Executive Summary / Key Takeaways

• nLIGHT is successfully executing a strategic pivot, with Aerospace and Defense (A&D) now the primary growth engine, representing over 60% of revenue by the end of 2024 and targeted for at least 25% growth in 2025.
• The company's vertically integrated technology stack, from proprietary semiconductor chips to high-energy laser systems, provides a critical competitive moat, enabling superior performance and cost-effectiveness in demanding A&D applications like directed energy and laser sensing.
• Q1 2025 results demonstrated strong momentum, with revenue exceeding guidance driven by record defense sales and significant year-over-year product growth, alongside notable gross margin expansion.
• Despite A&D strength, commercial markets (Industrial and Microfabrication) face persistent challenges from weak demand and intense competition, expected to continue impacting overall revenue and profitability in the near term.
• Management's outlook points to continued sequential growth, particularly in A&D, and anticipates a stronger second half of 2025, supported by a substantial backlog and ongoing program execution, though risks related to program timing, market volatility, and tariffs remain pertinent.

The Strategic Pivot: Leveraging Deep Tech for Defense Dominance

nLIGHT, Inc., founded in 2000 and headquartered in Camas, Washington, has evolved from a developer of semiconductor and fiber lasers into a focused provider of high-power laser solutions for mission-critical applications. At its core lies a vertically integrated model, designing and manufacturing its own gallium arsenide chips – the foundational building blocks that enable performance leadership across its product portfolio. This deep technological expertise, spanning from chip-level innovation to complex beam combination and control systems, is the bedrock of nLIGHT's strategy, particularly as it increasingly targets the demanding Aerospace and Defense (A&D) market.

The company's strategic narrative is now overwhelmingly centered on A&D, a pivot that gained significant momentum through 2024, culminating in the segment accounting for over 60% of total sales by year-end. This shift is not merely a reallocation of resources but a deliberate leveraging of nLIGHT's core technological strengths to address critical national security priorities. Its high-power lasers and related systems are integral to applications like directed energy and laser sensing, areas seeing increased investment from the U.S. government and its allies in response to evolving global threats.

nLIGHT's technological differentiation provides tangible advantages. Its proprietary fiber lasers and beam systems offer superior energy efficiency, which can translate into lower operating costs and enhanced performance in high-energy laser (HEL) systems. For instance, the company has demonstrated a 300-kilowatt high-brightness laser and is developing a 1-megawatt system under the $171 million HEL-TD program, pushing the boundaries of power and performance. In laser sensing, its products are incorporated into missile guidance and range-finding systems, benefiting from the company's ability to deliver reliable, high-performance components. This vertical integration allows nLIGHT to optimize system-level performance in ways that competitors, often defense contractors rather than laser specialists, cannot easily replicate.

Within the competitive landscape, nLIGHT faces larger, more diversified players like IPG Photonics (IPGP), Coherent (COHR), and Lumentum Holdings (LITE). While IPGP dominates the broader fiber laser market with significant scale and cost advantages, and COHR and LITE have strong positions in microfabrication and optical components, nLIGHT carves out a niche through its specialized high-power technology and vertical integration tailored for performance-critical applications. Its R&D agility, particularly in developing defense-specific technologies, is a key strength, allowing quicker product cycles compared to some larger, more bureaucratic competitors. However, nLIGHT lags in overall scale and profitability metrics compared to these larger rivals, with lower gross and operating margins, partly due to its higher fixed costs relative to current production volumes and a greater reliance on a few key customers.

A&D Momentum Drives Recent Performance

The strategic focus on A&D is clearly reflected in nLIGHT's recent financial performance. The first quarter of 2025 marked a strong start to the year, with total revenue of $51.7 million, exceeding the high end of the company's guidance range. This outperformance was directly attributed to record defense revenue, which represented over 63% of total sales in the quarter, a significant jump from 49% in the same period last year. Defense product sales were a particular highlight, growing more than 50% year over year in Q1 2025.

This growth is underpinned by progress on key programs. Shipments of critical components for the HEL-TD 1-megawatt laser program were a significant driver of defense product revenue in Q1 2025 and are expected to contribute substantially throughout the year. Work on the Army's DEM SHORAD 50-kilowatt laser effort is also progressing, anticipated to conclude by mid-2025. Beyond these, nLIGHT is actively engaged in supporting the Israeli Iron Beam program and is responding to opportunities arising from the U.S. President's Golden Dome executive order, signaling a growing pipeline of future A&D business. The company's historical performance and early success in classified laser sensing programs are also opening new avenues for growth, with low rate initial production (LRIP) for one such program expected in the latter half of 2025.

Consolidated gross margin saw a notable improvement in Q1 2025, reaching 26.7% compared to 16.8% in Q1 2024. This expansion was primarily driven by a favorable product sales mix, increased production volumes leading to better absorption of fixed manufacturing costs, and a $1.9 million benefit from duty reclaim. Excluding the duty reclaim, gross margin was still approximately 23%, indicating an underlying improvement in profitability tied to the A&D ramp. Laser Products segment gross margin specifically increased to 35.1% in Q1 2025 from 22.7% in Q1 2024, reflecting these dynamics. Advanced Development gross margin also improved to 11.5% from 8.9%, benefiting from a favorable program mix including higher-margin fixed-price contracts.

Operating expenses increased modestly in Q1 2025, driven by higher project-related R&D costs, incentive compensation, and stock-based compensation, partially offset by headcount reductions in R&D. Sales, general, and administrative expenses also rose due to similar compensation factors. The net result was a reduced GAAP net loss of $8.1 million in Q1 2025, compared to a $13.8 million net loss in Q1 2024. Adjusted EBITDA improved significantly, reaching $116 thousand compared to a loss of $4.9 million in the prior year quarter.

Commercial Headwinds and Operational Shifts

While A&D shines, nLIGHT's commercial markets continue to face significant headwinds. The Industrial and Microfabrication segments remained challenging in Q1 2025, although Microfabrication saw some sequential improvement due to stabilization in operations at the company's contract manufacturing partner in Thailand, enabling the fulfillment of previously delayed orders. However, overall demand in these markets is expected to remain weak throughout 2025.

The Industrial segment, encompassing cutting, welding, and additive manufacturing applications, is particularly impacted by muted global manufacturing demand and intense competition, notably from Chinese laser suppliers who have gained market share in standard fiber lasers. This has led customers to adopt a bifurcated strategy, relying on different suppliers for standard versus high-performance or programmable lasers. Despite these challenges, nLIGHT continues to innovate in this space, introducing products like the nfinity laser for thick metal cutting and new welding solutions (APT, WELDform, ProcessGuard) targeting the EV and battery markets. The company also sees long-term potential in metal additive manufacturing, particularly within the A&D sector looking to accelerate prototyping and build domestic supply chain resiliency. Its Corona AFX dynamic beam-shaping technology and the new Corona AFX-2000 laser are aimed at increasing printing speed and flexibility, with the AFX-2000 demonstrating print speeds up to three times faster for aluminum alloys with a leading customer.

Operationally, nLIGHT completed a significant transition by formally ceasing manufacturing operations in Shanghai by the beginning of Q4 2024, shifting production to its U.S. facility and a contract manufacturer in Thailand. This move is intended to support the expected growth in the defense business and mitigate risks, including those associated with potential tariffs and geopolitical factors. While this transition may take a few quarters to reach normalized production levels, it represents the completion of a strategic operational shift.

Liquidity and Outlook

nLIGHT maintains a solid balance sheet to support its strategic objectives. As of March 31, 2025, the company held $82.5 million in cash, cash equivalents, and restricted cash, and $34.5 million in marketable securities, totaling $117 million. In Q1 2025, the company drew $20 million from its $40 million revolving line of credit, bringing the outstanding balance to $20 million. This decision was made to prudently build a cash buffer, anticipating increased working capital needs to support the forecasted ramp in A&D growth and navigate the uncertainties surrounding tariffs and the global economic environment. The company was in compliance with all LOC covenants.

Looking ahead, nLIGHT provided guidance for the second quarter of 2025, expecting revenue in the range of $53 million to $59 million, with a midpoint of $56 million. This guidance anticipates continued sequential growth, particularly in A&D revenue, while commercial market weakness is expected to persist. Q2 2025 products gross margin is projected between 27% and 33%, with development gross margin around 8%, resulting in a total gross margin range of 19% to 25%. Adjusted EBITDA is guided to be between negative $4 million and positive $1 million. Management reiterated their expectation for breakeven adjusted EBITDA with quarterly revenue in the $55 million to $60 million range.

For the full year 2025, nLIGHT expressed increasing confidence in achieving at least 25% growth in A&D revenue, supported by its strong backlog and pipeline. They anticipate the second half of 2025 to be stronger than the first half. However, the outlook is not without risks. The timing of deliveries for complex, new directed energy products can introduce uncertainty, even with firm backlog. Continued weakness in commercial markets and the potential impact of tariffs on supply chain costs and customer demand, particularly in the industrial segment, remain challenges. While the company believes its A&D business is relatively insulated from tariff impacts, margin variability is possible in the short term.

Conclusion

nLIGHT is undergoing a significant transformation, successfully pivoting its business towards the high-growth, high-value Aerospace and Defense market. Leveraging its unique vertical integration and deep technological expertise, the company is well-positioned to capitalize on increasing global investment in directed energy and laser sensing. The strong Q1 2025 results, driven by record A&D performance and expanding margins, underscore the momentum behind this strategic shift.

While persistent headwinds in the commercial markets and potential risks related to program timing and tariffs warrant careful monitoring, the substantial A&D backlog and pipeline provide a degree of visibility and confidence in the company's growth trajectory. nLIGHT's ability to execute on its key defense programs, translate its technological advantages into sustained market share gains in A&D, and manage the challenges in its commercial segments will be critical determinants of its financial performance and the realization of its investment thesis as a leading provider of advanced laser solutions for the defense sector.