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nLIGHT, Inc. (NASDAQ:LASR)
Q1 2019 Earnings Call
May. 8, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the nLIGHT First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note today's event is being recorded.

I would now like to turn the conference over to Jason Willey, Senior Director of IR. Mr. Willey, please go ahead.

Jason Willey -- Senior Director, 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 the speaker 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. In addition, you can access an archived version of today's call from our web site.

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 market, 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 business. We will then be glad to take your questions.

Ran Bareket -- Vice President and Chief Financial Officer

Thank you, Jason, and good afternoon, everyone. We delivered first quarter revenue gross margin and adjusted EBITDA in line with the outlook we provided in mid-February. Revenues for the first quarter were $14.9 million down 1.4% year-over-year. During Q1 sales to the industrial end markets were $18.1 million, representing 43% of total revenues and down 5.3% year-over-year.

Sales to microfabrication end markets were $14.5 million or 75% of total revenues and down 7% year-over-year. Aerospace and defense sales were $9.2 million or 22% of total revenues and grew 19% compared with the first quarter of 2018. On geographic basis sales to China were $13.7 million in the first quarter of 2019 or 73% of total revenues down 10% compared with Q1 2018.

Sales in North America were $15.8 million, representing 38% of total revenue and down 2.6% year-over-year. Rest of the world sales were $12.4 million up 12% compared with the first quarter of 2018 and were 70% of total revenues. Gross margin was 32.3% in the first quarter, a decrease of 240 basis year-over-year compared to the first quarter of 2018 gross margin in Q1 '19 was negatively impacted by U.S. China tariff implemented in September 2018 and reduced pricing in the Chinese industrial end market. These headwinds will partially offset by cost reduction and positive mix toward high-power fiber lasers.

The Chinese industrial end markets represented approximately 20% of our overall revenue during the first quarter of 2019. Operating expenses were $14.6 million during the first quarter compared with $10.5 million in the first quarter of 2018. Q1 '19 operating expenses include $1.7 million stock-based compensation, an increase of approximately $1.6 million year-over-year.

Operating expenses reflect high run rate G&A expenses post our public offering in April 2018, an investment in R&D to position the business for long-term growth opportunity in high power laser market. First quarter operating loss of $1.1 million was negative 2.5% of revenues and compared with operating profit of $4.2 million or 9.9% of revenue in the first quarter of 2018.

Our adjusted EBITDA for the first quarter was $3.1 million or 7.3% of revenues this compared to $6.3 million or 14.9% of revenues in Q1 2018. GAAP net loss for the first quarter of 2019 was negative $1.2 million compared with net income of $2.9 million in Q1 2018. GAAP EPS for the first quarter of 2019 was loss of $0.03 per share compared with zero in the first quarter of 2018.

Non-GAAP EPS, which exclude the impact of stock-based compensation and assumed the conversion of all outstanding preferred stock in the period to common stock was $0.02 per diluted share in Q1 2019 compared with $0.10 per share in Q1 2018.

Turning to the balance sheet. We ended Q1 with total cash and cash equivalents of $142 million. DSO for the first quarter of 2019 was 61 days, the higher receivable balance reflects timing of revenue and moving to more standard payment terms with some of our large customers. Inventory at the end of the quarter was $41 million, representing 121 days in inventory. We built inventory during Q1 to support the anticipated ramp in volume in the second quarter.

During Q1, we use $4.9 million of cash in operating activity reflects lower net income and continue working capital expenditure. Capital expenditure for the quarter were $2.7 million or 6.5% of revenues. Turning to the guidance for the second quarter of 2019. We expect the revenue to be in a range of $46 million to $50 million.

In the midpoint of this range, it implies revenues down approximately 7% compared with the second quarter of 2018 and up approximately 15% from previous quarter. Based on our current expectation for product mix, we see gross margin for Q2 2019 in a range of 72% to 75% which includes approximately $400,000 of stock-based compensation.

Operating expenses for Q2 are expected to be approximately $15.5 million, which includes approximately $2.1 million of stock-based compensation. For the second quarter, we expect adjusted EBITDA in a range of $4 million to $6 million. We expect Q2 average basis show an average fully diluted share to be in a similar level with Q1.

Looking at the full years of 2019, we continue to believe we can deliver a moderate amount of revenue growth compared to 2018. This reflects our expectation for increased revenue from new product as the year progress, improve contribution for the microfabrication end market to the first quarter and continue the strength in aerospace and defense.

I will now turn the call over to Scott.

Scott Keeney -- President and Chief Executive Officer

Thank you, Ran. We begin 2019 with first quarter financial results that met expectations we outlined back in February. We continued to experience solid demand trends in the aerospace and defense end market with this strength being offset by challenging conditions in the Chinese industrial end market and a slower quarter at some of our larger microfabrication customers.

Taking a closer look at the industrial market, revenues declined 5% year-over-year in the first quarter with reductions in China and North America partially offset by strong growth in the rest of the world. For the second consecutive quarter, we generated more than 50% of our industrial revenue outside of China. Markets in Asia and parts of Europe saw strong growth during the quarter as we made in-roads with several customers that have not historically purchased meaningful quantities from nLIGHT. These customers are embracing our differentiated technology such as Corona and the benefits of the serviceability of our lasers and focused customer support.

We are excited by the initial customer interest in our new product offerings. Corona played a key role in a number of opportunities during the quarter, and we see programmability taking on growing importance as we expand our presence outside of China. The programmability features enabled by Corona allow our customers to offer performance and flexibility that clearly differentiate their systems from their competitors.

In the ultra-high power segment of the fiber laser market, we generated initial revenue from our 12 kilowatt fiber laser in Q1. We expect volumes of this product ramp as 2019 progresses. There is growing customer interest in higher power offerings in China, a segment of the market where we see more limited competitive landscape.

During Q1, approximately 24% of our fiber laser sales were at 6 kilowatt and above which is up 12% from the comparable period in 2018. High powered growth in China was even more favorable than these global trends. Sales in the 2 kilowatt to 5 kilowatt range were over 50% of our fiber laser sales in Q1 2019 down 8% from Q1 2018 levels.

I will now provide a bit more color around the Chinese industrial market. As a reminder, China industrial revenues are approximately 20% of overall company revenues. Over the past several months, we have seen improved activity in China. We believe this improvement reflects a combination of factors including positive seasonal trends exiting Chinese New Year. Economic and tax stimulus from the Chinese government and expectations for a resolution to the trade disputes with the US.

While unit demand in China has improved from Q4 and Q1 lows, competitive pressure in the lower power segment is weighing on the overall market. Despite the current competitive and macro headwinds, we continue to see opportunity for nLIGHT in the Chinese industrial market.

We see this opportunity centered on a set of customers who are providing high-quality highly reliable products to their end users. We are focused in China on supporting these customers and in penetrating the ultra high power market. The high power segment continues to grow in units and revenue and we see limited competition from local vendors in this segment.

In the microfabrication market, revenues declined 7% year-over-year during the first quarter. We experienced slower activity at several large customers following the strong purchases in the back half of 2018. We believe the reduced activity is a temporary dynamic and we expect revenues in this end market to improve sequentially in the second quarter. Despite the temporary volume reductions at a few customers, we are encouraged by the broad trends across the microfabrication market.

Over the past several quarters we have seen increases in the breadth of customers we are serving. We believe this broader set of customers positions as well for future growth in this market. Our microfabrication customers serve a wide range of end applications and we see the improved cost and performance of dyed pump solid state lasers, opening up new applications enabling the replacement of legacy technologies.

Finally in the aerospace and defense market. We grew revenues 19% year-over-year in the first quarter. This growth follows strong results in this end market through 2018, resulting Q1 benefited from higher activity at several long-term programs. We also continue to see opportunity to participate in government R&D projects. While these projects remain a relatively modest portion of our A&D revenues. They support the evolution of our core technology and provide important foundational work for larger longer term opportunities such as directed energy.

In conclusion, our results for the first quarter of 2019 met our expectations and showed progress across a number of areas despite challenges in the industrial end market in China. We are excited by the initial customer response to the new products we recently introduced and the continued momentum in the aerospace and defense market. As 2019 progresses, we see further opportunity to improve our position with key industrial customers and expect more normalized volume trends from our leading microfabrication customers.

In closing, I would like to thank the entire nLIGHT team for their efforts during the first quarter, and with that we'll now hand it over to Q&A.

Questions and Answers:

Operator

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Jim Ricchiuti with Needham & Company.

James Ricchiuti -- Needham & Company -- Analyst

Hi, good afternoon. I wanted to pursue the microfabrication business first. A little surprising the decline you saw there. Can you talk about which verticals and it appears that was mainly in North America or was it also in Europe as well?

Scott Keeney -- President and Chief Executive Officer

Hi, Jim. Yes, we saw a slight decline really globally, I think, consumer electronics might be the one area, I would target. We see an expansion of our customers in that space. So that gives us you know it's a encouraging sign for continued growth over time, but that's probably the single driver for Q1.

James Ricchiuti -- Needham & Company -- Analyst

Okay. And, Scott, going back to the last call. It seem like you were perhaps expecting a little bit more moderation in growth in the aerospace and defense. Is that tracking stronger? It seems to be consistent with what we're hearing from some other players in the market?

Scott Keeney -- President and Chief Executive Officer

Indeed, Jim. Yes, we've highlighted that as a -- an ongoing area of growth and we think longer term it will continue to be a strong area of growth. It will be lumpy. There'll be different projects that come up, but yes we remain optimistic about the long-term growth options there.

James Ricchiuti -- Needham & Company -- Analyst

And if I could one last I'll jump back in the queue. Just overall pricing in China Industrial. In terms of the pressure at the low end of the market and are you seeing it in the mid range segment of the market?

Scott Keeney -- President and Chief Executive Officer

Yes, it's a little hard to be too prescriptive thereof. The exact you know point of power where things change, but let's just say, we see limited competition as you get to the high power segment in the very low power segment, you see more intense competition in that space. We do think that, as you go up and power, the technology gets far more difficult, and so we continue to see more limited competition there.

James Ricchiuti -- Needham & Company -- Analyst

Thanks. I'll jump back in the queue. Thank you.

Operator

Thank you. And the next question comes from Tom Diffely with D.A. Davidson.

Thomas Diffely -- D.A. Davidson -- Analyst

Yes, good afternoon. I guess follow-up on the last question. When you look at the consumer electronics softness, do you see historically a one year on, one year off type trend in that space or is it with your customer base a little tougher to call?

Scott Keeney -- President and Chief Executive Officer

Yes, I know, I think, it's more difficult to call that we don't see the one year one off. And we're seeing an expansion in this set of customers as we've noted and the expansion and applications of largely the dyed pump solid state lasers in that space. So, no, I think consumer electronics was the driver of Q1 from what we can tell, but over the longer term we see an expansion in that space.

Thomas Diffely -- D.A. Davidson -- Analyst

Okay. And it seems like obviously the Corona driving a lot of interest. In addition to just sales or interest, do you see that impacting either the pricing or the margin as well?

Scott Keeney -- President and Chief Executive Officer

Well, the way we think about Corona is, it's a differentiated product that allows our customers to differentiate their systems, and that's allowing us to grow with the larger players around the world. And certainly in that space we see a different environment where it is more about high quality, high productivity and that's allowing us to win those design wins where the margins are better. So it's more about the design win aspect of the differentiation.

Thomas Diffely -- D.A. Davidson -- Analyst

Okay. And do you think that it's more popular at the higher powers or the mid powers or what's the kind of the sweets spot for Corona?

Scott Keeney -- President and Chief Executive Officer

Good question, Tom. When we launched, Corona, we saw it as a very differentiated product that would lead to adoption in certain segments and what we're seeing is the benefit across power levels. And so we believe that programmability is going to be critical across a broad spectrum of power levels.

Thomas Diffely -- D.A. Davidson -- Analyst

Okay. And then finally when you look at the aerospace and defense part of the market. Are you selling complete systems there now or is this still mainly the semi lasers and a lot of R&D projects?

Scott Keeney -- President and Chief Executive Officer

Yes. We, good, today we do not sell systems in that space. We sell largely at the component and there's some pretty advanced components in that space, but certainly we don't sell systems.

Thomas Diffely -- D.A. Davidson -- Analyst

Okay. Thank you.

Operator

Thank you. And the next question comes from Andrew DeGasperi from Berenberg.

Andrew DeGasperi -- Berenberg -- Analyst

Andrew DeGasperi. Thanks. I guess my first question on the microelectronics against the follow up, but the improvement that is lagging in 2Q. Is that going to be, I'm assuming, it's sequential on a year-over-year basis?

Scott Keeney -- President and Chief Executive Officer

Andrew, there's a little hard at the end of the question there, I think, your question is around Q2 microfabrication. Can you repeat the last part of your question?

Andrew DeGasperi -- Berenberg -- Analyst

Yes, the improvement that you are confident on. Is that on a, I'm assuming, that's on a sequential basis, if I'm right?

Scott Keeney -- President and Chief Executive Officer

Yes, that's correct.

Andrew DeGasperi -- Berenberg -- Analyst

Got it. And then just on in terms of the weaknesses you saw in the quarter. Obviously, you have a pretty large customer in that space and they liked being weaker in the call three weeks ago. Just wondering is it, the improvement coming from other sources or other customers or is it generally broad based?

Scott Keeney -- President and Chief Executive Officer

For the general weakness in Q1? That's your question.

Andrew DeGasperi -- Berenberg -- Analyst

Yes.

Scott Keeney -- President and Chief Executive Officer

Yes, well, I mean you know Q1 is generally weaker because of the Chinese New Year is a key driver of Q1. So, that was someone amplified this year by just the uncertainties around the various trade issues. But generally Q1 in the industrial space is softer because of Chinese New Year.

Andrew DeGasperi -- Berenberg -- Analyst

Got it. And then, I apologize, if you have already answered this before in previous segments. Is there gross -- relative big gross margin difference between your different segments? If you can maybe quantify?

Ran Bareket -- Vice President and Chief Financial Officer

Yes, we will not quantify big, but yes, I think, that we talked about it in the past. There is a mix between the different end markets and between the different products that we have i.e. semiconductor or laser versus fiber laser, but will all the mix within the product and it's mainly refer to a higher power in the fiber laser versus lower power in the fiber laser. As Scott mentioned the higher power in the fiber laser where we do gain momentum there, where we do increase our share there. The margin is higher due to lower competition as well as better technology that's coming with the higher margin obviously.

Andrew DeGasperi -- Berenberg -- Analyst

Right. And then in the aerospace and defense, obviously, that's growing faster this year, last year versus your other segment. So, just wondering, I know you don't disclose margin differences between those, but is it -- should we assume that's the higher margin business relative to the others?

Ran Bareket -- Vice President and Chief Financial Officer

We will not go to that level, but yes we will not go to that level to disclose the different margin between the different end markets.

Andrew DeGasperi -- Berenberg -- Analyst

Okay, understood. Thank you.

Ran Bareket -- Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. And the next question comes from David Ryzhik with Susquehanna Financial Group.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Thanks so much for taking the question. Scott, can you just elaborate again on the interest you're seeing in the 12 kilowatt. Is there anyway to size like the amount of customers that are in qualifications and, in that context, actually how long our qualification cycles, and perhaps maybe you know can you fill us in on 10 kilowatt. Should we expect 12 kilowatt to be a bigger driver, over the next few quarters than the 10 kilowatt? And I have a follow-up.

Scott Keeney -- President and Chief Executive Officer

Okay, good. So, as I highlighted, the ultra-high power, the area where there's significant growth today is in China. And in China there are really only small handful of customers that have the technology to use those ultra-high powers. And then likewise we see very limited competition on companies that can produce that 12 kilowatt, so there's a handful of customers.

There's a very strong demand interest which therefore shortens that cycle to go from inquiry to design and what's going on in this space is, as you go up and power for key end users, their productivity goes up, they get paid based upon how many pieces they cut and doing it faster means that they get paid more.

So, there's keen interest there, and we've been out meeting with end users, many of them over the last few quarters, and so we see strong interest there, which is driving this market. There are limited companies that can do it and there are limited companies that obviously can provide the lasers.

So we do see it as an attractive market that will continue to expand over time.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Got it. And then, Ran, you talked about building inventory to support a ramp in volume in 2Q. Is that mostly for 12 kilowatt or for Corona or a mix. Just would love a little more color on what products are in that inventory build? Thank you.

Ran Bareket -- Vice President and Chief Financial Officer

It's across the board. It's for diodes, it's for fiber laser, it's for 12 kilowatt, it's for Corona, it's across the board.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Okay. And then as we talk about 12 kilowatt and Corona. Is the expectation that both perhaps become more material and ramping by mid-year or just wanted to understand the timing and maybe how we can think about the model?

Ran Bareket -- Vice President and Chief Financial Officer

Yes, I think, that in terms of the model, yes, mid-year is the right way to look at that where we will ramp even more than what we are seeing right now.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Thanks so much.

Ran Bareket -- Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. And the next question comes from Greg Palm with Craig-Hallum Capital Group.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

Hi, guys. This is actually Danny on today for Greg. I'm just kind of curious, what kind of levels of tariffs are you seeing right now and how are you implementing those into your quarter two guidance?

Ran Bareket -- Vice President and Chief Financial Officer

So, of course, they are part of our -- we took it into consideration when we provided guidance. And we disclosed it in the past. We are seeing right now impact from the tariff that was implemented in September 2018, call it, the incremental tariff that was implemented in September 2018 at roughly of $600,000, $700,000 or call it roughly 1.5% of the margin. So, if you look at a decline in the margin from Q1 '18 to Q1 '19 more than half of it was a result of that additional tariff that was implemented again in September '18.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

Okay. That's great. And then I guess just moving to kind of the additive market. How are you seeing your guy's current position in there and what kind of end markets or geographies are you seeing strengths and weaknesses from there?

Scott Keeney -- President and Chief Executive Officer

Yes. So, in additive again remain quite you know have a strong perspective that we'll see continued growth in that space. We have seen some slowdown in the near term in that space due to various factors at the various companies that play in that space. There are a few key players that have the technology there today.

I'd say that sort of first generation products. There's a long list of other companies that are coming out with the next generation products and that's what we're really focused on the next generation in that space. And so we don't everything specific to report on that this quarter, but we do believe that this is a space that is a great example of where the performance characteristics laser are critical and we've seen that in the engagements that we're working on.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

And then I guess just following up on that one real quick. Are you seeing trends where these additive systems are starting to use maybe the like multi-laser where you're getting into two lasers or four lasers or even eight?

Scott Keeney -- President and Chief Executive Officer

Absolutely. Yes, I mean, I think it's all about throughput with these, well, the quality and throughput with these systems. And so certainly we're seeing multiple lasers, but also again even the performance of a single laser can be absolutely critical to increasing the throughput in this space.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

All right. Thanks, guys. I'll hop back in the queue.

Operator

Thank you. And the next question comes from Jed Dorsheimer with Canaccord Genuity.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Hi, thanks. Just a follow up on the tariff, if I back out the tariffs on the 150 basis points. Would the other 150 basis points sequential decline be mainly in pricing pressure or volumes or is that kind of split evenly just a helpful understanding of that would be useful?

Ran Bareket -- Vice President and Chief Financial Officer

First of all, when you back out the tariff from 240 basis points year-over-year, you are getting less than 1% reduction year-over-year, and that 1% reduction there are many things that impact our margin.

In one hand, yes, there is price impact there, but that price impact, as I mentioned, in my opening remarks offset by, first of all, but everything that basically improve our margin, and I will go one by one. When we are going up in the power in the fiber laser, as we mentioned before, the margin is higher.

So, the mix within the product that we are selling is a better mix for us in terms of the margin, and we are selling 12 kilowatt, we are getting better margin than when we are selling the 3 kilowatt. So, this is point number one.

Second point is to introducing new product to the market. Again 12 kilowatt, the Corona and other product, which they'll cost is lower than where we are today. So, cost reduction is coming into the effect.

And lastly it's obviously investment in manufacturing processes and automation and other cost reduction internally in the company that help us to improve the margin. So, all of those factors offset the price reduction. And, if you will, the overall impact was roughly a reduction of 1% year-over-year.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Got it. So, if you -- so we're basically looking at absent tariffs kind of that high watermark of the 36% that you saw in Q4?

Ran Bareket -- Vice President and Chief Financial Officer

Yes, if you -- if you look at the guidance that we are giving for next quarter, right. 72% to 75% that assume again that first of all the volume will be higher, right. Don't forget that the volume in Q1 was low. So, as we go back in the volume and this is basically definitely what we are planning to do in Q2 based on our guidance. So, obviously, the margin will be higher, but it's not just that.

Again, we are planning to go high in the volume, but in the area where the margin is higher. Again those 12 kilowatt Corona and everything else that I just mentioned. So, all of those things will impact, but will help us to improve the margin. Definitely if we will not have the tariff, it will help us even further.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Got it. Two other questions for you and then I'll jump back in the queue. I was wondering on the component side is all of the greens still being split in terms of the or where are you, I guess, in the development of a pure green. Sorry, so the green laser is it -- is all that being split -- at a component level. Is that still all being split in terms of splitting the red wavelength or I'm just curious in the development of solid state green laser where that is from either from your business or from an industry perspective?

Scott Keeney -- President and Chief Executive Officer

Yes, to be honest, where we see most of the growth in the dyed pump solid state laser market is in ultra-short pulses and certainly picosecond, femtosecond where it gets really interesting. So, using a really sharp pulse to in many cases athermally affect material.

In terms of the frequency conversion, there we typically see more of the UV wavelengths as a key market. We certainly support green lasers. I wouldn't highlight that as a key area growth and we certainly are aware of continued improvement in that space. We're certainly supporting continue improvement, but it's not a key driver of the growth in that market.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Got it. And the pico and femto is for the micro material processing?

Scott Keeney -- President and Chief Executive Officer

Yes, we call it all micro. It's really a broad range of different applications. It is consumer and it is other things it's medical, it's all kinds of different applications in that space. And we do believe that market will continue to grow as the lasers continue to improve both in terms of price and performance.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Got you. One last one. Scott, over, so 6 kilowatts and over. What percentage Corona enabled?

Scott Keeney -- President and Chief Executive Officer

Well, we don't break it out. Let's just say this. We see benefits both in higher power and in Corona and when you combine those, you get even bigger benefits.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Okay. Thank you.

Scott Keeney -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And the next question comes from Patrick Ho with Stifel.

Patrick Ho -- Stifel -- Analyst

Thank you very much. Scott, maybe first off following up on the questions on the 12 kilowatts. You mentioned it's a limited customer base today, but at the same time, this could be an opportunity for you to work with existing customers and have them kind of move up the power curve and enhance their productivity. Can you give a little bit of color of the interest between new customers that you're focusing on with the ultra high power laser versus helping your existing customers kind of move up that power curve as well?

Scott Keeney -- President and Chief Executive Officer

Good question, Patrick. Yes, I know, I think, the first order it's about helping our existing customers who have who've grown very nicely and continue to improve and helping them continue to move up. That's really the first order driver of our growth in that space. There are some newer customers that are also very interested in our products, but certainly initially it is our existing customers.

Patrick Ho -- Stifel -- Analyst

Great. Ran, just a follow up and maybe to get a little bit of clarification. I think you mentioned OpEx in 2Q will be $15.5 million. Can you just give a little color of where we're seeing the increase on a sequential basis? Is it more in R&D or is it more on the SG&A line?

Ran Bareket -- Vice President and Chief Financial Officer

It will be probably half R&D and half SG&A roughly. Yes, but what we will see is, an improvement of the OpEx quarter-over-quarter when we are investing more in R&D on those project that we are working and some related to SG&A. Some of that will -- some of the incremental OpEx between Q1 to Q2 will be related to stock-based compensation.

Patrick Ho -- Stifel -- Analyst

Great. That's all I have. Thank you very much.

Ran Bareket -- Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And the next question comes from Mark Miller with Benchmark Company.

Mark Miller -- Benchmark Company -- Analyst

Thank you for the question. Your other income of $820,000 that was up tenfold from a year ago. I'm just wondering what was driving that. What should we expect in the coming quarters for this year for other income?

Ran Bareket -- Vice President and Chief Financial Officer

The other income. Let's put it like that below the -- below the operating income there are two lines where the interest income, which that's the interest that we are getting from the cash that we have in other income. The majority of the $800,000 was due to exchange rate between China and the US.

Mark Miller -- Benchmark Company -- Analyst

Okay. So, it's exchange rate driven?

Ran Bareket -- Vice President and Chief Financial Officer

Mainly.

Mark Miller -- Benchmark Company -- Analyst

Okay. In terms of the diode business. What are you expecting from your major semiconductor customers because they've been reporting and the recovery seems to be getting pushed out further that they were anticipating a quarter ago. Do you feel that you'll see improvements in the diode sales in September, December quarter from your major semiconductor customers?

Scott Keeney -- President and Chief Executive Officer

Yes, good, Mark. With respect to semiconductor if you talk about WFE it's actually a pretty limited part of our exposure. So, it's not a big driver to our microfabrication business. So, no, I wouldn't factor in big change plus or minus there.

Mark Miller -- Benchmark Company -- Analyst

Thank you.

Operator

Thank you. And the next question is a follow-up from Jim Ricchiuti with Needham & Company.

James Ricchiuti -- Needham & Company -- Analyst

Hey, Ran, I wanted to just make sure I heard you correctly. So, you're assuming you are still in a position to show growth for the year as a whole?

Ran Bareket -- Vice President and Chief Financial Officer

Yes, nothing, on the overall for 2019 again there are many assumption there. But for 2019 the assumption that we had at the beginning of the year, didn't change.

James Ricchiuti -- Needham & Company -- Analyst

Okay, because if I take the low end of your guidance for Q2 that's a pretty healthy sequential ramp in the second half over the first half. And I'm trying to see what -- which areas you feel a little bit more, I think, I guess confident about aerospace and defense. Are you that much more positive about the other areas?

Ran Bareket -- Vice President and Chief Financial Officer

No. Just and let me tell you where we planned that growth will come from and I will go one by one. So, we'll start with microfabrication, we had a lot of question about that. Definitely, we see that Q2 is, as I mentioned, at the beginning will be higher than Q1, and we believe that there's going to be some recovery in the second in the second half as well.

On industrial end market, outside of China, we do anticipate to see growth. Again Corona and everything else that we talked about, and within China, we will see a growth from the 12 kilowatt in the high power. As a matter of fact we just started to sell 12 kilowatt in Q1. We will see a much bigger ramp this quarter and definitely at the second half.

And lastly as you mentioned aerospace and defense. It's another factor that will help us to grow the company. Listen, I don't want to (inaudible) we will not. It's not that we anticipate to have a significant growth year-over-year, but nothing changed from the remark that we said at the beginning of the year.

James Ricchiuti -- Needham & Company -- Analyst

Okay. Anything we need to bear in mind about operating expenses we look out over the balance of the year?

Ran Bareket -- Vice President and Chief Financial Officer

Yes, so we talked about the OpEx for Q2. I think there is going to be a little bit incremental in Q3 and the second half nothing significant. If you look at the trend that you saw in the last few quarter, that should be the trend going forward for the second half as we continue to expand the company.

James Ricchiuti -- Needham & Company -- Analyst

Okay. Thanks very much.

Ran Bareket -- Vice President and Chief Financial Officer

Thank you, Jim.

Operator

Thank you. And as that was the last question, I would like to turn the floor to Jason Willey for any closing comments.

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

I would like to thank everyone for their participation today and continued interest in the company, and we look forward to talking with you over the coming weeks and months. Have a good rest of your day.

Operator

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

Duration: 41 minutes

Call participants:

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

Ran Bareket -- Vice President and Chief Financial Officer

Scott Keeney -- President and Chief Executive Officer

James Ricchiuti -- Needham & Company -- Analyst

Thomas Diffely -- D.A. Davidson -- Analyst

Andrew DeGasperi -- Berenberg -- Analyst

David Ryzhik -- Susquehanna Financial Group -- Analyst

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Patrick Ho -- Stifel -- Analyst

Mark Miller -- Benchmark Company -- Analyst

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