Jason Willey - Senior Director, Investor Relations Ran Bareket - VP & CFO Scott Keeney - Co-Founder, Chairman, President & CEO.

James Ricchiuti - Needham & Company Brian Gesuale - Raymond James & Associates J. Ho - Stifel, Nicolaus & Company Jonathan DeCourcey - Canaccord Genuity Limited Thomas Diffely - D.A. Davidson & Co. Samik Chatterjee - JPMorgan Chase & Co. Thomas Hayes - Northcoast Research Partners David Nierenberg - Nierenberg Investment Company.

Good day, and welcome to the nLIGHT, Inc. Second Quarter 2018 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jason Willey, Senior Director of Investor Relations. Please go ahead..

Thank you, and good afternoon, everyone. As the operator said, I am Jason Willey, nLIGHT's Senior Director of Investor Relations and Corporate Development. Scott Keeney, Chief Executive Officer of nLIGHT, and Ran Bareket, Chief Financial Officer, will be the speakers on today's call.

If you have any questions after the call, please direct them to me at 360-567-4890, or Jason.Willey@nLIGHT.net. A copy of today's earnings press release is available on our website, at www.nLIGHT.net. In addition, you can access any archived version of today's call from our website.

In today's call, our discussion will contain forward-looking statements, including statements about financial projections, future business growth, trends and related factors, prospects for expanding and penetrating addressable markets, and our strategic focus and objectives.

Forward-looking statements are subject to risks and uncertainties, many 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. We undertake no obligation to update publicly any forward-looking statements.

Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these non-GAAP financial measures against 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 Ran, to go through the financials and outlook. Scott will then provide additional color on the second quarter and the overall business. We will then be glad to take your questions..

Thank you, Jason, and good afternoon everyone. We delivered strong results in the second quarter with record quarterly revenues, gross profit, and adjusted EBITDA. For the first half of 2018, revenues grew 46% year-over-year and we continued to make meaningful progress towards our midterm gross margin and profitability targets.

Revenues for the second quarter for 2018 were $51.7 million, up 49% year-over-year reflecting positive trends across each of our end markets. During Q2, sales to industrial end markets were $25 million, representing 49% of total revenue, and up 83% year-over-year.

Sales to microfabrication end markets were $19 million or 38% of total revenue, and up 21% [ph] year-over-year. Aerospace and defense sales were $7 million, or 14% of total revenue, and grew 47% compared with the second quarter of 2017.

On a geographic basis, sales to China were $24 million in the second quarter of 2018 or 46% of total revenues, up 59% compared with Q2 2017. Sales in North America were $16 million, representing 32% of total revenues and growing 62% year-over-year.

Rest of the world sales were $12 million, up 20% compared with the second quarter of 2017, and 22% of total revenues. Gross margin was 34.2% in the second quarter, an improvement of 340 basis points year-over-year.

This improvement was driven by higher volume and continued cost reduction effort, partially offset by higher mix of industrial revenues from China. Operating expenses were $12.1 million during the second quarter, compared with $8.8 million in the second quarter of 2017.

Q2 operating expenses include $800,000 of stock-based compensation, an increase of approximately $700,000 year-over-year. As we grew the business, we continued to invest in R&D, and the go-to-market infrastructure necessary to support this growth and future opportunities.

Second quarter operating income of $5.5 million was 10.7% of revenues, and compares with $1.9 million, or 5.5% of revenues, in the second quarter of 2017. Our adjusted EBITDA for the second quarter was $8.5 million, or 16.5% of revenues. This compares to $3.9 million or 11.3% of revenues in Q2 2017.

GAAP net income for the second quarter of 2018 was $4.7 million compared with a loss of $0.3 million during Q2 2017. GAAP EPS for the second quarter of 2018 was $0.11 per diluted share compared with a loss of $0.11 in the second quarter of 2017.

Non-GAAP EPS, which excludes the impact of stock-based compensation and assumes the conversion of all outstanding preferred stock in the period to common stock, was $0.14 per diluted share in Q2 2018 compared with the loss of $0.01 per share in Q2 2017.

Turning to the balance sheet, we ended Q2 with total cash and cash equivalents of $129.7 million and $17.4 million of total debt. DSO at the end of Q2 2018 were 35 days. Inventory at the end of the quarter was $75.3 million, representing 93 days in inventory.

During Q2, we generated $1.8 million in cash in operating activity, reflecting an improved profitability, partially offset by working capital expansion. Capital expenditures for the quarter were $2.4 million or 4.6% of revenues. Turning to the guidance for the third quarter of 2018. We expect revenues to be in a range of $48 million to $52 million.

At the midpoint of the range, this implies year-over-year growth of approximately 37%. Our outlook for the third quarter reflects continued strong demand across each of our end markets.

For the second half of 2018, we reiterate the comments we made during our Q1 earnings call in May that we expect revenues to be slightly higher than the first half of 2018. Based on our current expectation for product mix, we see gross margin for Q3 2018 in a range of 33% to 36%.

This outlook reflects our expectation for accelerating price decline in certain segments of the industrial end market, particularly in China. While price declines are a normal part of the market, we expect more aggressive declines at the lower end of the fiber laser market in the second half of 2018.

For the third quarter, income from operations is expected to be in a range of $3 million to $5 million. Our income from operations outlook includes approximately $2 million of anticipated stock-based compensation expenses. We expect adjusted EBITDA in a range of $7 million to $9 million.

We expect average basic shares outstanding of approximately 35 million, and approximately 40 million average fully diluted shares for Q3. Going forward, we will move away from providing quarterly outlook for operating income, and instead provide guidance for adjusted EBITDA.

We believe adjusted EBITDA provides the best view into the underlying profit trends of our business. I will now turn the call over to Scott..

North America, China, and the rest of the world. Both China and North America sales grew approximately 60% year-over-year. We are benefiting from strong overall demand and are expanding our design wins with new and existing customers. In the China market, we continued to see strong demand across the industrial and microfabrication end markets.

Q2 is typically a strong quarter in China, as activity accelerates out of Chinese New Year. In Q2 2018, we were better-positioned than in the past from a working capital perspective to meet this seasonal uplift in demand.

We have focused in China on developing relationships with a set of strategic customers, and we are seeing the benefit of these efforts from ramping volumes in this geography. As we look to the back half of 2018, we see opportunities to expand into new strategic accounts and markets.

As Ran mentioned in his outlook for the third quarter, we have seen an increase in price declines in certain low-end segments of the industrial end market in China, and we anticipate the pricing environment will remain aggressive in the near term.

We are comfortable with our ability to manage through this environment, given the scale of our business, our ongoing cost reduction efforts, and the new products we are bringing to market in the second half of 2018. Cost reductions are a key component of both our technology R&D and design efforts.

These cost reduction initiatives, along with the addition of value-added features and high-power offerings, support our belief that over time we can drive gross margins higher even as prices move lower. To date, we have not seen any meaningful impact on our financial results from the Section 301 tariffs imposed by the U.S.

in early July, or retaliatory actions by the Chinese government. As a reminder, the majority of our end products do not end up in the U.S., and are therefore not ultimately subject to the new tariffs as currently structured.

We also have flexibility in our manufacturing capabilities, and the ability to manufacture our products here in the U.S., and assembly capabilities in China. Our sizeable manufacturing presence within China also helps us manage our foreign exchange exposure.

We are closely monitoring the current geopolitical dynamics for potential direct financial impacts and changes in customer behavior, and we have examined various mitigation plans in the event of an escalation of trade actions.

Moving to new products, earlier today we announced new fiber lasers that build on our leading position in small-form-factor high-power lasers. This includes a 1.5-kilowatt rack-mounted offering, which extends the output power of this highly successful product family by 25% while reducing the product size by over 15%.

In addition, we are extending the output power of our compact product family with the addition of a 3-kilowatt offering. These lasers are the smallest available at this power level, greatly simplifying tool integration and consuming less space on shop floors.

Products in the range of 1 kilowatt to 3 kilowatts are in high demand for industrial metal processing.

Despite the small size, nLIGHT's new products incorporate advanced features found in our higher-power fiber lasers, including hardware-based back-reflection protection for uninterrupted processing of reflective materials, the industry's highest modulation rate and power stability, rapid field serviceability, and proven reliability in harsh environments.

These new offerings continue to extend our high power product and technology leadership and provide meaningful cost advantage for nLIGHT compared to our existing offerings.

In the coming months, we will introduce two new fiber laser platforms that will significantly expand our commercially-available high-power capabilities beyond 8 kilowatts, and will greatly enhance the utility of our lasers through programmable beam characteristics. We are excited about these next-generation products.

These new platforms will better position nLIGHT to address the large market in high-power cutting applications. They will enable numerous applications in advanced manufacturing, and they will come with a substantial reduction in our costs.

The team at nLIGHT continues to execute to our three key strategic initiatives of increasing sales, reducing costs, and enabling new applications. Core to this strategy is our new product pipeline and our success establishing strong relationships with strategic accounts across our global footprint and diverse end markets.

We look forward to talking more over the coming months about an exciting set of new solutions we will bring to market, that will enhance our leadership in the semiconductor and fiber laser market, and allow nLIGHT to further penetrate larger customers in China, North America, and Europe.

In closing, I'd like to thank the entire nLIGHT team for their efforts during the second quarter. With that, we will now hand the call over for Q&A..

[Operator Instructions]. Our first question comes from Jim Ricchiuti with Needham & Company..

I wonder if you could just talk a little bit more about the pricing environment.

Is -- some of the pricing that you're anticipating in the second half of the year, is that coming mainly from some of the local Chinese companies at the lower end of the market?.

Yes, happy to talk about that. Towards the end of Q2, we did see some acceleration in price declines. Over time, the market has continued to grow as prices have come down, so this is something we see twice a year, typically.

But we did see continued competition in the lower-power competitors in China, and we have factored that into our guidance going forward. We certainly expect the market to be competitive in China, and we've experienced that for some time.

So we're comfortable with our ability to manage through this environment, given the scale, given the ongoing cost reduction efforts, and particularly the new products that we're introducing. Today, we announced our new low-power, 1.5-kilowatt and 3-kilowatt lasers that are smaller footprints, higher power, and lower cost.

So, I think we're well-positioned to continue to compete in this market..

And a follow-up question. Scott, you alluded to not only the strength within your existing OEM customers on the industrial fiber laser business, but you talked about some initial qualifications with some specific customers.

Can you shed any more light on that, in terms of what's happening?.

Yes, happy to, Jim. So we've alluded to the fact that we'll be introducing new products in the coming months that are both higher-power and higher-performance, and it's really those products that we think will be very important to continue to drive our growth.

The legacy lower-power market in China is certainly an important market, but looking ahead higher power and higher performance are the key themes that we'll be driving, and we'll be announcing those products in the coming months, but certainly we're talking to larger customers today about those new products and the features that they provide.

So we're not in a position to announce anything today, but that's the direction that we're going..

Can you say when you might have a beta, some beta lasers with those customers? Or is that a little too further out, still?.

No, no, it's in the coming months. So Q4 is probably the -- we'll be announcing some new products starting next month on the performance side, so stay tuned for that. And then following that, we'll be announcing products with further features and also higher power, so coming up soon..

Our next question comes from Brian Gesuale with Raymond James..

A couple questions I wanted to explore, is we kind of compare and contrast the first half of the year and the second, maybe by geography. North America and China were somewhat congruent in growth.

Do you expect that kind of parity to continue as we exit the year and hit the second half, or are we going to see any pickups or decelerations in either market?.

Brian, it's Ran. No, as a matter of fact, and we talked about it last time. Q2 was a little bit, the mix was a little bit higher in China as expected due to the Chinese New Year, but we will see that going back to, call it a normal mix, in the second half of the year, very similar to what we had at the beginning of the year.

So we will see the same trend, growth in China as expected right now. We will continue to see a growth in China. However, what we saw in Q2 was a little bit higher than mix to China versus the rest of the world..

Wondering also, maybe to piggyback off of that one within kind of your top 4 or half dozen clients, are you seeing any meaningful changes in buying patterns? And maybe just on the housekeeping side, assuming Zhu Xiu [ph] was a 10% customer in the quarter, can you maybe talk through client result there?.

Yes. Certainly, Zhu Xiu [ph] quick laser is the number one customer, and you'll be seeing those data. So they continue to do well. We've supported them for years now, and they continue to grow very nicely. I just want to reiterate that Q2 coming off of Chinese New Year is the real peak quarter for the industrial market in China.

And remember, that's roughly a third of our business, so our business is diversified outside of that. But it is an important market and Q2 really is the peak there. So what we see going forward are those customers continuing to expand with new products, and higher-power products in the second half..

Great, that's helpful, Scott. And then the last one, and I'll jump back into the queue.

Just to follow up on your commentary on pricing, is there any way you could maybe talk about the magnitude in change that you saw kind of over the last couple weeks of the second quarter, in terms of how much the pricing declined, or deteriorated in the lower end of the market?.

Listen, we will not quantify that just for the reason that you need to understand that in different product, we are seeing obviously different price change. However, as Scott mentioned before, it's very typical to see on an existing product, a reduction in ASP.

It's true that at the end of Q2 we saw maybe an acceleration in this process, specifically from the Chinese market. Specifically on the low end, or low-power products. However, it's all incorporated in the guidance that we provided for the revenue as well as the margin, and this is what we are seeing currently..

Our next question comes from Patrick Ho with Stifel..

Scott, maybe a little bit of a follow-up or some color on your commentary regarding some of the 1-kilowatt to 3-kilowatt power -- I guess power lasers that you talked about, in terms of cutting applications. But you were seeing growth in other areas.

Can you just discuss what other applications you were seeing growth, that kind of differs from some of your other competitors?.

Sorry, yes, I just want to make sure I'm responding thoughtfully here, Patrick. I noted that a third of our business, roughly, is industrial market fiber lasers in China. Outside of that, we serve the microfabrication market, aerospace and defense market, and other industrial applications outside of China.

So are you referring to those markets outside of China, or are you referring to within….

No, I was actually probably referring -- I apologize if I wasn't clear.

More just kind of China and the applications, whether it's cutting, welding, what were the key drivers for you?.

Yes, for us the majority of our business is in cutting, and we continue to see growth in those applications. Certainly we serve other markets, EV battery and welding and other applications, but the majority is in cutting for us..

Great, that's helpful, and maybe just going to the new platforms that you're going to be introducing in a few months, given historically in other market segments or other businesses, typically when you introduce a new product, there's always kind of the softer margin profile you'd get as those products ramp up.

Have you done anything on the cost side, where you'll see less of that impact of new product rollouts having lower margins?.

Great question. These products are not only about higher performance and higher power, they're also driving cost. So we're incorporating new architectures from the core technology of the semiconductor laser, the fiber, and other technologies, to also continue to drive our average costs down for these new products..

Our next question comes from Bobby Burleson with Canaccord..

This is Jon DeCourcey on for Bobby. We've had a couple questions answered already, but just on to a few of our questions. First off, looking at the guidance on an initial review, it looks as if OpEx would be up pretty significantly, sequentially, from the second quarter.

Can you give a little more color on that?.

Yes, sure. So first of all, you are absolutely correct. Keep in mind that there is a growth in incremental costs between Q1 to Q2 of roughly $700,000 due to the equity base compensation. The cost in Q2, by the way, was $800,000. In Q1, it was roughly $100,000. So incremental $700,000.

In Q3, we should expect to see around $2 million, $1.9 million to $2 million of equity cost compensation. That will be the majority of the increase between Q2 to Q3 on the OpEx.

You will see some additional cost increase due to the investment in R&D from headcount perspective as well as the development costs for our new product which Scott just mentioned. So you will see that cost going up as well, however, the majority of the growth between Q2 to Q3 will be roughly again $1.2 million on the equity compensation.

By the way, this is one of the reasons that we are giving a guidance also on adjusted EBITDA, that as you know does not include the equity cost compensation..

And then a second question is, in terms of competition, how have you seen the pricing environment and competitive environment relative to some of the others in the space, namely an IPG, a Raycus, Coherent?.

Yes, good. So just to reiterate, we continue to see competition primarily in what we call the lower-power legacy fiber lasers in China, and with, in particular, the manufacturers in China. And I do want to note, I mean, it may affect our ability to continue to improve our margin in the near term at the same rate that we have.

However, we remain committed to our 45% gross margin target, and really excited about the new products that we're launching.

I mean, today we're launching a product that directly addresses that market with a smaller, lower-cost product, and we'll be launching future products that continue to move beyond that legacy market to higher-power, and much higher-performance products.

So that's where we see the main competition today, and certainly as we go forward we'll be talking more about those new products..

Our next question comes from Tom Diffely with D.A. Davidson..

First, a couple clarifications.

Ran, did you say that the full-year outlook, you're saying, is unchanged versus a quarter or two ago, and so pricing's come down but the volume has gone up?.

So basically what I said, that the same remark or the same business strength if you will, that we saw in the previous call in May when we said that the second half of the year will be slightly higher than the first half of 2018, the same comment has remained as we speak right now.

We still see that the second half is going to be slightly higher than the first half, and we took everything that we so far know, including -- as we said at the beginning -- including the price erosion into consideration..

And then what are you looking at for the share count in the third quarter?.

Okay, so let's talk about Q3. It will help you to obviously calculate the EPS so the diluted share will be roughly 40 million shares. And the basic will be 35 million..

And Scott, just a clarification on this side, you talked about price weakness, pricing pressure at the low end. But then you talk about 1 kilowatts to 3 kilowatts right after that.

I just wanted to get a clarification [indiscernible] pricing extends all the way up into the 3-kilowatt range, or below that?.

That's a good question, Tom. Yes, I think different ways to segment out products here, but I think 1 kilowatts to 3 kilowatts is a reasonable way to take a look at it.

Certainly as you get to 3 kilowatts, it is a higher-powered product, and we have features in our 3-kilowatt laser that are far beyond a lot of the competition that we see, especially in the low end in China. So it's really not apples-to-apples, but I think it still is fair to consider that sort of 1 kilowatt to 3 kilowatt range.

That segment, where we see more of the competition..

And then when you're talking to some of the potential customers, is it the programmability that is what they've been waiting for, or something that they're really looking forward to? Or is it [indiscernible] second source of prior higher-powers?.

I'll highlight the -- the programmability we'll be talking about that in the coming months. But that is a feature that we have disclosed to select customers, and there's very strong interest in that ability that they simply don't have today. So we will be talking about that more coming up..

Okay, and is that a retrofit possibility, or is it different hardware as well?.

I’m sorry, you cut out there, Tom.

Can you repeat that?.

Yes, can you possibly retrofit that upgrade to the existing customer base, laser base, with that programmability? Or is that new hardware, as well, new system?.

Well, let's see. It's a little bit of a complex -- very good question, it's a complex answer. I think the short answer is, we're really focused on new lasers, new applications, although there's certainly the option of retrofits also.

But the first order, this is new lasers and really some new applications, new cutting applications in particular to start with..

Okay, and then [indiscernible] when you look at the potential for welding, what needs to happen for that market to take off like cutting has in the last couple years?.

It's a good size market today. It's a very large opportunity for lasers. The reason it's harder to -- it doesn't grow as quickly, is it tends to be a much more fragmented market where each application tends to be a separate project, or can be. So it takes a little longer to be adopted and to be qualified in these applications.

When you're doing a weld on something, it can be a mission-critical part of whatever product you're building in, say, an automobile. And so the qualification process there can be more lengthy and more particular to each application.

So I think that's the fundamental difference between the two, but no, we remain bullish that that is a large opportunity that will continue to seek growth..

Our next question comes from Samik Chatterjee with JPMorgan..

I just wanted to sort of get a sense when I look at your revenue growth here in the first half, which is 46% year-on-year that you've talked about.

How should I think about the outperformance for the underlying market, what is kind of the peer group growth, what is the market growing at when I look at your different segments like industrial or microfabrication, and aerospace and defense? How do I get a sense of what kind of market share wins are you getting right now in the first half, or in a more sort of longer-term basis? And then when you talked about the new products that you're launching later this year, do you think of those as an opportunity to back share your market share wins, given that you sort of address it any pleasing market or do you think as them as more of being sort of a cost, or cost opportunity, rather than a revenue opportunity?.

So first, we're growing faster than what we believe the market is growing, and if we segment it by these end applications, industrial, you just take the year-over-year for Q2, we grew over 80%. That's well above what we think that market is growing at. And microfabrication grew over 20%. Again, that's well over what we think that market's growing at.

Aerospace and defense we grew almost 50%, which is far beyond what that market is growing at. In aggregate, there aren't any great resources to point to, to summarize what the semiconductor and fiber laser market overall is growing at, but we believe roughly at 20% CAGR over the long term is the right way to think about this market.

We see strong growth as semiconductor and fiber lasers displace other technologies, and that will change over time. But we think that's a reasonable number, so our growth rate is well in excess of that..

And how do you think about the new product, is that more of an incremental that you're addressing, and more kind of opportunity for market share wins? Or are you thinking of more kind of the cost reduction opportunity with those new products?.

Yes, I think first order is, we are opening up new applications for fiber lasers. For example, some of our new products will allow our customers to do things that they can't do with fiber lasers today, so it opens up that TAM. It certainly opens up the opportunity for us to gain share of some of the larger customers in this space, also.

And certainly at the end of the day, as I mentioned before, these new products are also lower cost, and that continues to help our customers gain traction in their markets, too..

And if I can just follow up with one more, it's just related to your comments around the pricing environment. Clearly, you're outperforming the market share based on the numbers you're sharing.

So how do you think about balancing how much outperformance you have for the market, and market share wins related to the gross margin, balancing that against the gross margin, and maybe sort of not going into segments that are low gross margin in that case? How do you think of the long-term ramification of that strategy?.

It's a great question, and it's a constant question that we face as a company. To just be really candid, that as you grow, we certainly are focused on continuing to drive our technology to continue to enable new applications for both semiconductor and fiber lasers, and we have always been a company that has grown at a steady and very healthy clip.

And in doing so, that's allowed greater scale that brings down our costs, and really then opens up the market further. And so we certainly see continued growth. But certainly, there are markets, there are specific customers and specific applications where we'll say no, we're not going to participate in that space because it's not attractive.

That's an ongoing discussion that we have for our management team, going all the way up to the board of directors. So there's no simple answer to that trade-off, but I think it's a good question, because we acknowledge that. That is -- we're not simply about driving the highest volume at any cost, and any margin.

We are about growing at a very healthy clip and continuing to expand our margins as we do so..

Our next question comes from Tom Hayes with North Coast Research..

Scott, you just want to circle back real quickly on your new 3-kilowatt laser -- is that available now, is that primarily like you mentioned, is that primarily to address the Chinese market?.

Let's see. It is available. We publicly announced it today. It's been out with customers in initial beta trials, and certainly the largest market is in China for that, in the cutting market. But it is a laser that applies certainly worldwide, and frankly we're getting interest in markets that we didn't expect.

It is the smallest 3-kilowatt laser that's available. And looking back just a couple years, it's significantly smaller than similar lasers were just a couple years ago. So we're getting interest beyond that market, but to start with, yes, certainly the largest single market is cutting in China..

Okay, and I think obviously a lot of focus on the questions today have been on China, but North America didn't really put up shabby numbers either.

Maybe you'd provide a little bit of color, what you're seeing there as far as end market demand, and kind of the outlook for the balance of this year?.

Yes, good. Certainly, 60% growth in North America was really nice, and we continue to see good growth in North America, and good balanced growth in North America, industrial, microfabrication, and aerospace and defense in North America. So we're seeing adoption in all of those segments, with key customers.

Obviously the industrial market in North America is not as big as it is in other countries, but we are seeing adoption and looking forward to releasing our new products, at the FABTECH show for example coming up will be a nice highlight for us..

And maybe just lastly, as far as on the pricing front, you called out certainly significant pricing actions or activity in China on the low-power or the 1 kilowatt to 3 kilowatt.

Are you seeing anything of a similar magnitude, or maybe you'd describe what that pricing environment looks like here in North America?.

We don't see the same sort of aggressive dynamics in North America as we do in China, for sure. But I will say that we've been doing business in China for a long time.

We started our business there in 2003, so we've seen this in other product spaces, and it's one of the reasons that we have been -- we've always seen China as a strategic market, not only as a good end market, but it also drives us to continue to drive our products, to serve that market well and to continue to make sure they're really cost-effective for the world.

And so over time, certainly it's a global market, and we want to make sure that we have products that are competitive around the world..

Our next question comes from David Nierenberg with Nierenberg Investment Company..

On the 31st, one of your competitors announced that its sales growth rate was only 12%. It guided down sequentially, reduced their expected annual revenue growth rate to only 7% to 9%, and cited a fairly long set of reasons why their business is weakening in Europe and China.

And they cited global unrest, and they cited foreign exchange, and your stock sold off substantially in sympathy. But you have produced a very different result, and given a very different forward guidance relative to them.

What explains the difference in the trajectory of their forward guidance, and their commentary, relative to yours?.

Good question, David. Let me parse it a bit, here. First, I want to say certainly our business is different to begin with. Fiber lasers are a very important part of what we do, but we are also in the semiconductor laser market, and that diversification, it's all the same core vertical and integrated technology.

But we do have a broader set of markets, and products. As I said, only a third -- it's important, but a third of our business is fiber lasers in China, and that's where we see the most significant competition.

We also have very strong markets in microfabrication, aerospace and defense, and it's really a different set of competitors that we face in those markets. That's point one. Point two, even in the fiber laser market, our exposure is a little different. We don't serve, for example, the automotive market in Europe.

That's not an important market for us today, and not exactly sure what's going on in that market but I understand that that's been a bit soft. There's some other segments. EV batteries in China, we serve that market, but it's not a very big one. It's one that it does appear that we've seen softness in that due to overcapacity.

It's not a big market for us. So those are some of the reasons, and that's one of the reasons that we're seeing continued growth..

Well, either you've done a shrewd job of picking your target markets, or there's some other explanation of the widening gap in your respective trajectories, and it suggests that the magnitude of the sympathetic sell-off that happened to you at the beginning of the month was not warranted..

Yes, we remain confident. We do want to acknowledge the aggressive pricing. We certainly want to clearly explain what we see going on in the market, but by the same token, yes. We're seeing, as we said before, continued growth year-over-year.

As we said, the second half will be only slightly higher than the first half, but it's still strong year-over-year growth..

[Operator Instructions]. Our next question is a follow-up question from Jim Ricchiuti with Needham & Company..

Yes, I just wanted to ask you about the other two parts of the business, the other two verticals, microfabrication where you did show very nice growth, and particularly in light of what's -- some people have pointed out, is a challenging consumer electronics market right now, that's -- there is some applications for your laser diodes in that market.

So I wonder if you could talk, Scott, about the outlook for that business. You alluded to some newer applications, even in the consumer packaging market. And then I had a follow-up on the aerospace and defense side..

Great, let's go through both those, then, Jim. So first on the microfabrication market, yes, it's been a very good market for us. And again, it's one where for us it is less about fiber lasers, and more about our semiconductor lasers. There's a different product, different vertical that we serve.

It's a broad-based set of applications for us, ranging from consumer electronics, semiconductor capital equipment, medical, wide range of different industries and the various applications range from hole drilling, PCB processing, wafer scribing, and marking.

Marking is one example that we listed, in this case UV marking in particular, where we're enabling a new application where previously the lasers were relatively expensive, and based on our technology we may be able to take that cost down and open up a whole new set of markets.

So we've seen really nice growth in that space, and I think we're quite well-positioned. We continue to drive our semiconductor laser technology very hard, and we continue to lead in the highest brightness semiconductor lasers in the world, and that's what enables these applications..

And in terms of your outlook there, is that typically part of the business where you have more or less visibility in terms of what you see in the industrial markets?.

Well, if I had to rank visibility, aerospace defense is where we have the most, and industrial, it's relatively shorter-term. Microfabrication, somewhere in between, I think is probably a good way to think about it..

Okay, and just finally on the aerospace and defense, small part of the business, but there does seem to be some more activity not only on the grant side, but also working with some customers on some specific programs?.

That's right. We have always served this market. We've won many awards for our work in this market. It's always been part of our business, and while it's a relatively small part of our business today, it is growing nicely. Q2 grew just under 50%. And we're continuing to expand our design wins in this space.

There's nothing that we can announce today that's specific there, but I will say the category of directed energy is an important one. We have leading semiconductor laser technology and fiber technology allows us to enable that space.

And just to highlight another example, and we'll put out a press release in September on this just one example -- one of our lasers will be launched by NASA next month to measure the polar ice caps. It's a really cool application. It's a very difficult thing to do, to qualify a laser for space.

It's one of the reasons that we serve this market, is not only do we believe it's an important market long-term, but it's a very challenging set of specifications that drives our technology and reliability that then serves the broader markets well, too. So very proud of our work there, and we envision continued growth..

This concludes our question-and-answer session. I would like to turn the call back over to Jason Willey for any closing remarks..

I'll say thank you to everyone for their participation today on the call, and we look forward to speaking with you over the coming weeks and months. Thank you, and have a good afternoon..

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