29 | $0.62 | $0.72 |
Q3 product revenue was $38.1m, down 20.7%; development revenue was $12.5m, up 4.0%. For the nine months, product revenue declined 19.3% to $118.8m, while development revenue increased 3.0% to $39.2m.
For the nine months, operating cash flow was $9.7m, compared with cash used of $14.6m in 2022. Investing activities used $13.2m, including $8.8m net purchases of marketable securities and $4.4m capital expenditures; financing activities used $2.1m. Cash, cash equivalents and restricted cash decreased $5.7m to $52.3m. At quarter-end, cash and cash equivalents were $52.1m and marketable securities were $59.5m.
Current assets were $224.4m and current liabilities were $33.6m. Total liabilities were $53.3m, including $14.5m of lease liabilities. No amounts were drawn on the $40m revolving credit line, which matures September 24, 2024; the company reported covenant compliance. Stockholders’ equity was $259.5m.
Material changes and management commentary
- Nine-month revenue fell 14.8%, primarily from lower Laser Products sales, with weakness in Industrial and Microfabrication and particularly China. China revenue declined 46.4% to $9.1m; management cited weaker market conditions and its exit from China’s fiber-laser cutting market in Q4 2022.
- Q3 revenue declined 15.7%. Microfabrication was down 32.1%, Industrial down 11.7%, and Aerospace and Defense down 5.8%. Management attributed Industrial and Microfabrication weakness to lower global demand and lower China selling prices; Aerospace and Defense product sales declined, partly offset by new development contracts.
- Q3 total gross margin fell 2.8 percentage points year over year. Management cited lower factory utilization, increased production variances, and sales mix, partly offset by lower manufacturing spend. Nine-month margin declined 1.3 percentage points.
- Research and development expense declined 15.3% for the nine months, reflecting lower headcount, project costs, and stock-based compensation. SG&A declined 4.8%, primarily from lower employee compensation and incentive compensation.
- Management said existing liquidity should fund working capital and capital expenditure needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance. It expects to recognize about 80% of $33m in firm fixed-price performance obligations extending beyond one year by the end of 2024, with the remainder in 2025.
Risks, contingencies, and notable items
- Demand depends on customer capital spending, design wins, market cycles, competitive dynamics, pricing, and government investment in aerospace and defense. Lower production volumes can pressure margins because of the company’s fixed manufacturing cost base.
- Inflation had not materially affected results, but wages, materials, and shipping costs had risen; management cautioned that it may not be able to offset significant future cost increases with pricing.
- A patent lawsuit filed by Lumentum in 2022 alleges ownership rights in certain nLIGHT patents. nLIGHT is defending the matter; management says a loss is not probable or reasonably estimable and has recorded no contingency.
- The U.S. Government represented 17% of nine-month revenue. Three customers collectively represented 39% of net receivables at September 30, 2023.
- A discrete tax benefit from expiring statutes of limitations on unrecognized tax positions reduced nine-month tax expense. The company continues to maintain full valuation allowances in the U.S., Austria, and China due to uncertainty about deferred tax asset realizability.
- Management reported no material changes to the risk factors in its 2022 Form 10-K and concluded disclosure controls were effective.
Key facts for investors to verify
- Whether Industrial and Microfabrication demand, China sales, and Laser Products utilization recover, and how these affect gross margins.
- Whether operating cash generation can continue while the company remains loss-making, including the effect of working-capital movements and capital spending.
- Progress and timing of the $33m long-term performance obligations and new Advanced Development contracts.
- Developments in the Lumentum patent litigation, customer concentration, and the company’s liquidity and revolving-credit-line status.