Q2 2020 Luna Innovations Inc Earnings Call
[music], ladies and gentlemen, thank you for spending by and welcome to the Q2 2020 Luna innovations incorporated earnings conference call at this time offers.
Business or in the listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you would need to press star one on your telephone.
If you require any further assistance. Please press star zero I would now like the hand the conference over to your speaker today Ms. Allison Woody directive of Ministrations. Please go ahead ma'am.
Thank you good afternoon, and thank you for joining US today. This afternoon, we issued our second quarter 2020 earnings Press release. In addition, we posted to the Investor Relations section of our website a presentation with supplemental information for the quarter. If you do not have a copy of the release or the supplemental materials. Please check our website.
Not at linear dotcom, we will all supposed to replay of this call trout website.
Some of her comment in discussions today are based on non-GAAP measures specifically adjusted EBITDA. These adjusted numbers exclude the effect as certain noncash expenses and other items.
The adjusted results or supplement to the GAAP financial statements Luna believes the presentation and exclusion of these items, it's useful in order to focus on what we deem to be more reliable indicator of ongoing operating performance.
Before we proceed with our presentation today, let's remind you that statements made on this conference call as well as in our public filings releases and websites, which are not historical facts, maybe forward looking statements that involve risks and uncertainties and are subject to changes at any time, including but not limited to statements about our expectations.
Regarding future operating results or the ongoing prospects of the company.
Actual results may differ materially as a result of a variety of factors more complete information regarding forward looking statements risks and uncertainties is available in the Companys SEC filings, which can be found on the FCC web sites and our website, we disclaim any obligation to update any such factors or two announced publicly.
The results of any revisions to any of the forward looking statements to reflect future events or developments, except as required by law.
After our prepared remarks, Scott, great, our President and Chief Executive Officer, Gi net through our Chief Financial Officer, Brian Solar Senior Vice President and General manager of our Lightwave Division and James Garrett Senior Vice President and General manager of our Luna Labs Division will be available to take your questions and at this time.
The turn the call over to Scott.
Good afternoon, everyone as Alan mentioned, we issued our second quarter 2020 press release at market close and you'll find it on our website.
At the beginning of Q1 I spoke about what an extra ordinary time it had been and today is no different.
The pandemic and other recent events continue to show the best and worst of the world in which we live.
Most importantly, I hope you wouldn't those close to you are saying, so safe and healthy and as always we appreciate the time you've taken to join us for this update.
Luna hasn't been immune to the effects of this pandemic and I will touch upon those effects of the moment. However, as a designated essential organization, we have largely been able to stay the course.
We will share with you today operational and financial results that were delivered as we expected and when we talk to you last quarter.
I'm proud of these results and the fact that we realized record operating income margin this quarter.
For that I'm incredibly grateful to our dedicated employees and to our customers.
Remember that last quarter, we mentioned the seasonality in our business would continue to be weighted to the second half.
With the percentage split in the first half of 2020 to be slightly below historical trends.
As a reference in recent years Luna has recorded approximately 44% to 46% of our revenue in the first half of the year with a larger portion of the annual results being realized in the second half of the year, we're on track with that seasonality. Despite the unusual times.
We continue to be mindful of the environment and how fast it can change.
But we are vigilant and focused on performing to meet the demands of our customers. So that they in turn can be a successful as possible navigating through these uncharted waters.
And while we continue to be flexible as necessary to meet the changing dynamics of the current environment.
We continue to deliver to our expectations and we believe very strongly in the potential blueness future opportunities. Therefore, we continue to invest strategically in our business and have accomplished or currently implementing some of the following important foundational items, we hire genus drew as our.
New CFO and we hired Jane Bailey into the new position of head of marketing and communications.
Overall, we have hired 29, new talented and committed employees. So far this year, some of whom replaced former employees and some of whom were hired into newly created roles. We began our ERP project, which will modernize our back office and give us ample room for growth and expansion.
[noise] out further investment in this platform.
We upgraded our four one k. options for the benefit of our employees and we just rolled out in employee stock purchase program to provide the opportunity for our employees to participate in the value creation, we are focused on driving.
Now onto detail around the second quarter and some recent events leading up to this call.
I will touch upon three areas. During my discussion first I'll highlight recent accomplish accomplishments such as our second quarter financial results as well as some challenges through which we're navigating.
Second I'll review organizational actions, we've taken as we continued to adapt to our evolving new environment and third I'll provide our perspective on the remainder of this year, both operationally as well as financially.
Let's begin with recent accomplishments and our second quarter financial results.
The team did a solid job of delivering growth this quarter in spite of the pandemic and I'm very proud of the lunar team for their focus and commitment.
As a reminder, we mentioned last quarter that we would begin to report results in our two segments Lightwave and Luna labs changing from our former segments of product in licensing and technology development.
This will allow us to more accurately reflect how we operate the business.
I'll be discussing financial results. According to these new categories and you'll see these names reflected in our financial statements.
For the second quarter total revenues were up 4% to 18.6 million compared to the prior years quarter.
The Lightwave segment had an increase of 3% year over year to 12.9 million in total revenues overall I'm pleased with the solid growth achieved during this shifting pandemic.
We expanded gross margin by 210 basis points.
Improved our operating income by 800000 and delivered adjusted EBITDA of 3 million up 600000 over last year.
Now, let me discuss lightwave in more detail, particularly as it relates to operational moves we've made to adjust for this new normal.
The year over year, 3% increase in Lightwave revenues was primarily driven by increased revenues from our sensing business.
As a reminder, Q2, mark the first quarter in which we completely lapped on an apples to apples basis, the acquisition of general Photonics.
Let me provide a few additional highlights starting with our communications testing business.
Revenues in our communications test business were down slightly on a year over year basis.
As a reminder, this is where many of our products have price points over $100000 and we saw some delays in capital spending globally due to the impact of cobot 19 on the economy, which has driven a lengthening sales cycle.
We continue to make progress with our newest product in this business the optical backscatter reflect Tom owner or Ob our model 6200.
As we've discussed on previous calls the Ob. Our 6200 is our new portable Ob our test instrument for field test applications and has been designated as support equipment for Lockheed Martin's F 35 fighter jet.
In Q2, we received several new orders for and delivered initial Ob our 6200 units for this application.
We also received new orders for qualification of the will be our 6200 to support multiple other military aircraft.
This marks an important milestone as we look to grow sales of this new product beyond our initial work on the F 35.
Moving to our sensing business as a reminder, this business includes our Odyssey and Hyperion distributed fiber optic sensing products as well as our terahertz instruments.
Total revenues in Q2 increased by double digits compared to the prior year.
This was driven by growth of international sales in both Asia Pacific and Europe as a result of our international expansion efforts as well as the addition of new strong regional channels over the past year.
Sales of our terahertz product within the sensing business bounced back in Q2 after a somewhat slower start to 2020.
This is a clear example of why we've highlighted and past earnings calls that the timing of terahertz orders can be lumpy throughout the year.
We continue to invest in both our comps test and sensing businesses, particularly in our sales and engineering capabilities and we're seeing the benefits of laying this foundation.
We're well positioned to leverage the growth in fiber optics.
As I mentioned earlier to support this growth we've hired a seasoned vice president of marketing and Communications Jane Bailey, who will lead our marketing efforts and help to support the Lightwave sales team.
Jane Joint My Executive team this week and we're thrilled to have her on the Luna team.
Now let me give you some color about our lightwave operations during this pandemic.
As I outlined on our Q1 earnings call, we began to organize our resources in such a way as to prioritize the health and safety of our employees and the communities in which they live while endeavoring to ensure continuity of our business operations.
We put in place more severe restrictions at that time, including a complete ban on all travel as the pandemic impact was unknown.
As we've learned more during the course of this second quarter. We've kept many of those initial restrictions in place while adjusting a few others to accommodate for what we now know.
We have closely followed and adhere to federal and state guidelines with the safety and wellbeing of our employees utmost in our minds.
Let me outline.
For you what we are now doing from an operational perspective, we've been able to maintain 100% continuity of operation across all our locations and to continue to deliver to our global network of customers.
And we continue to have flexible work schedules and environments to limit employee gatherings in common spaces to maintain significantly enhance cleaning procedures throughout all of our facilities and to ban all international travel, we're allowing domestic travel on a very selective basis and with senior level upper.
Ruble required.
From a supply chain perspective, we're working very closely with our partners last quarter. We discussed the relatively minor impact we were seeing on our global supply chain.
Im happy to report that those impacts in Q2 continued to be minimal.
We continue to see to see some minor delays in delivery from our supply base, but the impact on our operation has also been minimal.
Looking ahead, we do not anticipate any major disruptions to our supply chain in the second half of the year.
Given the constantly changing environment, we are working very closely with all of our global partners to ensure continuity of supply throughout the second half of 2020.
On the demand side, we continue to monitor our pipeline of sales opportunities very closely.
In Q2, we did see the lengthening of sales cycles, I mentioned earlier due to the global impact of Cobot 19.
Our core target markets have been affected differently. The main target markets for our fiber optic solutions our aerospace.
Military and defense communications infrastructure energy and automotive remember when we refer to aerospace we are primarily referring to military with some limited exposure to commercial aerospace.
Demand in military aerospace and infrastructure have remained strong.
We have probably seeing the most pronounced impact of the virus on the automotive and commercial aerospace industries with all of our other end markets staying strong.
We have seen a lengthening of sales cycle in our communications test business.
Our lightweight business has continued to build a growing pipeline of new opportunities.
However, it's been more challenging a bit slower to grow our pipeline because the in person industry events and trade shows where we normally have the opportunity to meet customers face to face demonstrate our products and close contracts have all been canceled due to co bid and travel restrictions.
So.
We have continued our customer outreach to close these important contracts and to continue to build our pipeline by taking some of the following actions.
We proactively moved our marketing efforts to digital platforms.
We've executed six webinars over the last three months, where our customers and community of users can join us virtually for interactive demonstrations of the unique capabilities of our products.
These webinars have generated over 2200 registrants.
Over a thousand live attendees and more than 1200 new leads.
The level of engagement in our digital platforms has been very strong and we believe these results are evidence that we will be able to maintain a robust funnel of opportunities throughout the rest of the year.
Having said all this nothing can replace the in person closing the deal aspect of sales and therefore, we have seen and expect to continue to see in pockets. Some lengthening of the sales cycle.
This is not completely unusual as we occasionally saw similar delays even before coated. This is precisely why we don't provide quarterly guidance, but rather look at the year in totality.
Let's move onto a discussion of Luna labs.
As a reminder, Luna labs works in research areas that are outside of our core strategic fiber optic activities.
Here, we primarily leveraged third party contract research to build a portfolio of technologies that could be future growth areas for Luna.
Mature technologies are commercialized by Luna labs through direct sales distributors or licensing agreements.
Most of our funding comes from the federal government. So our pint prime contracts were not materially affected by covered 19.
In fact, the majority of those contracts with the department of defense and because of that we were declared an essential partner, which cleared the way for continuous operations in all of our locations.
Luna Labs total revenues were 5.6 million in the second quarter, 2020, which represents a 7% increase versus the prior year.
As I mentioned on our Q1 call what are the biggest challenges stemming from the pandemic is at several of our partners, especially academic collaborators have been forced to shut down.
As a result, we did have difficulty maintaining output at some of our University lab partners during the quarter, but these delays appear to be over.
We are seeing work resume in some form and that is reflected in the 7% total revenue growth increase during the second quarter.
The growth was largely driven by commercial sales and licensing later stage research and Luna lab projects as we projected on our last quarter call.
We said in May that we did not expect the cobot impact Luna labs to significantly affect our total top and bottom line and that the adjusted contribution still falls within our 2020 outlook ranges.
That outlook stands today.
Kenai continue to spend quite a bit of time with our operational and sales teams to understand any trends or forward indicators they might be seeing that could suggest a softening of the business or any other significant changes.
And Brian James and I continue to reach out to our customers and components suppliers to monitor the ongoing effects of the pandemic on supply chain and on their operations.
The four of US gene, Brian James and I also spent significant time this quarter in reevaluating our forecast assumptions.
Including completing a full new bottoms up forecast to inform our decisions and our disclosures.
With the information we have today, we have no evidence of a softening in our business that would cause us to alter our guidance.
Which is why as you saw from the press release, we're tightening our guidance range for the full year since we have two quarters behind us.
Our 2020 outlook ranges projects total revenue of 81 million to 83 million and adjusted EBITDA of 10 to 12 million.
As I mentioned earlier this outlook includes a heavier weighting of results to the second half of the year.
This is normal seasonality for Luna, but keep in mind in our pipeline for the second half the year has forecasted orders of varying sizes and that any delay in one large order could affect our should results.
We realize how complex our current environment is and we're being as transparent as possible as we see shifts in operational or financial trends.
I recognize that this has been a challenging year for numerous stakeholders, including investors to navigate given the pandemic and its effects. However, Luna began 2020 by articulate a strong vision of enabling the future with fiber and were very clear about our purpose. Despite the challenges in.
Our current environment, we continue to feel good about delivering against our goals, including our 2020 outlook with the additional color that I've mentioned.
Ill now hand, the call over to gene for more the financial details on the quarter Jamie.
Thank you Scott before I dive into the second quarter financials in more detail.
I want to begin by highlighting a number of items for you as you review Q2 2020.
First this quarter, we present, our financial results as lightweight and Luna labs segments.
Recall that I mentioned on our Q1 call, we would provide pro forma financials to make it easier for you to adjust your models to reflect the new reporting structure. Those may be found at the back of our supplemental deck, which is posted on our website.
As you'll recall, our former products and licensing segment was primarily comprised of our lightwave products and to a lesser extent product sales related to the commercialization of our Luna labs technology.
Our former technology development segment was mostly comprised of our Luna labs contract research business, along with light waves fiber optic sensing and terahertz related research groups.
The new reporting segments, combined lightwave product and research businesses into our Lightwave segment, and Luna Labs contract research and commercialized products into our lean the lab segment, which reflects how we are now managing our two segments.
Second we recorded a solid Q2, considering the environment in which we were working.
Our sales profitability and cash position are all healthy.
Third we all recognize that the impact of code to 19 has created a challenging business environment and has reduced the velocity of business. However, we remain bullish on the key mega trends that support Luna fiber fiveg.
Lightweighting.
Civil structure monitoring.
And we continue planning for future growth.
Fourth the main impact of coded has been an extension in the time it takes for us to get a purchase order through our sales pipeline, we have not seen cancellations in orders, although a few contracts are taking longer than expected to obtain vinyl signatures.
Fifth as Scott mentioned in his discussion of our ongoing investments we continue to make progress with our back office and infrastructure initiatives moving to cloud based systems implementing a new ERP to streamline operations and upgrading our infrastructure.
And six on a more technical note Q2 marks the first full quarter of lapping the general Photonics acquisition, thus year over year comparisons do not contain any first year acquisitive results.
With that as context, I'll now shift to cover our second quarter results.
Our revenues for Q2, 2020 were 18.6 million compared to revenues of 17.8 million for Q2, 2019, representing a 4% year over year increase.
The increase in revenues year over year was composed of a 3% increase in our Lightwave segment, and a 7% increase in our Luna lab segment.
Within the Lightwave segment year over year growth was driven by strong performance from our sensing business within Luna labs growth was driven by later stage commercial products.
Our gross profit increased to 9.5 million for the quarter compared to 8.8 million for the same quarter last year, representing a gross margin rate of more than 51% in Q2 2020 compared to approximately 49% in Q2 2019.
The gross margin improvement was primarily due to acquisition related charges in Q2 2019 in a favorable product mix in Q2 2020.
In Q2, 2020, approximately 70% of our revenues stems from the Lightwave segment, which is similar to what we achieved in Q2 2019.
Operating expenses were 7.7 million or approximately 41% of revenue in Q2, 2020, compared to 7.7 million or about 43% of revenue in Q2 2019.
Our Q2 20 reflects.
Appropriate expense control combined with continued operating leverage on our increasing sales.
There was only a slight increase in Q2 2020, SGN a expenses at 6.2 million compared to the prior period. This increase was primarily driven by the same two items. We previously discussed these are both the incremental expense associated with last year's acquisition as well as higher sales and marketing expenses and.
Lightwave as we continue to support that divisions, increasing sales.
Q2, 2020, DNA included approximately 400000 recurring noncash amortization expense associated with the acquisitions of general Photonics and Micron optics.
With the revenue growth and gross margin expansion in our operating profit improved a 1.8 million in Q2 2020 compared to a loss of 1 million in Q2 of last year.
Net income from continuing operations for Q2, 2020 was $1.4 million or four cents per share compared to <unk> point 8 million or two cents per share for Q2 2019.
And finally, a key metric, reflecting our underlying operations is adjusted EBITDA.
As Scott mentioned adjusted EBITDA increased to 3 million for the second quarter 2020 versus $2.4 million for Q2 2019.
This solid performance was driven primarily by topline growth from both our legacy businesses and those businesses, we acquired combined with our ongoing expense management.
Let me move now to the balance sheet.
We ended the quarter with 26.5 million of cash and cash equivalents compared to 25 million at the end of 2019.
Our working capital was 44.8 million at June 30, compared to $41.1 million at December 31, 2019.
Without repeating that 2020 outlook, Scott provided I want to outline a few areas that informed our decision to reaffirm and tighten our previous guidance range.
First is the comprehensive bottoms up analysis that Brian and James conducted which provided good insight into our forecast for the remainder of this year.
This is predicated on assumptions our customer orders are delayed not canceled.
Second I want to reiterate what I said on last quarter's call, we take providing an outlook very seriously and know that you our investors do as well we continue to monitor and evaluate the effects from this pandemic on a daily basis.
We believe we will still come in at the lower end of our guidance range. We've just tightened our topline outlook a bit with two quarters now under our belt.
We will continue to be transparent and should things change significantly we'll communicate that information.
With that I will turn the call back over to Scott.
Thank you Jane at this time I'd like to open up the call for questions, Brian Solar Senior Vice President General manager of our Lightwave Division and James Garrett Senior Vice President and General manager of our Luna Labs Division, our with Jane to me at this time and are also available to address questions I wanted to ensure that the proper.
Folks were on the call today to address any specific business questions you might have.
As a reminder to ask your question you need to press Star one on your telephone to ask your question press the pound Keith Please stand by while the capacity can a roster.
I can capital.
Charity.
Hey, good afternoon, gentlemen, and Amber please.
Hey.
Just to go back on the impacts of co that it sounds like there was a negative revenue impact you had some purchase orders push out the labs had some academic partners on able to operate.
I mean is that fair, but it doesnt sound like it was a huge number but the revenue would have been higher without cobot.
Yes, Thats correct, yes, we had.
We had a couple orders.
Quite frankly that.
We are expected in and.
Related to Cobot 19.
Purchasing.
And focusing on purchasing work in the office that that last week of June.
And some receiving folks would not in due to some changing schedules and so we had.
We had several orders.
Not coming by June Thirtyth, and actually quite frankly came in.
The first couple of days of July 2nd and third so yes. There was there was a piece I was not meaningful but it was.
You are correct in noting that.
There were several hundred thousands of of orders that.
Still within our what we what we were we were guiding towards from a percentage standpoint, but yes, you're correct.
And you went through at length to process sign you're thinking in terms of our guidance and how it may or may not be impacted by cobot.
One of the things you've talked about is push out a purchase orders my experience a lot of times when customers start pushing out decisions.
Thats, a prelude to not making the deciding not to go forward with the purchase.
The higher ups, maybe trying to control the budget have visibility and if things don't turnaround.
They they pull the plug on the purchase order so you're more optimistic than that you're assuming that you are delayed purchase orders that have been in the pipeline will get approved and will come through in the second half.
Yes, Thats correct, we were not looking at this with.
Kind of rosy goggles on here. This is something that we are in touch with those customers and every we're not hearing any of that in what and when we used our our bottoms up analysis. These are not if theres any one that we felt was in that camp they're not in our.
In the evaluation that we did to look at the rest of 2020.
Okay, and then I'm trying to understand better why the second half implied guidance.
It implies much stronger year over year percentage growth than what we just saw in the second quarter.
I understand that there's generally a.
Uneven mix between first half in second half revenue.
But that should impact the year over year growth rate and what you're guiding to implies a much stronger growth rate in the second half of the year.
And then on a.
Break that down if you could talk about which segment do you expect to really accelerate and why.
Yes, well as you know the last months maybe of Q1 and throughout Q2, you had we had some companies that they had closed down completely so we had more slippage into the second half of the year.
Than typical than than we would typically see like I said, if you looked the last five years.
The range of H., one revenue to the total revenue for the year as is in the range of 44 to 46 and.
We thought we'd be at the lower end or medium slightly below that I think were spot on in that 44 ish range. When you look at at the annual guidance. So.
It's really not out of whack or what we've seen when we look historically on what it is we will see we do believe we'll see.
Yes, you will have higher year over year growth.
When we deliver what were what we're guiding to in the second half right about that.
Specifically at any particular segment, Brian do you want to you want to talk a little bit about that.
Yes, I think.
The impact in the first half of the year as we discussed as it relates to the.
Anything in the sales cycle was stronger in our communications test business than it was in our sensing business.
And.
So we expect that to impact the second half the year, but to the positive.
Which will increase the year over year growth numbers, there and then as we've talked about in the past we do have some.
Expectations for the second half for our our new product was 6200.
That weve been working with some major customers with one of course, the last few years than we do have in plan for the second half year. So that will also help accelerate idea the communication test segment.
Yeah.
And Barry I did mention also.
The Luna labs.
Division was was affected by win win academia kind of shut down for a while so some of those things did affect.
The revenue in the first half specifically the second quarter and we expect those to pick up so.
James I think Thats right, we have a more opportunity in the second half.
In Luna labs in the contracts now that they're back open fully.
We'll see.
For.
Projecting a higher year over year.
Absolutely.
The first part of the year, yes.
And that higher second half growth.
Is partially driven by.
Academic lab facilities reopening.
Yes, we were James we were we were low on some contracts in the first half of the year, because those academic labs or.
We are so down we're starting to see them come back we expect some of those lives to.
We backed by the end of the month now.
So subcontracts will come back.
In the second half of the year those academic subcontract labs will be back.
And then we expect some other things come back in the second half so.
Year over year growth for Luna labs.
Should be stronger in the second half of the year than the first subsidiary the will contribute to some of those will keep in mind. Our you know. These are these are contracts that are in backlog. This is a matter of executing on on contracts that are.
That are that are in house and being fully worked upon but in some ways. We are limited if we have those subcontracts.
Where we could move some of them. We did some of them, we're not worth giving up that the progress at already made and just kind of wait out until that that lab back opened.
And that's what we did and we'll see the benefit of that in the second half.
Okay and financial question Gene first of all thank you for that last slide with the historic breakdown in these segments very helpful.
You mentioned I think the number was.
You hired 29 employees, if you could put that in some perspective.
What's the increase in head count what what is the new head count number is that a significant percentage increase and then a breakdown aside how many of those are.
Quota bearing sales reps that are going to drive revenue and how many of those are kind of back office, they're going to drive expenses.
Yes sure.
So about half where or new positions that were created.
And there were only a few back office.
More so on sales and marketing yes.
Barry I asked HR for those numbers I wanted I wanted to reiterate that we are continuing to move forward and that we have the work to do so when she gave me that raw number it is 29.
I guess at about half of them are replacements of some positions half knew that includes some summer interns in it maybe five six summer interns that that we would typically have in our in our Atlanta office, our Charlottesville office Blacksburg Chino. So it's a number the uptake with the grain of salt, but I, but I wanted to know.
Layoffs and that we are continuing with our plans that we would because we have the work to perform so that's why it is a raw number and I didn't break it out I think it was three back office Jane Bailey is one of those three.
NSP in a person was another one of those three.
And I believe kind of a staff account was another one so as we continue move forward most of that.
His engineers.
As we go forward and keep in mind that the folks that we hire in Luna labs is the increased ability that we have they don't show up in GNS.
You know.
That that.
As it relates to the folks at work and would allow thats in your in your above the line. So.
We had in the budget I will just to put it out we had in the budget to higher five new sales folks worldwide.
Through through today, we have hired four of them.
And the rest is open for the fifth one so if you add the the Markham person Jane Bailey.
Thats five sales and marketing folks that we hired so far this year.
Okay, and then shifting gears to.
Question on M&A, obviously, you've got a lot of cash burning a hole in your pocket there no debt on the balance sheet.
Im thinking that it's much more difficult to make a an acquisition in this environment I can understand you might be able to get by in terms of selling product with wet with webcast meetings, but if somebody and a cellular business. The company's you bought has been.
Proprietors, who are selling a business they created I can't see them agreed to sell the some new they've only met over zoo meeting is that is that fair as that is the current slowing down M&A.
I would not say that's fair to be honest with you.
I would say that we are the type of business the space that we're in.
We're not someone that hires the banker to come in and pitches 10 things you know from.
From Volvos to Chevy East affords we know the folks in the space and how we have found the acquisitions we've done in the past our people that we knew that was not an investment banker pitching us on some long slide deck looking for us to bite on one of them. So the folks that we continue to have conversations with and we are continuing to.
Be active in this space.
Our folks that we knew.
When you go to that to the trade shows and our around in this space, we kind of know the players that are in the sensing space or the communications test space and.
No we.
We're engaged in those folks because we know them not because a banker throws a name and we say Oh I would have never thought of them. That's that's just not that's just not how how M&A gets done in our in our particular space.
Hi.
So why haven't we seen a transaction obviously you have the capital to do it you've indicated in a desire to do it.
Sure just indicated that you know what's available out there for sale, but we havent seen anything and sitting there with that much cash on the balance sheet is not preferable to having additional revenue and earnings per certainly certainly keep in mind a lot of the folks that we talk with and that I talk with our.
Not people that are out being.
Being pits through some information memorandum they are folks that that I'm talking to and can and saying why I believe being part of US is a better path forward for them. So it takes some time, there's a lot of.
Kind of.
Dating if you will before before you get you get involved in the in the actual ceremony. So I think it just takes some time I'm not willing to to get out of the discipline that we've stuck with we've always said, it's going to its going to fit within our organization that's covered because I'm not talking to folks don't fit.
It's going to be accretive.
Either immediately or shortly thereafter.
And and quite frankly, we're not talking to folks that don't fit that mold, either but I think not overpaying. The third the third thing I've always said is not overpaying and I think thats, that's critical to stick to that disciplined.
And I believe with the organic growth that we're having certainly I want to give you more revenue theres no doubt I want to give everyone more revenue, but I don't want to chase something.
Just to chase it I believe that.
Doing the right deal will make all the sense and I think you know history shows that we've chosen.
Two really good acquisitions over the last whatever has been a year and a half and.
We'll continue to follow that approach.
And hopefully okay well.
Hopefully hopefully meet your expectations and not let that whole in my pocket get too big.
Yes, hi, it will continue to sit there and wait for the press release. Thank you.
Thanks Barry.
Your next question comes from the line of Jim Murren with singular research.
Yes, good afternoon gentlemen.
A kind of want to discuss perhaps a little bit about going forward.
You mentioned, though about low supply line disruptions.
And I was curious on exactly which product lines that will be affected the most.
And next could give just give some comment in regards to the or be our line on how that could be impacted in terms of supply.
Also you mentioned that there's been an expansion from the F 35, and perhaps you can discuss.
Some of the other type of Rob.
Machinery or.
Applications that.
Lightwave is expanding Tam.
Within the military application or even outside military.
Thank you, yes, sure I'll, let I'll, let Brian talk a little bit about the supply side. He's he's got his finger on the pulse of that I will say you can see.
When you look at a suite of products that are out there certainly the F 35, we've talked a lot about.
You can look at Lockheed suite and see that the F 22, the C 130.
There's the the F 16, the F 18, Efifteen all folks that that we have been talking to that is a natural fit in in this military air aircraft space. So.
And all of them.
Continuing to have we've watched this stage happened with the F 35, and the process it takes to get.
Specked into that and things like that and we are advancing down the path with those different aircraft now on the supply side I'll, let I'll, let Brian talk a little bit more about hey, Jim This is Brian.
It was really.
For the commercial side of business the lightweight product side.
We we developed manufacture ship product that a poor locations Blacksburg, Atlanta, Ann Arbor, Michigan, and Chino, California, and all I would say all four locations.
Experienced some minor.
Issues or delays in the first half of the year.
Primarily.
Early in the year out of our supply base in Asia, but that really by Q2 that that really was resolved.
And then in the beginning of Q2 is really.
We do a suppliers in Europe, and North America, and the shutdowns really kind of caused some delays really more than anything.
We were able to manage those.
Pretty well, we set on our last call we expected to be fully caught up.
Yes, I think said by the end of May that did happen.
And we still have a little if you things here and there but for the most part there that really manageable and we don't as we said expect to see anything.
Throughout the rest of year that isn't.
Something we can't manage through.
And then specifically to your question on the 6200.
No impact to that product.
Okay. Thank you gentlemen.
Alright, Thanks, Jim.
Again, if you like to ask that question Press Star one on your telephone keypad.
Your next question comes from the line of Dave Kang with B. Riley.
Thank you. Good afternoon. Our first question is regarding Opex came in at 7.7 billion I'm, assuming you guys kind of benefited from.
Your employees working from home what do you think the normalized level will be once things become more normal.
Yes, we saw we saw some benefits from that but.
As we talked about.
Previously we are we are sticking to our plan of.
Building up our infrastructure and not just.
On the T. side, but also our people side. So we had a plan when we went into this year to get set up for growth and we have not deviated from that and other than we've been delaying some of the hires as as we go through the year because the sales were soft so what I would tell you is if you look back.
And you look back on.
Our operating income we were negative 6% in Q1, the last year and we've had steadily been increasing that that's kind of our plan as we go forward, So where what we're trying to do is match match, our increasing operating income with our revenue so that we see quarter on quarter operating income growth.
And so we're going to layer in the Opex as we see fit based on sales, yes, I think Dave we were we were very pleased to see.
The tickup in the gross margin and and as I've said on my cost for us to hit 10% operating margin was it was a first for Luna and certainly a goal internally.
And we continue to set set going forward that bar higher but.
But that was that was.
Thats, a real metric that with that we monitor here inside of Luna on that operating income and because we know we will we will continue to to manage the expense side of the business. So if we can if we can continue to.
To pull through that operating margin.
We'll see we'll see EPS increase as we move forward.
Actually that was my follow up question was on on speaking of course margin, 54% nicely above lyase Smith.
Just wondering if that's how should we think about out quarters should be.
Using 51% rather than something lower than that.
Oh, I think you would want to look at it and in our segments because each segment is slightly different.
So Luna labs had really good and a really strong gross margin in the first half of the year. It was somewhat coated related so if you get into the to the barrels of of how these contracts work, we actually had less third party costs coming in and more of our internal folks working on the project.
And so that tends to give us a little higher gross margin and so we think thats going to creep back more to normal us as we get through the year on Luna lab. So I think you saw a little bit of.
Coven impact there on higher gross margins in first half versus second half.
When you take a look at Lightwave, we do expect year on year to see a higher gross margin then and then what we had last year again, the timing on quarter to quarter is is when our revenues going to come in and hit and cover our fixed costs. So I guess, what I would say is for the full year. We do we are expecting a full.
Year gross margin versus 19, a little bit higher on on Lightwave, and I think Luna labs will be right around where they were for the full year 2019.
Yes, you can imagine Dave we did give Brian a little grieve for coming in at 59.9, I don't know how you don't fund another 0.1 to be over 60%, but.
We'll take it.
Yes.
A couple more.
All right.
You are military segment since we find that affected by covert, but sounds like youre commercial aerospace and automotive.
US verticals seem to be impact can you just tell us.
Roughly how big those two verticals are.
Yeah, we've talked about in the fiber.
Sensing business that segment that we talk about the sensing.
That it really was future growth we talk about.
And you've seen among some of my presentations, where we refer to it as kind of a central nervous system in these different structures, whether whether it relates to commercial aerospace putting the fiber in the.
On the plane things like that that would certainly we're still working with our partner megabit and some of the other big players in doing that in the development segment. So we never had that really factored in in 2020 or really 2021 that was future revenue growth. So we don't have a lot of impact you had the specifics about what that yes.
Turning to size.
Dave Our communications.
From a market perspective.
If you would have a communications.
Look on Datacom market that represents about 20% of our revenues.
Government defense comes in.
Just a little bit under that if you look at H., one about 17%. So those are the two biggest slices aerospace's third of about 15%, but Scott was saying if you look at aerospace the commercial side, we have seen pretty significant slowdown.
Other than in our work with Mega it.
But that's a smaller slice than the military defense side of aerospace from closer to 5% as that 5% automotive what 2% ish yet is that right.
Well for the first half of this yet because of the impact yes.
Yeah.
Got it and my last question it seems like the optical com speaking out.
Telecom optical communication.
Industry seems to be actually benefiting from from this covert because of increased telecommuting.
Can you give us an update how you're doing.
64, 15 for 400 gig.
Like Theres a lot of a pent up demand for that just how that is shaping up for for second half this year.
Yes, it's shaping up really well I'd say, what we're seeing is exactly what you said David with the on the demand side there.
We are growing.
Relative to last year.
In a tough market.
The only the only thing I would add to that is that the majority of our products.
As you know there are over that 100000 dollar price point, so what happens is.
We're just seeing some delays in getting those purchases approved and moving so the pent up demand is there it's kind of like we're pushing evaluated here into the second half of the year.
And we're looking forward to seeing that.
Next year as well.
Demand is certainly there and then we just manage through some of these issues with with getting.
Over the finish line.
And we Werent of class Scott how does is good said, we've received some peos where.
The customers said, we don't have the receiving guys working on a regular schedule. So if you could just shift that in August or should that in September or July I mean, theres. Some of those things. So for me, it's almost mechanical and people are trying to figure out how to make sure labs are staffed and and.
Yes.
It can get product in and set up and that sort of thing I think we're through most of that yes.
Yes, we've done with the sales process.
And with that gets going do you think.
That could become a needle mover.
Just wondering how.
How to think about in terms of trajectory.
Yes, I mean, what I'd say about that in the second half of the year as.
Would you expect our communications segment for the the strongest element of our of our overall growth we have new products. There. We've got the 6200 50 64 15, we've seen pretty.
Pretty steady demand the other products in that in that space, our GP products.
Auto Chino as actually performed very well in the first half of the year and we're expecting to see them do very well in second half year. So.
I guess, depending on how you define needle mover, we're looking at a good second half of that segment.
Well and I think it's important to state that one of the one of the hires in the sales side that we made was a seasoned executive sales.
Got it will be focused in Europe on the communications test business.
They will carry all of the general photonics products on the photonics side as well as as our communications test side as senior senior fellow that came out of 20 years with spirit. So.
We're excited to have him onboard I think he started.
Yesterday actually this week Monday, so we believe that as that European market is growing it needed some special attention.
The guys are very busy they're chasing the sensing side of the business.
As well as the communicates test and so we're starting to.
To give some dedication to some sales folks over there and it was a big coup for us to to land someone with his background to sell our communications test products.
Got it thank you.
Thanks, Andy.
Your next question comes on the line of Charles No.
Hello.
Hey, good evening.
Yes as usual I can follow what all you all are into it. It's impressive first this is just a side and on that bridge. Your building in Morgan County, My mother's from Oakdale, That's Martin County, and frozen head is a great Park and do you know where that bridge is that they're replacing.
I do not specifically in over that bridges, Charles Okay, and then to allow them, it's interesting that Tim fiber.
Can replace steel that's just great the tone this computerized.
The optical coherence tomography, which had never heard of before reading your block can it be thought of as similar to the cat scan, but just using ultrasound and as this device that youve people fit into like a cat scan or MRF higher.
How does how does that work.
Well you can think of it as.
It's an imaging method that it can image through tissue.
It's not exactly like attached scanner MRI, because they can't see through the whole body, but it can see through opaque tissue was very fine resolution. So it's used primarily today in the eyes image, the retina and specifically to see through the surface down to subsurface layers, where you might have cancers lesion. There are other application.
As well as in arteries and others.
Skin et cetera, we.
We actually supplied most of the world's major manufacturer of those.
Because it's an optical techniques to produce that imaging.
We supply through our general Photonics product line and genome.
Okay and components the form the inside if you will have both products.
So thats what that bond close was about.
We're trying to get our name out there a little bit so we get more exposure to some of the other players, but it turns out if you look at the images of our products out there that ends up being.
Fairly significant.
Chunk of our of our sales so thats why that's why you saw that blog.
And how does it do the endoscopy.
Faster intestinal imaging.
Well it goes along added as a tool or aluminum at the end of the endoscopic okay.
And then it images through the as I said it continues through really tissues.
Through the volume of all of hours, while anywhere where you could have a sub service.
For instance, cancer lesions that you might want to fund.
And look reading the blog sounds like you need more than five salesman.
Generally go by how Scott sounds and the presentation, where are you still have good.
Well those are those are five additional sales folks Chuck.
We have.
We have a lot more them about 15 worldwide. So and then we use a lot of partners distributors reps things like that so yes, it's much much larger we're adding five so it's it is a nice move up for us to get more feet on the street working everyday thinking nothing about about Luna products.
Thanks for the good news catching next time. Thank you appreciate it thanks.
Again, if you like to ask a question I make a comment. Please proceed.
Our one on your telephone.
And there are no final questions over the phone line I would now like to hand, the conference back over to Mr., Scott Group, President and CEO for final remarks.
Well. Thank you everyone for joining us today, you've heard me say repeatedly that we believe we're on the right path with the right vision.
Given the environment, we are in I believe our financial and operational success. During this first half of 2020 underscores this belief.
We continue to believe in our potential that we're on the right side of a market shift in trends towards Lightweighting and Fiveg.
In fact, our capabilities can help to accelerate these trends.
Please feel free to reach out to gene ousted or myself with any questions and we look forward to speak with somebody you. Soon thanks for your time and interest and Luna innovations and operator that concludes the earnings call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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