I'm Louie DiPalma. I am the aerospace and defense analyst on William Blair's equity research team. I wanted to say welcome to the laser show, everybody. For those who are from Boston in the audience, Dustin Pedroia used to be a Red Sox player, and that was his nickname. This is day one of the 46th annual William Blair Growth Stock Conference. We are pleased to be hosting a 30-minute presentation with nLIGHT's management team. Joining me are Chair and CEO, Scott Keeney, and VP of Investor Relations, John Marchetti. Scott and John, thank you for joining me. I'm required to inform the audience that a complete list of disclosures and conflicts of interest are available on our website at williamblair.com. After this presentation, we are going to be moving to the Richardson Room for the breakout session. Take it away.
All right.
Thanks.
Everybody hear me okay? Good. Scott Keeney. I founded nLIGHT 25 years ago, and I'll go through a short overview, and then we'll have questions afterwards. Very quickly, just a quick overview. We'll take you through the specific markets that are driving our business now, directed energy, laser sensing, and advanced manufacturing. Just high level, the company, just under 1,000 employees, detectors, laser, and we'll go through a lot more details here. First vision that we had when we started the company 25 years ago and remains to this day is leading the world in the highest performance lasers based upon our vertical integration from semiconductor chip to a complete subsystem, and I'll take you through that. In order to do that, I'll just give you a quick overview of where we're located.
We are in the Northwest. The reason for that is we're right next to other key semiconductor fabs. Our neighbor is TSMC. Across the river is Intel. We have our own fab, three sites in that area and one in Longmont, Colorado. We're vertically integrated from the semiconductor chip all the way through to the complete laser system. I'll take you through more details, you can see where the sites array against that. Better way to give you an overview is just a short animation. We're vertically integrated from the semiconductor chip. We start from gallium arsenide substrates. We have our own fab where we grow our own chips. Each one of the chips that come from this substrate are on the order of about five millimeters. That's where electrons are converted into photons. This is the semiconductor laser that starts everything.
Each one of those chips gets packaged into an assembly that couples that light. Multiple chips come together to couple the light into a fiber. That's known as a pump laser. Each one of these packages gets assembled into another assembly where they're put into another fiber that we also manufacture, an active fiber that is a fiber amplifier. Those modules produce on the order of three kilowatts of power. Those modules are put into these racks, and this is done in our Longmont facility. Those are fiber-coupled into a coherent beam-combining module where that light is further combined to the highest power laser in the world now at 300 kW. It goes into a beam director that puts that light on target for directed energy. That's our technology stack.
Vertical integration is critical for what we do because the technology continues to evolve, and we see continuous improvements across really every dimension of that stack. A little bit about the vision, too. We started back in 2000, and we had a vision similar to Gordon Moore. He had sort of five data points when he wrote his paper. Highly recommend reading his paper, by the way. Gordon Moore sort of postulated that semiconductor electronics would improve at this rate. We had five data points when we started nLIGHT. We drew a line. It's the same idea, right? This is a log plot, orders of magnitude that have improved as we've improved the technology, and that leads to our fundamental vision around brilliance, the brightest lasers in the world.
I think it's important to remember that these kinds of improvements, these orders of magnitude, are dramatic, and they lead to dramatic changes in markets. That's what we've seen. Another part of our strategy, in addition to the technology, was our business structure. Being a dual-use business was part of our vision from day one. In the year 2000, when I started the company, pitching the business plan on Sand Hill Road, not many VCs wanted to hear about the defense sector. I believed that it was critical in our space, and over time, we've seen that to be true. More recently, you can see that space and defense really the core drivers of the business. To develop that a bit further, very well-positioned in key markets.
While our lasers provide key sources for a broad range of markets, there are three main applications that are driving our business today. Those are well-aligned to the priorities at The Pentagon. There are six critical technology priorities that Emil Michael put forward. We're critical for three of those, directed energy, sensing, and advanced manufacturing. Just to talk through that, directed energy, I'll start with. This is a very important one. In directed energy, we're using our lasers to defend against incoming threats. That top row relates to air defense, both terrestrial and maritime. Upper left represents the lower power segment of that market. We participate in that market. Middle is medium power, maybe up to group 3 drones and other threats, then the high power to the right.
I think for those of you who haven't followed this, lasers provide a number of benefits. I'd highlight two. One is the ability to economically address these threats. I think as most of us know now, spending on the order of $1 to $2 million per missile to address a drone is not sustainable. Lasers, as long as you have that energy source, your cost is minimal. Then the second dimension is the depth of magazine. As long as you have that energy source, you have a weapon. Today, our DDG destroyers need to go back to port to rearm, for example. That's what's driving the business in directed energy. The bottom row is also important. Those are more, I call them, strategic applications, air-based, ground to space, and space to space. There's a wide range of different applications in directed energy.
Just to tell you a little bit more, Hades is our product in this space that we recently launched publicly, although it is out in a Stryker today. That's a 50 kW laser that is embedded inside that Stryker. We have distinctions across the stack here, from the chip all the way through the beam delivery. Just to give you a quick primer on this space, there's only two ways to combine light to provide high power directed energy sources. One is spectral beam combining, and here what you do is use different colors of light, reverse prism, Pink Floyd, et cetera, and get a bright spot. We do that for low power, by the way, but we think for higher power, coherently combining is the critical path. Here, same color of light, but phased up. You see that array in phase.
A couple distinctions here. One is the ability to scale power we believe is superior with coherent beam combining. With spectral, you need to have multiple colors. It's more difficult combining those colors. Second, you can see it on the right, is the brightness is better in coherent beam combining. In addition to that, the coherent beam combining allows you to adjust the phase front to compensate for atmospheric effects. As light propagates through the atmosphere, thermal gradients degrade that light, and if you can ascertain what that degradation is going to be, you can provide the inverse phase front to compensate for that. That's what we do. Those three dimensions, power, brightness, and atmospheric correction are key, and that's why coherent beam combining wins to provide for a faster dwell time and longer range. We have the highest power laser in the world.
We have used this technology to scale, and you can see it's a fairly recent inflection point. There's two reasons that this market is becoming very important. One is the technology is there now. It's been 25 years of development on our side, but you can see it's scaling up very nicely. Second, as you all know, the world has changed dramatically and the threats are very different indeed. Little bit of detail here. Those three dimensions I talked about are important. Power, I'll start with. This would be a standard 100 kilowatt laser, which would be appropriate for, say, a group three drone. You get the range and the dwell time. You want to have shorter dwell time and longer range.
If you have a brighter source and one that corrects for the atmosphere with coherent beam combining, that same power will do a lot more. You shift this curve significantly. As you scale up power further, you really shift the curve. This is an illustrative example of why there's so much interest in coherent beam combining and higher powers.
Do you have any insight in terms of the X-axis, in terms of the range of the difference?
I do indeed. The Y too. I'm not allowed to disclose it yet. I have pushed the Pentagon very hard to use this, because I think it's super important for people to understand that any power level will work at very short ranges, but it's too late. You've got to get out further. That's why it's important to understand what this rough relationship is.
Understand that.
The second category I talked about is sensing. This is a broader set of applications. Just to give you a feel for this is using pulsed lasers. Instead of transferring energy, you're providing information. It could be a proximity detection on a missile. They're ranging. We've got space qualified lasers, those bottom pictures on the right. The space communication systems were in those. Countermeasures is one, navigation, and the top left is basically LiDAR. It's lasers supplementing radar. Really critical area. I would highlight that space is where a lot is occurring, both in the defense space and the commercial space. There's a lot going on here. It's just more difficult to talk about because most of these applications are indeed classified. Finally, the advanced manufacturing. We have done manufacturing for years and things like metal cutting and welding and other applications.
Additive manufacturing, 3D printing metal parts, is a key application area where we lead, and our lasers are used in everything from key rocket engines that you probably read about, to various parts, missiles, and even the fastest car in the world. There's a wide range of applications for additive. Just to quickly give you a sense of this, our distinction here is a little technical. I apologize. Again, we have a beam shaping technology here. When you're printing these parts here, you're melting, you're sintering metal powder together in layers, and typically use that single mode Gaussian laser at the top. You're really limited in the power you can use in that. If you can take that and create a ring, you can provide much more power, you can go a lot faster, but you need to toggle between those two of those.
That's what we do. We provide for a higher productivity and a higher quality part. That's what's leading us to continue to drive the performance of additive down, dollars per kilogram of part. The market is growing. Okay, finally, talk a little bit about financials. To do this, I'll give you a little bit of history of the company. It's a more complex story, but I'll try here. We started the company as a dual-use company, and China became the largest market for lasers. We had a vision that that was going to happen. We were the first company to enter China to do this. Indeed, that did happen. China became the biggest market, and we created our own entity to participate in that market.
I think as we sit here today, there's a tendency to say, well, that hope for China as it grew, it liberalized, right? I think there was a strong point of view for many people there. I'd just like to highlight that I think that there's people forgetting that that was a hope that many people had, including some fairly right-wing folks, if you will. Henry Rowen, head of Hoover, Dick Cheney. He believed China would be a democracy by 2015. I didn't agree with him, by the way, there was a hope. We went public in 2018, and about that quarter, I think 40% of our revenue was in China. That same quarter, I would say that hope was dashed. We actually had a board meeting about this. Xi Jinping changed the term limits in China from two terms to indefinite terms.
Luckily, Gary Locke, former ambassador, is on my board. We had a board meeting to discuss this. We said, "World just changed. We need to change our strategy." We did that. We de-risked China very aggressively. We focused on growing outside of China, the bar, and we focused on reducing our exposure to the supply chain in China. Not an easy thing to do after you go public and tell public investors this is what you're doing. For the last five years, we've been determined about this, but this is what we've been working through. Fortunately now we're growing very nicely on the other side as especially aerospace and defense is driving our growth. As we grow, that growth in the aerospace and defense has been on the order of about 30% CAGR.
In addition, as we do that, it really demonstrates the financial model that we've always had of getting nice flow through here. You can see our EBITDA improving as we grow. Again, to reiterate, there's a whole host of benefits to being a dual use company. There are very few companies that I believe that truly are. It's a very hard strategy to pursue because you've got to be a commercial company with a deep understanding and the right infrastructure for compliance and other topics in the defense sector. You have to have both those things at the same time. We're very well positioned in this market to continue to grow and to continue to get that leverage. That's a summary of those points I wanted to get across. Again, our tagline is we're a little geeky.
Brilliance is actually a technical term, how well you can focus light. That's what we've been focused on for 25 years, and simplifying lasers so that they are usable by a broad set of participants. With that, open up for questions.
Thank you. One of the first questions that I had, can you discuss your role as both a supplier to many of your competitors in the industry in that you are one of the leading providers, as you described, in terms of?
Right
in the high-powered category, but there's also the low-powered category. Over the next few months, I think, and few years, many in the industry expect there's going to be other laser providers that win contracts as the industry is developing. Can you discuss how you expect to play a role in both competing systems and your own systems?
Good, happy to. In directed energy, we'll focus on that market. I would bifurcate, I showed those segments, but let me just bifurcate into below 30 kilowatt and above 30 kilowatt. Below 30 kilowatt, I think it's effective at addressing group 1 and 2 drones and some other stuff. You really need more power to address group three. That's the first distinction I would make. In that segment, we supply a number of companies that have very good systems in that space. We don't provide systems in that space. We provide modules, components that go into that space. Those are our customers. In the higher power segment, there's very few companies that can do it, we're one of the very few in that space. We're not a prime. We are a module company. We build laser modules that are sophisticated.
It includes both hardware and software, and it's a lot that goes into that Stryker, but there's typically a thin prime that sits between us and that Army customer in that case.
Great. Yeah, to summarize, so you expect to play a role in terms of being both a content provider for many of your competitors that.
Yeah, I wouldn't call them competitors.
are involved. Yeah. They'd be customers.
They're customers there.
Yes
They're not competitor. High power is a different space.
Okay.
Yeah.
For high power, can you provide more color in terms of the applications? I think you mentioned group 3 drones. What beyond group 3 drones?
Right
your systems will be capable of deterring. What is the overlapping use cases with missile interceptors?
Good. We talk about counter drone, group one and two for lower power, group three for higher power. I also showed on that chart, rockets, artillery, mortars, and then missiles.
Yeah.
There's a host of other threats from, gosh, small Zodiacs in Red Sea to other things out there. There's a wide range of different key threats on air defense.
Yeah.
That bottom row gets a little more difficult to talk about, but you put a laser into the air, you can address both air-to-ground and air-to-air, whole number of things. Again, with these lasers, at times you're destroying something, sometimes you're damaging, sometimes you're disabling or blinding something also. Often, the adversary doesn't even know what's going on.
In terms of how these lasers are actually deployed, whether it's in the U.S. as part of a Golden Dome type architecture or defending bases versus overseas in actual theater, do you expect those lower powered systems to be deployed first and then for it gradually to phase into the higher powered systems? Is that what the audience should anticipate? Do you think that some of those higher powered systems that you described in the previous slide, that those are ready for prime time either in 2027, 2028? How do you think the market is going to develop there?
It's a great question, and I'll start with being humble and saying, I don't know a lot about both of them.
Yeah.
Which one will win in the end is contingent upon a whole host of different things. Perhaps I'd highlight Israel to start with. We're a supplier into Israel, and while Israel has some lower power systems, the first deployment are more medium power because the threat is more critical, the distinction of the laser is sufficiently different. Whether that will be the same in the U.S. and other countries, to be determined. We're participating in both markets, I don't want to say I don't care.
Yeah
We're positioned for both. Yep.
Great. I guess on that point, in terms of you being somewhat ambivalent, but do you have a bias in terms of how, are you more economically advantaged for those higher powered laser systems, such that, I guess, your content for that system significantly greater? Perhaps the price point for the lower powered systems is lower, and so the volumes might be higher, and so ultimately that's why you might be ambivalent.
Yeah. If we're selling 10 systems in both, I'll take 10 higher power, thank you very much.
Yeah.
I think there's the promise that there could be a collaboration of the lower power.
Yeah.
We have a lower percentage, that we participate because it's a component level.
Yeah.
The volume could make up for that.
Right.
There's some great systems out there. I'd highlight AeroVironment. They've got a system called Look. It's a great system. It's done very well, and I think there's promise that there's growth there with systems like that, and there's others.
Okay. Great. One more question before we move to the breakout is, one of the highlights of your great presentation was how your company has been dual use, and that term has been used a lot in terms of technology being commercially developed using your own R&D.
Yeah.
What does that convey in terms of your potential long-term margins, such that do you have some degree of pricing power? What's the competitive environment in terms of your margins, and how does commercial pricing play into that?
Good. Dual use is a fairly rich topic, and it's probably worth spending more time to flesh that out further, but I'd highlight a couple things. When we think about dual use, we think about exactly what you're getting, let me come back to that. We also think about the other way. Well, there's a number of programs and frustrations with working with the government. There's also been some huge successes. DARPA has done some programs in the past that we participated in that fundamentally changed our industry. We went from 30% efficient diodes to proved out 70% due to a really important DARPA program. That was critical. We started the company in year 2000. There were 500 companies started that year alone in this optical component space. This is for those of you who suffered through that, maybe.
The telecom bubble and meltdown, right? It was exciting and incredibly challenging. Of those 500 companies, last time I checked, five of us made it out the other side, right? It was just incredible value destruction. DARPA not only proved out the technology, that's one of the reasons we survived. It goes that way. The HELSI program more recently has been profound. Also, then we've taken what we've developed commercially and brought it to defense, and that is critical here. You've got to have that volume. You've got to have the understanding there. Yes, our model is a commercial company selling products. We do development work on cost plus fixed fee models, but that's not our core business. That is what we do when it's appropriate and necessary to do those programs. We are a commercial company building commercial products at commercial margins.
Great. That is all the time that we have.