nLIGHT, Inc. (LASR) Q4 2018 Earnings Conference Call Transcript

LASR earnings call for the period ending December 31, 2018.

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nLIGHT, Inc.  (NASDAQ:LASR)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, and welcome to the nLIGHT Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there'll be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Jason Willey, nLIGHT's Senior Director of Investor Relations and Corporate Development. Please go ahead.

Jason Willey -- Senior Director of Investor Relations and Corporate Development

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 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 In addition, you can access an archived version of today's call from our website.

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 would also like to note that members of nLIGHT's senior management will be attending several investor conferences in the coming weeks including the Raymond James, Institutional Investor Conference in Orlando on March 4th and the Susquehanna Technology Conference on March 12th in New York.

I will now turn the call over to Scott for a brief comment before Ron goes through the financials and outlook. Scott will then discuss trends in each of our end markets. We will then be glad to take your question.

Scott Keeney -- Chief Executive Officer

Thank you, Jason and good afternoon, everyone. 2018 was a transformative year for nLIGHT. In April, we completed our initial public offering, which not only solidified our financial position, but also raised nLIGHT's profile with customers across the globe. In 2018, we grew revenue by 38%, improved gross margin by 300 basis points, and expanded EBITDA by over 60%. We also made significant additions to our product portfolio, which greatly expanded our ability to serve customers in each of our end markets. We started nLIGHT almost two decades ago with the vision that rapid evolution in semiconductor laser technology would open up new market opportunities, with significant innovation across our product portfolio, we are even more enthusiastic about this vision today.

Before providing an update on each of our end markets, I will turn the call over to Ron for details on our financial performance in the fourth quarter and the full year.

Ran Bareket -- Chief Financial Officer

Thank you, Scott and good afternoon, everyone. 2018 was a record year for nLIGHT, revenues reach $191 million, up 38% year-over-year. Gross margin improved by over 300 basis points to 35% and we delivered adjusted EBITDA of $30 million or 16% of revenues. We saw strong growth across each of our end market and geographies regions during 2018 and we believe we continue to grow faster than the industry in each of the core markets we serve.

Focusing on results in the fourth quarter, revenues were $46.2 million, up 23% year-over-year. During Q4, sales to industrial end markets were $17 million, representing 38% of total revenue, and up 7.1% year-over-year. Sales to micro fabrication end markets where $19 million or 41% of total revenues, and up 26% year-over-year. Aerospace and defense sales were $9.6 million or 29% of total revenues and grew 60% compared with the fourth quarter of 2017.

On geographic basis sales to China were $15 million in the fourth quarter of 2018, or 32% of total revenues, up 5% compared with Q4 2017. Sales in North America were $18 million, representing 39% of total revenues and growing 22% year-over-year. Rest of the world sales were $13 million, up 54% compared with the fourth quarter of 2017 and were the 29% of total revenues.

Gross margin was 35.8% in the fourth quarter, an improvement of 300 basis points year-over-year. The improvement was driven by higher volume and favorable end market mix partially offset by more aggressive price activity in the Chinese industrial end market. The Chinese industrial end market represented less than 20% of the overall revenues during the fourth quarter and approximately 25% of total revenue for the full year of 2018. The impact of recently implemented US China tariff on Q4 2018 gross margin were approximately 550 k (ph) or 120 basis points.

Operating expenses were $14 million during the fourth quarter, compared with $9.6 million in the fourth quarter of 2017. We continue to invest in research and development and the corporate infrastructure necessary to support the growth in the business. Q4 '18 operating expenses included $1.7 million of stock-based compensation, an increase of approximately $1.6 million year-over-year. Fourth quarter operating income of $2.2 million was 4.8% of revenues and compared with $2.7 million, or 7.2% of revenues in the fourth quarter of 2017. Our adjusted EBITDA for the fourth quarter was $6.1 million, or 13.3% of revenues, this compares to $4.9 million or 13.1% of revenue in Q4 2017.

GAAP net income for the fourth quarter of 2018 was $2.4 million, compared with an income of $1.1 million during Q4 2017. GAAP EPS for the fourth quarter of 2018 was $0.06 per diluted share, compared with the $0 EPS for the fourth quarter of 2017. Non-GAAP EPS, which exclude the impacted of stock-based compensation and assume the conversion of all outstanding preferred stock in the period to common stock was $0.10 per deluded share in Q4 2018 compared with $0.04 per share in Q4 2017.

Turning to the balance sheet. We ended Q4 with total cash and cash equivalents of $149 million. In December, we repaid $16 million outstanding on our lines of credit. DSO for the fourth quarter of 2018 was 47 days. Inventory at the end of the quarter was $75 million, representing 109 days in inventory. During Q4, we generated $1.2 million of cash from operating activities reflecting an improved profitability, partially offset by working capital expansion. Capital expenditures for the quarter were $3.1 million or 6.6% of revenue. Over the full years of 2018, we generated $3.3 million of cash flow from operating activity and invested $12 million in capital expenditure of 6.1% from revenues.

Turning to the guidance for the first quarter of 2019. We expect revenues to be in a range of $40 million to $44 million. At the midpoint of the range, this implies revenue at a similar level of the first quarter of 2017. While we have seen improving customer sentiment and order activity in China over the past two months, our visibility is limited due to the ongoing trade dispute. Based on our current expectation for product mix we see gross margin for Q1 2019 in a range of 30% to 33%. This outlook incorporates approximately 150 basis points reduction in margin due to the US China tariff introduced in 2018.

For the first quarter, we expect adjusted EBITDA in a range of $2 million to $4 million. Stock-based compensation is expected to be in approximately $2 million. We expect Q1 average basis share and average fully diluted share to be in a similar level with Q4. While our current visibility does not put us in a position to provide a specific outlook for the full year, based on our current market condition we believe we can deliver moderate growth in 2019. Similar to 2018, we expect revenue in the second half of the year to be higher than the first half. Our outlook for the revenue and profitability reflects our current view into the business and incorporates the typical slower seasonal activity in China around the Chinese New Year, which is being amplified by border customer uncertainty in the region.

I will now turn the call back over to Scott.

Scott Keeney -- Chief Executive Officer

Thank you, Ran. 2018 was a continuation of the strong business momentum we experienced over the past five years. Our outperformance relative to the overall high power laser industry is not tied to one end market or geographic region. The foundation of our core semiconductor laser technology and our continued innovation in fiber lasers has driven outperformance in the industrial micro fabrication and aerospace and defense markets. While we are not immune to short-term market fluctuation, we are focused on driving the penetration of our products across existing and new customers in each of these three end markets.

In the industrial market, we dramatically expanded our fiber laser offerings in 2018 which enabled us to grow revenue 46% for the full year and 7% year-over-year in the fourth quarter. As we enter 2019, the availability of an expanded portfolio of high power fiber lasers and Corona opens access to new customers and new segments of the market. We are excited today to announce that we have shipped our 12 kilowatt fiber lasers.

Our new higher power fiber lasers provide not only improved power, but come at a reduced cost structure as we integrate our latest semiconductor lasers in a smaller form factor. We see increasing interest from customers in high power fiber laser solutions and we expect volumes for our portfolio for up high power offerings to steadily ramp in 2019. During Q4, approximately 27% of our fiber laser sales were at 6 kilowatts and above, which is up 90% from the comparable period in 2017. Sales in the 2 kilowatt to 5 kilowatt range were over 50% of fiber laser sales in Q4 2018, up 20% from Q4 2017 levels.

In September 2018, we officially launch Corona, our all fiber programmable fiber laser. Corona offers customers and approach to program ability that is unique in the market today and initial customer response has exceeded our expectations. We accomplish rapid beam program ability through an all fiber technology that does not require at an optics, special process heads or fiber or over provisioning of multiple lasers in the same tool. We believe this approach provides end users through flexibility in optimizing their beam profiles for the specific job and material.

Others in the industry share excitement around the innovation in Corona as earlier this month at the SBA Photonics West trade show in San Francisco. Corona was awarded the Prism Award for industrial lasers recognizing outstanding examples of innovation in photonics. Corona enables our customers to offer performance and flexibility that clearly differentiate their systems from their competitors. Helping us expand our sales with key global customers. In 2018, one-third of our fiber laser sales were outside of China, compared to less than 20% in 2017. This equates to over 100% growth year-over-year in fiber laser sales outside of China. We expect Corona to play a key role in continuing to expand our global presence in industrial end market in 2019 and beyond.

In the micro fabrication market, we grew revenues 26% year-over-year during the fourth quarter and 22% for the full year 2018. Our microfabrication customers serve a wide range of end markets including automotive, consumer electronics, semiconductor capital equipment, solar and scientific research. Within these end applications, we continue to see the cost and performance of dyed pump solid-state laser evolve and enable the replacement of legacy technologies. This growth in laser penetration has driven increased demand for semiconductor lasers, which serve as the pump source for many of the industry's leading pulse lasers.

We continue to lead the world in the highest brightness semiconductor lasers and in January, we introduced the e24i, which delivers 400 watts of output power from a 200 micron fiber in a form factor small enough to hold in the palm of your hand. e24i will allow us to further expand our customer base as it greatly simplifies system architecture of direct diodes, solid state and fiber lasers.

In aerospace and defense market, we grew revenue 64% for the full year and 60% year-over-year in the fourth quarter. This growth was driven by both existing contracts and newer directed energy programs. We have a long history of working with US Government and large aerospace and defense contractors to support numerous applications, including guidance, measurement, counter measures and directed energy.

Our development of highly reliable semiconductor laser technology leads the industry and power, efficiency, size and weight, which positions us to be a key beneficiary of increasing growth that we anticipate in this market over the coming years. Direct Energy applications are particularly important long-term opportunity. Revenue related to direct energy grew in 2018 and while we expect contributions from this market opportunity to be lumpy in the near term, we see a sizable opportunity in this market over the coming years.

In conclusion, we found nLIGHT in 2000 with a vision that the rapid innovations in semiconductor laser technology would open up new opportunities. Today this premise is more evident than ever. In 2018, we made significant progress in expanding our product portfolio with new semiconductor lasers, higher power fiber lasers and Corona. These ongoing innovations vision as well for 2019 and the long-term. As a result, we remained confident in our ability to continue to grow faster than the market.

In closing, I would like to thank the entire nLIGHT team for their efforts during 2018 and with that we will now hand it over to Q&A

Questions and Answers:

Operator

(Operator Instructions) The first question comes from Patrick Ho with Stifel. Please go ahead.

Patrick Ho -- Stifel -- Analyst

Thank you very much and congrats for a very nice 2018. Scott maybe first off on the industrial side of things, given a lot of the changing dynamics in the market environment today and some of the growth prospects you're looking forward to your new products. You talked about how adoption usually takes about a year from when products are introduced. As you look forward for the new products in second half of '19, do you believe they'll be driven by the transition from existing customers making the new products or do you see a bump up or step up in new customers who are adopting the new products?

Scott Keeney -- Chief Executive Officer

Good. Thanks, Patrick. So certainly see growth from current customers, but the more substantial growth we believe will come from new customers around the globe. We continue to expand our sales in all geographies and all the sectors, however, we're seeing more rapid growth outside of China. We saw that in 2018 and we expect that to continue in 2019.

Patrick Ho -- Stifel -- Analyst

Great. And then maybe just my follow-up question from Ran in terms of I think gross margins I understood with some of the market dynamics today and some of the pressures you're facing. But as you look at the operating expense line that you guys have managed very well over the past year or so, how do you look an OpEx and especially R&D with your next generation of new products? How do you expect that I guess line item to progress as 2019 goes on? And when I'm looking at it as revenues grow do you expect the percentage to stay the same, and OpEx moving up on an absolute dollar basis or is there an opportunity for OpEx as a percentage to come down as revenues ramp?

Ran Bareket -- Chief Financial Officer

Sure. So in terms of OpEx, if you recall from day one when we did the -- when we put the mid-term model. We talked about that we are aiming to spend roughly 10% from revenue in R&D and roughly 12% from revenue in SG&A. However, as we have -- this is for them call it mid long-term. However, when we have an opportunity here and there to invest more in R&D, we will do so and it could be that we will invest in the near future slightly higher than 10%. And definitely this year at the end of 2018 it was a very good example when we had some investment in new product, Corona 12 kilowatt everything that you are seeing right now that get into the market. The investment in R&D was higher than 10%, but definitely when we will grow the business we will go to that level of target that we put through our self again 10% from R&D roughly plus or minus 12% on SG&A.

Patrick Ho -- Stifel -- Analyst

Great. Thank you very much.

Scott Keeney -- Chief Executive Officer

Thank you, Patrick.

Jason Willey -- Senior Director of Investor Relations and Corporate Development

Operator next question, please.

Operator

Does my line wide open? Pardon me. Sorry for the delay. The next question comes from Tom Diffely with D.A. Davidson. Please go ahead.

Tom Diffely -- D.A. Davidson -- Analyst

Yes. Good afternoon. Hopefully you could remind us what you -- what your expectations are for normal seasonality here in the first quarter and then is it quite a bit different between your differing interest segments?

Ran Bareket -- Chief Financial Officer

Yeah. We will not go to the town, we will not go to the different segment in term of the -- in terms of the guidance for Q1, but however what we are seeing in Q1 in terms of seasonality, it is definitely the same trend that we saw last year. As I mentioned in my opening remark, the trend at least in revenue that's what we are seeing right now this year will be similar the trend again, will be similar than what we saw last year the second half would be expected to be higher than the first half. You need to understand given everything that I'm was saying that was limited visibility specifically in China, specifically this quarter. And after the Chinese New Year, I'm sure that by the end of this quarter, we'll will know better, but we don't see that in terms of seasonality, if you will any differences versus last year or the year before.

Tom Diffely -- D.A. Davidson -- Analyst

All right. That's helpful. And then Scott when you look at the move to the higher power with your customers. Is it, the customers are they using higher power for the same application or is this driven by new applications for your higher power tools?

Scott Keeney -- Chief Executive Officer

Well, it's certainly the largest market for those high powered lasers today is in the cutting market and they're what we're seeing are customers migrating to say thicker metal and so, our high powered hybrid lasers are out cutting very thick metal today over time certainly see other opportunities in welding and other new applications. But today cutting is where we see that and largely being driven by thicker metal.

Tom Diffely -- D.A. Davidson -- Analyst

Okay. That makes sense. And then finally, when you look at your aerospace business, it seems like a lot of that is driven by the semiconductor laser at this point. Are there plans to move to more of a complete system sale into that market or is that going to be more of a components market for a while?

Scott Keeney -- Chief Executive Officer

Yeah. Good. In aerospace and defense largely what we sell there today are components, both the semiconductor lasers and other components. And as we continue to progress, there'll be higher levels of integration. I wouldn't call it a system play. I think certainly that the defense primes have a role that it is very different from ours. But certainly we'll see higher levels of integration.

Tom Diffely -- D.A. Davidson -- Analyst

Okay. That's helpful. Thank you.

Operator

The next question comes from David Ryzhik with Susquehanna Financial Group. Please go ahead.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Thanks for taking the question. So you've noted some constructive signs out of China. Are these actually orders in the pipeline or (Technical Difficulty) with customers and if you can provide a little more context around what customers are saying, are they waiting for the tariff situation to be resolved or they are waiting for some stimulus measures to kick-in? And I have follow-up.

Scott Keeney -- Chief Executive Officer

Very good. Yes. We certainly we are seeing increase in orders and so that is certainly positive. However, the visibility is still limited due to the uncertainties around the trade issues. And in China, and frankly around the world, we're seeing people waiting for more certainty around those issues. So we are seeing some positive improvement, but everybody is waiting for resolution.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Okay. Thanks. And welding typically hasn't been a market that you focused on too much, but with Corona, have you seen an increase in demand from welding customers and any way to size how much of an opportunity this can become within welding for nLIGHT?

Scott Keeney -- Chief Executive Officer

Good question. We certainly are seeing increased interest and it is due to Corona and higher power of fiber lasers. However, your point is valid. This has not been a key focus for us to-date. Welding again requires -- generally requires further integration into those applications. And so it has been a relatively lower priority for us, so over time, we will be investing more there and we're confident that Corona creates further differentiation in that space. And it's a large addressable market. It's a difference market from say the cutting market, it is a much more fragmented set of end applications, but we see strong opportunities for continued growth there ranging from industrial automotive to electric vehicle to various more refined applications. So looking ahead, we'll be talking more about that.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Great. Thanks, Scott.

Operator

The next question comes from Jim Ricchiuti with Needham and Company. Please go ahead.

Jim Ricchiuti -- Needham and Company -- Analyst

Hi. Good afternoon. Not trying to pin you down with respect to forecasting the quarter by vertical, but I'm just trying to get a sense. You've given us some color about visibility in the industrial market being limited. If I think about that midpoint of your guidance, what kind of visibility do you have in the microfabrication and the aerospace and defense verticals?

Ran Bareket -- Chief Financial Officer

Yes, obviously -- Hi, Jim. Obviously, -- good question. Obviously, the visibility that we have in aerospace defense by definition it is much, much better than definitely -- in this time, it is much, much better than the industrial end market. And on microfabrication, it is better than the industrial end market in China low commissioned, and by the way, that those fundamentals in the business are nothing change here. Specifically on the industrial end market, the visibility usually in Q1, it is low due to the Chinese New Year and currently, as Scott mentioned with the trade wars and everything else that's going on, there's a visibility to even lower than that.

Jim Ricchiuti -- Needham and Company -- Analyst

So that range of revenues that you're providing in your Q1 guidance much of that variability is it safe to say boils down to the industrial segment of the business?

Ran Bareket -- Chief Financial Officer

This is correct.

Jim Ricchiuti -- Needham and Company -- Analyst

Okay. And you alluded to the customer reception for Corona exceeding expectations and I'm wondering, if you can talk a little bit about either, which verticals -- which applications and which geographic regions are you seeing the strongest reception through the technology?

Scott Keeney -- Chief Executive Officer

Good. Thanks Jim. We're seeing strong interest in Corona across all of our industrial end markets. However, the near-term design wins are focused on the cutting market and largely -- larger companies typically outside of China. What we're seeing is that the benefits of Corona are exceeding our expectations. They're allowing our customers to differentiate and in various applications provide a substantial advantage over their current approaches. And that's leading to a more rapid design win process for us. And right now it's generally in cutting and outside of China.

Jim Ricchiuti -- Needham and Company -- Analyst

And last question, I'll jump back in the queue. You may have given and I may have missed it, but did you talk at all about customer concentration in the quarter?

Ran Bareket -- Chief Financial Officer

Q4 or for the guidance?

Jim Ricchiuti -- Needham and Company -- Analyst

Well for Q4. And if you want to provide some color with respect to the Q1 outlook for your large customers, that's fine?

Ran Bareket -- Chief Financial Officer

Yeah. So we didn't provide customer concentration in Q4 and it was not significantly different versus what we saw in the previous quarter. And as you can imagine I will not comment on customer concentration in Q1.

Jim Ricchiuti -- Needham and Company -- Analyst

But Ran, is it 1%-10% (ph) customer is that?

Ran Bareket -- Chief Financial Officer

Close to that, yeah.

Jim Ricchiuti -- Needham and Company -- Analyst

Okay. Thank you.

Operator

The next question comes from, and please pardon me, if I mispronounce this Brian Gesuale with Raymond James. Please go ahead.

Brian Gesuale -- Raymond James -- Analyst

Yeah. Hey guys. Thanks for taking my question. I wanted to maybe explore the defense business a little bit. It really outperformed expectations in 2018, grew 60%, I think many were thinking it might be a 15% or 20% grower at the start of the year. Can you maybe just give us a little bit of color on how we should think of the rate of growth as it progresses in '19?

Scott Keeney -- Chief Executive Officer

Yeah. Good, Brian. We did grow faster than we had expected in 2018 and that 60% growth certainly speaks to the migration toward higher power lasers, particularly in directed energy. We do not expect that same growth rate in 2019. However, again, I think that does speak to this long-term growth prospect and the adoption of lasers for those applications is becoming clear. And we do expect that, it will continue to grow in the coming years.

Brian Gesuale -- Raymond James -- Analyst

Okay. Great. And then just a follow up wondering if Ran, if you could maybe help us out as we shape our gross margin thoughts for the year. Sounds like seasonality volume picks up second half to first half the e24i imagine helps on the cost basis, new products begin to penetrate the mix at an increasing rate. You may be just think how we might think of a progression of gross margins. I know you're not really precised, but just a little bit of help there.

Ran Bareket -- Chief Financial Officer

Therefore 2019, sure. So let me remind you how we managed to improve I think significantly the margin in the last -- specifically in the last two years, if you again -- just as a reminder if you look at the margin improvement between '16 to '17 it was 900 basis points and between '17 to '18, it was 300 basis points, which I believe it's very impressive. Where it's coming from, it's coming from mainly three areas. And as we grow the business definitely, we will get a better utilization of our fixed costs. So this is the first point.

Secondly, we are investing a lot in cost reduction in automation which help us to reduce the cost. But not less important those new product that we are talking about higher power, better technology i.e. Corona for example, it's coming with a better margin. 2019 and going forward, yeah, Q1 the revenue is due to this seasonality is low so we are not getting those benefits that I just talk about. And similarly, those new products that will not be significantly impact the margin in Q1 that's 12 kilowatt and the Corona, but as we -- as we move forward with the year, and as we continue to grow the business and as we continue to introduce those new products to the market, we will see some margin improvement.

Brian Gesuale -- Raymond James -- Analyst

Okay. Great. Just a quick follow up on that I mean, if we see volumes bringing in $50 million, $55 million a quarter or even a little bit higher I mean is this something where we can approach or actually topic the gross margins that we saw periodically last year or is it just the pricing environment and the macro it just not going to support that even on the higher volumes?

Ran Bareket -- Chief Financial Officer

Very difficult to say, there are so many things that impact the margin on a quarterly basis. And that's why it's difficult to say on a quarterly basis. There is mix between different product, there is a mix between different geographies, there is many thing that impact the margin. However, and this is what really important to understand, the trend that we saw in the last two years conceptually as we continue to grow the business, as we continue to introduce those new products to the market definitely, we will see a margin improvement.

Brian Gesuale -- Raymond James -- Analyst

Great. Thanks a lot guys.

Operator

The next question comes from Andrew DeGasperi with Berenberg. Please go ahead.

Andrew DeGasperi -- Berenberg -- Analyst

Thanks for taking my question. I guess the first, now that you have the super high powered lasers 10 K watt and over, are your sales efforts a little different relative to the mid power lasers.

Scott Keeney -- Chief Executive Officer

Well, I think the customers they can use the high powered lasers are a fairly limited set of customers. So no dramatic change in our sales structure or efforts, but the customers that are capable of using that high power are more limited.

Andrew DeGasperi -- Berenberg -- Analyst

Got it. And I guess with regard to Chinese New Year, I know there's been some commentary that because it's earlier there was a little bit of a pull forward of orders. Have you see something like that happening and the reason why you have low visibility is because right now things are a little quiet or is there -- it's just some other reasons based on your historical -- what you've noticed historically?

Scott Keeney -- Chief Executive Officer

Yeah. Relative to our many years of working through Chinese New Year, there is always a lot of -- well, there's less visibility around Chinese New Year in general as you come into it, customers tend to buy less and it takes a couple weeks after New Year's to provide that visibility. So that's sort of the general seasonal trend in the China Industrial market. Amplifying that this year is the trade dispute and with that deadline that sort of was overlaid on top of Chinese New Year. So you've got that exacerbating that uncertainty. Again, as I said before, we have seen some positive trends in the first quarter. We are hesitant amplify those because visibility is limited due to those trade issues.

Andrew DeGasperi -- Berenberg -- Analyst

Right. And then my last question on the second half, you better should be stronger. Do you see that across all three segments, was it really mostly on the industrial side and is there some kind of assumption baked in on resolution of this trend obviously?

Scott Keeney -- Chief Executive Officer

Yeah. Good. On the last question, we're assuming things don't get worse in our plans. We are not expecting that there's a glorious resolution that could provide some upside, but that's what we're assuming in our base plans. And in those base plans, we do have visibility into continued adoption of our new products in all three end markets and that's where the second half perspective comes from.

Andrew DeGasperi -- Berenberg -- Analyst

Great, thanks.

Operator

The next question comes from Greg Palm with Craig-Hallum. Please go ahead.

Greg Palm -- Craig-Hallum -- Analyst

Yeah. Thanks. I'm curious if you would characterize your Q1 guidance is maybe overly conservative just based on the lack of visibility. I'm just trying to get a sense if you've changed all the way you're thinking about the near term based on this uncertainty out there, if it really is just kind of a best guess at this point?

Ran Bareket -- Chief Financial Officer

Yeah. So this is Ran. No. The answer is no. It's not over pessimistic and they're not over optimistic. This is what we see right now. This is what we see right now and again with limited visibility that we have. If we will wait another two weeks, three weeks and get more information from the Chinese New Year, we will be better off, but we are doing this call right now and base what we are seeing right now that's the best information that we can provide to our investor at this point.

Greg Palm -- Craig-Hallum -- Analyst

Understood. And just remind us orders that you receive now or maybe in the coming weeks. Are those still could be recognized as revenue this quarter or would that be more of a Q2 event and I guess specifically referring to some of the industrial China product?

Ran Bareket -- Chief Financial Officer

Sure. Sure. We are specifically in the industrial end market. We will get all those in March that we will deliver at the end of the quarter. No, no question about it.

Greg Palm -- Craig-Hallum -- Analyst

Yeah. Okay. And I guess just hop in one last one for me on the gross margin guidance. I'm just trying to sort of figure out impacts from mix, from negative pricing and just additional costs from tariffs, any way to break that out specifically?

Ran Bareket -- Chief Financial Officer

Yeah. So let me try to compare it year-over-year instead of the previous quarter or like in the previous quarter if you prefer. But year-over-year first of all, you need to take into consideration the tariff impact which is 150 basis points. We've already talked about it, we already quantify that. Secondly, there is a new product that we just introduced to the market. Again Corona a 12 kilo that will give us a better margin later on, but will not impact significantly the margin for Q1. And lastly, there is an impact of the pricing. We talked about in the last two quarters there is what we sell at least at the end of last year. It's more significant price per share in the industrial end market in China and some of that we see that in Q1 definitely.

Greg Palm -- Craig-Hallum -- Analyst

Okay. Fair enough. I'll hop back in the queue. Thanks.

Ran Bareket -- Chief Financial Officer

Thank you.

Operator

The next question comes from Jed Dorsheimer with Canaccord Genuity. Please go ahead.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Hi. Thanks for taking my question. Just two quick ones. I guess as you look at the introduction of the 12, I'm just wondering on that particular product given that the Sam is -- there's fewer competitors in that market. What would revenues have been if you had that for the whole year. Just to give a healthy perspective on what that might be for next year? Thanks.

Scott Keeney -- Chief Executive Officer

Yeah. Good. It can really speculate on the particular estimates there, but certainly I think your question is spot on to the fact that it is very difficult scaling power to those levels in a real industrial product. And we see very limited competition in that space really, and we see one other competitor in that space, that has no real products. So we're seeing a shift to higher power and we're seeing limited competition there. So we are excited about the growth prospects there in '19.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Got it. Thanks. And then in the micro side of the business. What's the -- why aren't you seeing a faster uptake in versus mechanical specifically with VS for example. Is it just a CapEx and companies looking to leverage fully depreciated equipment or is there just not a cycle happening right now? I'm just curious in terms of -- or is that a technology issue in terms of the lasers?

Scott Keeney -- Chief Executive Officer

Yeah. Not a technology issue. We're seeing increased penetration of lasers in a wide range of different applications in micro. So with our new products we're launching and with what we're seeing in applications, we are confident that there will be continued growth in that space. Having said that, there are end markets cycles there and some of those markets are softer right now. But over time, we anticipate continued displacement of mechanical and other processes in the microfabrication space.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Got it. Thanks. I'll jump back in the queue.

Operator

(Operator Instructions) The next question comes from Mark Miller with The Benchmark Company. Please go ahead.

Mark Miller -- Benchmark Company -- Analyst

Thank you for the question. The industrial sales decline sequentially decline was driven primarily by pricing or was it also units down?

Ran Bareket -- Chief Financial Officer

Give me just one second. Yeah. The industrial end market if you compare quarter-to-quarter Q4 was 6.17% through Q4 '18, there is actually an increase of 7%.

Mark Miller -- Benchmark Company -- Analyst

But sales were down sequentially. That's what I was talking about.

Scott Keeney -- Chief Executive Officer

I am sorry, yes, you're right. It is mainly coming -- the industrial end market. It's mainly coming from China. And there is some reduction yes, in revenue in China in the industrial end market. There we see unit end price reduction as well. Yes.

Mark Miller -- Benchmark Company -- Analyst

So both. You're really the -- excuse me.

Scott Keeney -- Chief Executive Officer

Both sequentially.

Mark Miller -- Benchmark Company -- Analyst

Okay. Your guidance for the current quarter, is the decline in revenue spread across all three segments or more concentrated in industrial?

Ran Bareket -- Chief Financial Officer

We will not split the guidance by end markets.

Mark Miller -- Benchmark Company -- Analyst

Thank you.

Ran Bareket -- Chief Financial Officer

Thank you, Mark.

Operator

The next question is a follow up from David Ryzhik with Susquehanna Financial Group. Please go ahead.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Hi. Thanks so much for taking the follow up. Just wanted to drill down a little bit on the pricing environment. Maybe you can comment on how it's changed since you updated us three months ago and does it remain confined to that 1 kilowatt to 4 kilowatt market or have you seen pricing begin to creep up outside of that segment? Thanks.

Scott Keeney -- Chief Executive Officer

Yeah. What we described previously was that the changes in prices sort of mid last year, we've seen relatively stable environment since then certainly over time, we certainly anticipate continued price reductions that will continue to open up new markets for us. But in the past quarter, we haven't seen significant changes with prices.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Great. Just one quick follow up for Ron. There was a tick up in DSO, in Q4 should we expect this to normalize in 1Q?

Ran Bareket -- Chief Financial Officer

Yes, that will normalize.and that was -- the Q4 revenue was back ended, loaded and as a result of the day that went up. If you recall, we talked about 40 days issues as the days of -- as a days of accounts receivable which will go down in Q1. Will go back to normal.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Okay. Thanks again.

Ran Bareket -- Chief Financial Officer

Thank you.

Operator

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

Jason Willey -- Senior Director of Investor Relations and Corporate Development

Thank you everyone for your participation and continued interest in nLIGHT. And we look forward to speaking with you over the coming weeks. Have a good rest of your day.

Operator

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

Duration: 47 minutes

Call participants:

Jason Willey -- Senior Director of Investor Relations and Corporate Development

Scott Keeney -- Chief Executive Officer

Ran Bareket -- Chief Financial Officer

Patrick Ho -- Stifel -- Analyst

Tom Diffely -- D.A. Davidson -- Analyst

David Ryzhik -- Susquehanna Financial Group -- Analyst

Jim Ricchiuti -- Needham and Company -- Analyst

Brian Gesuale -- Raymond James -- Analyst

Andrew DeGasperi -- Berenberg -- Analyst

Greg Palm -- Craig-Hallum -- Analyst

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Mark Miller -- Benchmark Company -- Analyst

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