Q3 2020 Luna Innovations Inc Earnings Call
<unk> earnings conference call at this time, all participants lines I know that shame on me note. After the speaker's presentation, there will be a question and answer session.
The question injury. The session you will need to pass sorry, bended number one on your telephone I.
I would now like to hand to conference over to your speaker today.
[music] Ms. Alison Woody did.
The director of administration. Thank you. Please go ahead ma'am.
Thank you Mary and good afternoon. Thank you for joining US today. This afternoon, we issued our third 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.
We do not have a copy of the release or the supplemental materials. Please check our website at <unk> Dot Com. We will also post a replay of this call through our website.
Some of our comments and discussions today are based on non-GAAP measures specifically adjusted EBITDA. These adjusted numbers exclude the effects of certain non cash expenses and other items. These adjusted results results are a supplement to the GAAP financial statements Luna believes the presentation and exclusion of these items is useful in order to focus on what we.
We deem to be a more reliable indicator of ongoing operating performance. This.
Before we proceed with our presentation today, let me remind you that statements made on this conference call as well as in our public filings releases and websites, which are not historical facts may be forward looking statements that involve risk and uncertainties and are subject to changes at any time include.
Including but not limited to statements about our expectations regarding future operating results or the ongoing prospects of the company Act.
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 company's SEC filings, which can be found on the FCC website and our website, we disclaim any obligation to update any such factors or to announce publicly the results of any revisions.
Any of the forward looking statements to reflect future events or developments, except as required by law.
Her prepared remarks, Scott Gray, our president and Chief Executive Officer demonstrate our Chief Financial Officer, Brian Solar Senior Vice President and General manager of our lightweight Division and James Geary Senior Vice President and General manager of our Luna Lab Division will be available to take your questions and at this time I'd like to turn the call over to Scott.
Good afternoon, everyone and thanks for taking the time to join our call.
2020 continues to be a remarkable unexpected year at.
At this time last year as we're getting ready to wrap up our 2019 fiscal year and we're finalizing the planning and budgeting for 2020, we never could have imagined how this year would unfold.
I'm sure most of you relate to this sentiment.
And yet your we are today three quarters into an unprecedented fiscal year.
And a full two quarters into a devastating global pandemic.
From the beginning we placed a priority on ensuring a constant flow of open and honest communication as well as focusing on employee health safety and wellbeing.
These two things have been a critical part of supporting the collaboration and teamwork that has driven our success.
And as a result, Luna is announcing our best quarterly results ever.
I am proud to be part of a team of talented and dedicated individuals who believe in and demonstrate lunas values and all they do the team has stayed laser focused on looking out for one another.
As they continue to serve our customers with the highest level of excellence advancing lunas mission to enable the future with fiber.
I can't say, thank you went up to these committed individuals for choosing to be part of the Luna team.
We will share with you today, our financial results for the quarter and provide an update on some of the projects and initiatives that represent the continuing investment in our company.
We're obviously mindful of the current environment and the speed with which it can change.
While we remain flexible we just delivered the strongest quarter in our history, which helps to give us increased confidence in the potential of lunas future opportunities.
We continue to invest strategically in our business. So that we can grow and scale significantly well into the future.
We have accomplished or currently implementing some of the following foundational items.
Implementing our new cloud based net suite ERP. This system is replacing for legacy ERP and we're on track with this project.
Implementing the Salesforce dot com platform, providing critical tools and information to our sales teams throughout the enterprise.
Hiring into key positions both in operations and in corporate shared services.
Enhancing the employee experience through investing in significant upgrades to several core systems that will allow better functionality for our employees.
For example, we changed to different partners for payroll slash human capital management.
Four one k. record keeping and for expense reporting.
Launching our first offering period in our employee stock purchase plan with a robust 59% enrollment.
And finally, posting a celebrate Tory thirtyth anniversary launch at all locations with gifts for the employees I believe recognition and celebration or a critical part of maintaining our culture and building a boozy ask them about what we see as an incredibly bright future.
As I detailed a significant investments, we're making and the work we're doing I hope you take away from this discussion that all of this investment has created a strong contemporary consistent and scalable Foundation. This foundation will allow us to drive organic and acquisitive growth.
For the longer term without the need for additional investment in our core infrastructure and systems.
As we continue to do acquisitions. These modern global platforms will allow for much quicker and efficient integration of future transactions.
Now onto details about the third quarter.
Let's begin with recent accomplishments and our third quarter financial results.
For the third quarter total revenues were up a robust 14% did what 21.1 billion compared to the prior year's quarter.
The lightweight segment had an increase of 17% year over year to 15.4 million in total revenues.
We expanded gross margin by 200 basis points improved our operating income by almost 800000 and delivered adjusted EBITDA of $4.3 million up 1.4 million over last year.
Someone recently asked me how we have continued to deliver such strong results throughout this year in the face of everything going on.
And I think there are a number of distinct factors that have helped us to drive this success.
First we have a superior product portfolio with products that are needed by companies, regardless of whether we're in the middle of something like a pandemic.
Second the end markets into which we serve have been less affected by Kobin then have some other industries and the organizations in these markets still require our products.
Third the key Mega trends that support Lunas growth continued to be relevant and strong fiber five G lightweighting and civil structure monitoring.
Fourth we have been successful in pivoting to the way we are selling and have successfully used virtual tools such as webinars to sell.
Of course, it definitely helps at all companies are in the same situation.
Fifth from day, one we have taken this virus and the danger very seriously we have delegated the authority to our managers to decide based on the circumstances in their locations went to work exclusively from home and when to bring people into our offices and assembly facilities.
Put strict safety guidelines in place for in office work, including social distancing mask wearing sanitation procedures and staggered shifts when possible.
Finally, as I mentioned previously open in frequent communication has been critical to our being able to operate safely efficiently and successfully and our ability to operate well is the result of the ultimate team effort and cooperation of every employee at Luna.
Now, let me discuss lightwave in more detail.
Revenues in our Lightwave Division grew 17% in Q3 versus the same period last year.
That growth was evenly split between our two segments in light wave with both sensing and comps test growing in double digits relative to last year.
Let's look at some of the accomplishments in these two segments, starting with our sensing segment.
As a reminder, our sensing solutions focused on two areas first our fiber sensing products Odyssey and Hyperion.
Which focused on the integration of optical fiber sensors in and on advanced materials and structures.
And second our t. rate products, which use terahertz waves to see through opaque materials to measure thickness for process control applications.
As I mentioned total revenues in Q3 increased by double digits compared to the prior year.
This growth was driven primarily by increased shipments of our Odyssey and Hyperion fiber optic sensing products.
Odyssey is our short range high resolution solution that is used within the aerospace and automotive sectors to enable next generation designs using composite materials there.
There are many other applications for this product.
We are also enabling smarter designs in multiple industries and have seen growth driven by the adoption of Odyssey technology in Geo technical and energy related applications.
Our Hyperion product is longer range and is paired with sensors for applications ranging from monitoring civil structures like bridges dams.
Two enhancing the security of perimeters, and the safety of offshore oil exploration and extraction.
In Q3 deliveries in the latter category drove growth as we delivered over 20 Hyperion systems to two customers.
Hi, peering is an integrated into industrial systems that monitor the structural helped in part of the structure that is used to transfer oil and offshore operations.
We continue to make progress with sales of our terahertz products. While results in Q3 were down slightly on a year over year basis, we continue to see strong indication of the potential for sustainable long term growth of our terahertz product.
Especially in the industrial process control space and we will keep you all informed as we see that potential manifest in increased sales.
Moving to our communications test vertical remember that this is the business focuses on the ever growing need for more bandwidth in communications networks.
Optical fiber is a key enabler in high speed communications.
This ability runs the gamut from core telecommunications networks to data centric networks to enabling cloud computing and Fiveg mobile networking.
Our products feed the need for speed.
And include the Olivier or optical vector analyzer, the ob, our or optical backscatter reflect Tom under and a suite of polarization instruments and photonics controllers.
In addition, hopefully you saw that we recently announced the acquisition of New Ridge technologies, whose solutions are a perfect complement to our communications test and measurement portfolio.
This acquisition is strategically very important to Luna, but it's very small and immaterial from a financial perspective. The transaction. The transaction is very much in keeping with our strategy to look for tuck in technologies that help us to advance our product roadmap.
The integration of new reaches products with Lunas will help our customers enhanced connectivity by developing faster communications networks to support everything from the Fiveg Buildouts to the continued expansion of bandwidth inside data centers.
As we've discussed in the past there are two main growth drivers in this segment.
The first is the integration of optical and electronic systems in silicon.
Generally known as Silicon Photonics.
In Q3 orders from customers working in Silicon Photonics development were strong.
The second main growth driver in this segment is the new portable version of our own VR product the model 6200.
We've spoken previously about orders of this new product that were delivered to Lockheed Martin in support of the F 35 program.
Remember that we initially developed this product for field support of the F 35.
By making the 6200 portable with an easy to use green light Red light touch screen.
I am pleased to share that recently, we have received confirmation from Lockheed of the need for over 100 units.
This is a major milestone for Luna because it is the highest quantity order that weve ever received.
We strongly believe that we have the opportunity to move some of our business from the small quantity orders. We have historically received two larger volume orders, which allow for faster and more predictable growth.
I believe we're just getting started with this product line as we move into the support operations of other military aircraft.
In addition, we can expand beyond military into civil aircraft and other applications such as data centers.
I want to thank our long term customer Lockheed Martin for their incredible collaboration as well as their confidence in us.
Their input has been key to successfully developing a user friendly portable device that will enable them to dependently troubleshoot fiber optic based issues in the aircraft.
As we mentioned on last quarter's call, we continue to take precautions, well importantly, advancing our sales and customer initiatives in the face of this new normal brought on by the ongoing pandemic.
Let me just underscore a few things first.
As an essential business, we continue to maintain 100% continuity of operations working closely with our supply chain partners and are delivering to our global network of customers at 100% capacity.
Second we continue to maintain flexible work schedules and environments and to take all the safety precautions recommended by health and other state and federal agencies.
We are now, allowing domestic travel on a selective basis.
From a supply chain perspective, we're working very closely with our partners, we have not seen and do not anticipate any significant disruptions to our supply base.
And finally as I mentioned earlier, our end markets and customers have remained relatively resilient through this pandemic, although we're still experiencing some selling challenges as we continue to be very limited in our customer in person interaction.
So we have continued our customer outreach through digital means.
We've executed nine webinars over the last six months, where our customers and community of users join us virtually for interactive demonstrations of the unique capabilities of our products.
These webinars have generated 3000 registrants over 1300 live attendees and more than 1400 new leads.
Let's move on to a discussion of Luna labs at.
At Luna Labs, we leverage third party contract research to build a portfolio of technologies outside our core strategic fiber optic offerings, which are commercialized through direct sales distributors or licensing agreements.
Most of the funding for Luna Labs comes from the Federal government, primarily the department of defense. So our contracts there have not been materially affected by the pandemic.
Total revenues for the division were $5.7 million in the third quarter of 2020, which represents an 8% increase versus the prior year.
Last quarter I spoke about the challenges of working with our academic collaborators through the spring and summer as universities remain partially shut down and laboratories were closed or operating on a very limited schedules.
We saw significant improvement in this work flow during Q3 as these partners got their labs open with students getting back to work.
Let me give you. An example of the work we do here one of the mature technologies about which I've spoken in is our corrosion sensors.
These compact durable and rugged devices have already been deployed on numerous military aircraft around the world. They.
They were recently selected by Lockheed Martin to help monitor corrosion on the Orion spacecraft that as part of the artemus missions to send astronauts back to the moon and ultimately to Mars.
The University of Dayton Research Institute and the US Air Force also recently placed a large order for these corrosion sensors as part of the effort to reduce the cost of aircraft maintenance associated with corrosion.
Q3 was a strong quarter for Luna labs, which contributed robustly to our overall success. This quarter. The pandemic has presented some challenges, but this division is well diversified with a mix of government funding from a variety of agencies and commercial revenue from an array of products and licensing.
In addition to the Q3 revenue success for this division. We also completed the consolidation of our Danville, Virginia facility into our Luna Labs headquarter headquarters in Charlottesville, Virginia. This.
This move has made the whole division more efficient and created new opportunities for collaboration and growth.
We expect a strong finish to the year.
Let me make a few comments about the reaffirmation of our outlook for 2020.
As we always do my leadership team and I did a full review of our forecast assumptions.
And experienced year to date to.
To inform our decisions and our disclosures.
We have also spent considerable time recently planning and budgeting for 2021.
And I look forward to sharing with those with you during our Q4 and year end call.
As a reminder, on seasonality we've shared previously that Luna recognizes approximately 44% to 46% of annual revenue in the first half of the year with the larger portion of the annual results be realized in the second half of the year.
We're now in the final quarter of 2020, we are tracking to that seasonality.
Today, we're reaffirming our 2020 outlook range, which is total revenues of 81 to 83 million and adjusted EBITDA of $10 million to $12 million.
In summary, this has been an unprecedented and challenging year for all of Us I.
I believe that Lunas clarity about his vision and purpose have served us well as we've navigated these stormy waters.
I am grateful to the Luna team for their focus and work and I could not be more proud that our hard work delivered these record breaking results for all of our stakeholders.
I'll now hand, the call over to gene for more of the financial details on the quarter Jean.
Thank you Scott.
Before I dive into the third quarter financials in more detail I want to provide some broad thoughts on the progression of this year and prospects for the future.
Coincidentally I am just a couple of weeks away from my one year anniversary with the company.
Obviously I never could have envisioned the challenges that this year would bring but as I sit here with you today I am more excited than ever about the growth prospects for Luna and Im very happy that I had the opportunity to join such a terrific company.
Despite the challenges brought by the global pandemic Luna has continued investing in people processes and platforms to support our ability to grow aggressively.
I am proud of the progress that we've made this year in driving superior operating and financial results. While we also implemented systems and higher the professionals that will allow us to scale significantly without further investment and back office infrastructure.
Let me provide some details.
First we recorded a terrific Q3, despite the environment in which we were working our sales profitability and cash position are all healthy.
Second Scott already mentioned the progress on implementation of our new ERP the.
The project is going well and will not only streamline our current finance and accounting work, but we'll also make the integration of future acquisitions much easier.
Third to position us well for the future we've hired some excellent new talent into an already skilled and energized finance team.
Our new controller brings 25 years of experience from a large public company advance auto where he was recently involved in a $3 billion acquisition, our new F. PNM manager brings over 15 years of experience from both GE is energy Division and also from Abbey.
Fourth the main impact of Cove. It 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 final signatures.
And fifth as I noted last quarter Q2 was the first full quarter of lapping the general Photonics acquisition.
Yes year over year comparisons for this third quarter do not contain any first year acquisitive results.
Obviously year to date year over year comparisons do include the impact of the Q1 2019 acquisition.
With that as context, I'll now shift to cover our third quarter results.
Remember that last quarter, we began to present, our financial results in two segments Lightwave and Luna labs for those of you who are not able to join our Q2 call or do you not have the pro forma financials for the new reporting structure. They can be found in the Q2 supplemental earnings materials, which are posted on our web site under the Investor Relations.
Action.
Our revenues for Q3, 2020 or $21.1 million compared to revenues of 18.4 million for Q3, 2019, representing a 14% year over year increase.
The increase in revenues year over year was composed of a 17% increase in our lightweight segment and that 8% increase in our Luna lab segment.
Within the lightweight segment year over year growth was driven by strong performance from both our sensing business and our communications test business.
Within Luna labs growth was driven by later stage commercial products.
Our gross profit increased to 10.9 million for the quarter compared to 9.3 million for the same quarter last year right.
Representing a gross margin of 52% in Q3 2020 compared to 50% in Q3 2019.
The gross margin improvement was primarily due to product mix as revenue from higher margin Lightwave products increased to 73% of total revenue in Q3 20 versus 71% in Q3 19.
Within Lightwave gross margin improved due to increased absorption on our cost of sales base approach.
Operating expenses were 8.7 million or approximately 41% of revenue in Q3, 2020, compared to 7.8 million or about 42% of revenue in Q3 2019.
Our Q3 20 results reflect appropriate expense control combined with continued operating leverage on our increasing sales including in included in operating expenses in Q3, 2020, our 668000 related to our footprint consolidation within our legal lab segment.
Third quarter SGN, a expense increased to 6.5 million versus 5.7 million in the prior year the.
This increase is primarily due to increased sales and marketing expenses in our lightweight segment to support increasing sales.
Q3, 2020 DNA included approximately 425000 in recurring noncash amortization expense associated with the acquisitions of general Photonics and Micron optics.
With the revenue growth and gross margin expansion, our operating profit improved to 2.3 million in Q3 2020 compared to a loss of 1.5 million in Q3 of last year.
Net income from continuing operations for Q3, 2020 was 3.1 million or 10 cents per share compared to 1.2 million or four cents per share in Q3 2019.
We claimed R&D tax credits for 2018, and 2019, and we plan to claim R&D credits for 2020.
These credits claimed are approximately $1.7 million. These credits helped to reduce our effective tax rate, resulting in a 6% negative effective tax rate for Q3 2020.
And finally, a key metric, reflecting our underlying operations is adjusted EBITDA.
As Scott mentioned adjusted EBITDA increased to 4.3 million for the third quarter 2020 versus 2.9 million for Q3 2019.
This solid performance was driven primarily by top line growth from both our legacy businesses and those businesses, we acquired combined with our ongoing expense management.
Let me now move to the balance sheet.
We ended the quarter with 26.4 million of cash and cash equivalents compared to 25 million at the end of 2019.
Our working capital was 49.3 million at September 30, compared to 41.1 million on December 30, Onest 2019.
Our working capital increased primarily due to Q3 sales increasing a our inventory build in anticipation of Q4 sales and the timing of accrued expenses in.
In addition, we have access to a 10 million dollar revolving credit facility should we need it.
Without repeating a 2020 outlook Scott provided I'll, just say that we again did a comprehensive bottoms up analysis, which provided good insight into our forecast for the remainder of this year.
This is predicated on assumptions that customer orders are delayed not cancelled.
We continue to monitor and evaluate the effects from this pandemic on a daily basis to ensure that we understand any potential impact on our business. We will continue to be transparent and should things change significantly we will communicate that information.
With that I turn the call back over to Scott.
Thank you Jane at this time I'd like to open the call for questions, Brian Solar Senior Vice President and General manager of our Lightwave Division and James Garrett Senior Vice President General manager of our Little Labs Division are with GE to me at this time and are also available to address these questions I wanted to ensure that the proper phone.
We're on the call today to address any specific business questions that you might have.
So Mary.
Let me see.
Im to have lost her operator.
Again to ask a question you will need to pass Star then the number one on your telephone by Incenting. Your line is now open.
Barry.
Pardon capital Securities. Your line is now open.
Hey, Barry Sine can you hear me.
Yes, Hey, Barry Yes, we can hear you.
Hi, good evening.
Couple of questions, Brian I'll put you on the hot seat cars.
You talk about what your hot products were in terms of top sellers in the quarter and where you're seeing the most interest.
Order book going forward.
Sure, Yes, absolutely.
So for Q3, we had a we had a couple of calls standouts, we mentioned that.
All three of them on the call.
You know, we really had the first quarter here in Q3 of really getting into the ocean and most of our new VR 6200.
You know we launched that we've seen this year and that would have been in March and you know it takes some time to get business moving through the pipeline and so that really started to hit in Q3. It was a nice.
A nice contributor there to our growth in Coms test and that was that was it.
You know anticipated but.
Nice results to see that with our newest product.
And as you know and we really see that as a game changing product and we mentioned that did things are coming.
Here in Q4 and into that.
We've done well with our announcement of the first relatively large round of orders from Lockheed Martin of over 100 of those so that was.
Nice element to Q3, and it will be going forward as well you know we also hit on in the in the.
Prepared remarks that in a sense inside of the business we.
Double digit growth and really it was both of our fiber sensing products and we have three products in that segment, our odyssey or Hyperion and our T. Ray terahertz products, while t. ready to not have a great quarter in Q3.
Both of our fiber sensing products did really well so.
Diverse set of applications.
And strong performance in Q3.
I think you asked at the ending about going forward.
You know kind of already hit on that.
The 6200, we do expect to be does the old VR.
[music].
You know it really probably our hottest selling product here over the next few quarters, especially with the addition of that.
So to the large order from Lockheed in support of the F 30 fives.
Okay. That's really helpful very thorough thank you on that.
The new Ridge acquisition.
From a financial analyst standpoint pretty healthy.
The only clue I heard so far if you said it was financially immaterial and I guess that both in terms of contribution as well as the amount paid for that could you talk a little bit more and what was the back story. There did they come to you try to sell or you go to them, how long and what are their product.
This is one of those we've known them for a long time, it's the principle there the founder Henry Affy I would argue Henry.
Henry and Steve Yao, who was the founder of General Photonics that we bought last year are probably two of the top five photonics polarization folks.
In the world.
And so we've known Henry for a long time. So this is something we've been talking about.
For a while and you know I think you probably know as well as anyone that some of these smaller deals.
You know take some time to get them comfortable with joining another organization. It just made sense I mean any time, we can do it.
On a deal that pulls our product roadmap forward.
We would certainly do as you saw I.
I did put out an 8-K I didn't want people to be.
To wonder what was going on I did go out and give them a little bit of color of what did why means first time, we've done to kind of what I'm, calling a tuck in technology. So gave a little bit more color around that I don't know if I'll continue to do 8-K's, if we do more deals that are that size, but.
It just gave you a flavor for what I'm talking about I don't think in 2020.
You see a meaningful impact to mean.
Getting Henry as part of the team.
And talking he's already collaborating with us and working towards.
The next generation thing he brings some products with them. So it doesn't have a real material effect. Both on what we spent to get it and and what will be going forward. The material part of that and why talk about that being important is what he does to the team and Bryan can talk more about that too, but he is down here.
Our blacksburg facility.
Working directly with all the folks in the back and talking about the things that we have in our road map.
Yes.
He said kind of a key thought leaders the way to look at it in a space the photonics and.
And.
No.
Looking at the technology that we build our product portfolio on.
And we had a product very similar to the one that he's brought to market through new ridge.
Our pipeline.
Matt to bring to bring to market and so it was a bit of a build or buy it.
More of a little bit more down the road from a financial impact, but it was an important technology for us to get.
So to speak so yes, it's a little it's a little tough to really good add on when we're in front of some customers you know anytime we're in front of these customers and they're buying something.
From the key sites or Viavi to the world that we believe.
This is a superior product.
That that we can sell while in front of that customer is a good thing you know we have a lot of real top sales folks that run our communications test vertical.
Both here in the us and in Europe, and I think to add this arrow to their quiver is an important piece.
Okay, and then a financial question gene if I could put you in the hot seat. Please.
Looks like and I think you alluded to this in the comments.
You sold one of your physical locations, so I noticed a pretty big drop in net.
Property plant equipment and.
There was a proceeds in the cash first and.
And then a loss on that that flowed through the income statement could you give any more color on that.
Sure.
As we mentioned, we consolidated that facility into our Charlottesville, Virginia facility for Luna Labs.
That was a building that had you know building improvements and equipment with it that we didn't need to move all of it to Charlottesville and so.
We ended up selling the building for 400000, and then we had.
Depreciation that we needed to write off and so that that's what you see on.
The income statement.
He call out on adjusted EBITDA as an addition to that we also had other relocation costs, whether it was for employees that relocated to Charlottesville or other equipment that we did move to Charlottesville.
Yes, Barry this is a building that we got into this market in its about two hours from here, it's not far but it was an old tobacco warehouse that the local municipality gave us some grant money.
And the Tobacco Commission gave us some grant money back in 2004.
You know we build out facility was going to be the nano manufacturing facility. We have since you know kind of exited that outside of contract work and James Garrett resides in our little labs headquarters in Charlottesville, where the University Virginia's and.
Made sense to get everyone under that roof and work on IP and collaboration together.
And that was something that James pushed on in a quite frankly, we were able to keep the majority of those folks and move them, there and really not skip a beat the team did a fabulous job of moving moving up two hours up the road to our Charlottesville office.
Okay, just a follow up on that so you've adjusted that out of adjusted EBITDA. So that's a normalized number but in the bottom line the 10 cents.
Yes, you reported.
That loss is still flowing through there so on a normalized basis EPS to be a little bit higher correct.
Yes.
Okay got it thank you very much Adam.
Thanks Barry.
Next question comes from the line at scheme marrow from singular research. Your line is now open.
Thank you.
Yes, very next quarter on that revenue line.
Speaking with the revenue will still.
You mentioned in the comments.
The military applications was looking to be expanded could you give us an idea which product lines on the mark on the military space that it could be expanded to and then you also mentioned that.
There, there's going to be soon to be commercial.
Commercial applications.
Can you give us an idea as what our type of product lines in the commercial space and what kind of timeframe are we looking at.
Well, you know, Jim I'll start and I'm going to let Brian talk a little bit more about that you know we we've talked about this before of our relationship with with Lockheed Martin and it started with the F 35 really the collaboration to build out the 6200.
With with Lockheed Martin and its initially starting with the F 35, but they've made it very clear. They think it has applications across all of their their aircraft. You know to include the F 22. The F 18. The C 130, the F 16, all those products.
We'll we'll be using the 6200, so I'll, let Brian he I think he talks with them.
Quite a bit they are close collaborator of ours down at Lockheed Martin I'll, let Brian talk about that but that's just that's one customer that when I was there.
And they talked about needing this across all of their fleet. Those are the products that we're talking about in fact I believe there is some follow work already going on on the F. 22, So I'll, let Brian give a little bit more color with that product, Hey, Hey, Jim with that product we're in earlier stage.
Finally, a late later stages.
35 aircraft right.
I'd say, we're in earlier stages of developing business with multiple customers for other aircraft as Scott mentioned, a three to 18.
C 130.
Two d. Hawkeye are all aircraft that we've actually now sold into part of why Q3 was as nice as it was and the way. The business works is they typically will order just a handful of systems to get them Specked in and test it out and then that will go through that procurement.
Through the government.
Take that more widely widely into the field. So that timeframe is about a year. So we've already got that process started so that's the good news on that on the commercial side we have.
We have aircraft as well so there's fiber optics on.
A lot of these.
Military aircraft that we've that we've hit on but that the similar arc.
Similar topologies are being integrated.
Commercial aircraft as well so we're working with those folks.
The Boeing Airbus is of the world to get that business going as well, we'll see that it next year.
And I also mentioned another good.
Application for this product as the data center market, we're very early stage in penetrating that space, but weve already sold systems into several data centers in particular financial data centers for testing very specific test thats required.
National data center that support the trading.
Really no other product on the market that can measure with the level of accuracy. That's required for the specific tests. So we see that as starting to be additive as well next year.
Probably more so mid late in the year.
Some.
Preliminary stuff happening in the first point of view.
All right. So we're looking into 2021 regards to both spaces.
No.
He got the job.
Yes.
Hi, guys the job putting that into the guidance that you're going to be providing I believe next quarter and rigorous 2021.
Yes, I mean, I think we will when we go through that and have a better handle on that.
You know when we give Q4 and full year.
Earnings we will get we will certainly give 2021 guidance as well.
We have talked about weather.
Whether we do that on the top and the bottom in the bottom being adjusted EBITDA is it EPS, we're not sure what our guidance will be but we will continue to give guidance and that will factor.
Those things in.
Sure.
When we do give that annual guidance.
All right very good.
And also just one one last question. So it seems like you guys are pretty.
Insulated earns though.
You know what happening 20 with regards to the Pan Mike. So can you just maybe.
Touch upon just the change in the administration or the U.S. government.
What do you what do you see in terms of.
Suburban spending whether that's in different auto or energy oil and gas and how that will could impact no not at all.
Yes is there any color.
Yes.
I don't see a lot of of change.
With with who's in the White House, if that would that's that's what you're asking and all it I'll, let James give a little bit of of his take on this me. He in running Luna labs is very connected with the government and we have a very good relationship with all the the depot de entities military and such and I don't know James If you see anything.
Everything I've heard and talking with some of the customers. They don't they really don't see a lot of change in what's going on so do you have any.
Yes, Hey, Jim This is James Gary.
I mean, I've been watching that pretty closely for the last six months as we've been coming up to the election.
Everybody in government and even all the defense contractors.
Most of them have been saying they don't see a big change in defense spending come.
Coming regardless of who's in the White House, and I think if there's a.
Any sort of divided government, that's even going to be more true so.
We don't anticipate a big change in defense spending which is our largest piece.
Really the only thing that might change would be an increase in health spending.
If we see a big uptick in spending to to address the pandemic further.
Into next year. So that's really the only thing we're looking at is.
Right.
<unk> spending levels in defense, and possibly an uptick and the spending on the on the health.
Well and Jim on the sensing side I know Brian has been looking at closely if there is an infrastructure bill.
That this administration chose to bring out if they got there everything has been is being done from a smart perspective. So any structure that is being done whether that's a retro retro and existing or putting new.
We are in front of them and everyone is moving towards making sure that fiber is on or embedded into any of those structures to make them Smart you saw some of our announcements about the bridge and things like that so.
Infrastructure Bill if that's where this administration took it would be would be a big plus for us.
Yes, that's our current color gentlemen.
Thanks, Jim.
Your next question comes from the line of Steve Kim from B. Riley. Your line is now open.
Thank you. Good afternoon. My first question is back to Lockheed about a 100 units can you tell us what.
Timeframe on that will be.
Yes, you know we've been talking about that for quite some time, we haven't we've kind of honed in now the number of units and it certainly is is in excess of 100.
It is something that that was is in our 2020 numbers, it's something we said.
It will happen in 2020, and so I think.
You can count on that that here in the remainder of the year. So.
That's that's kind of where we are we have not changed our position like I said, we talk with Lockheed on a regular basis. It is much more than than a.
A customer relationship we really really have a very close relationship with them.
And then you talked about other platforms such as the F 22, I mean with that whole free next year could lucky be karma, 10% cost customer sometime.
Sometime in sometime next year.
Interesting.
You know I don't know, Brian I, it could be I would say it would seem like it would see that 10% for sure I mean, I don't when it gets Tempur said I don't know, but it will be a very meaningful customer, let's let's say that I think will be quite yet, but it will be more.
Could be north of five and it can be pushing out there yeah.
Got it we helped Mitch Ria, we talk about that if it does drift that way, we'll make sure that.
Everyone's aware.
Got it and just regarding now that you.
Repeated or reiterated this year's outlook, we can back out the first three quarters. So you essentially give us a fourth quarter outlook can you just go over some of your assumptions, especially on coal.
It would cover cases, rising again, and some countries going back to.
Locked out more than you know what what are your assumptions regarding corporate.
Well you know a lot of our our product is coming out of backlog, we're halfway through the quarter now almost halfway through the quarter.
Some things have pushed out you know we talked about that even even in Q1 got pushed into Q2 got pushed into Q3, and we've seen some of the things even push into Q4 here. So you know we we looked at this from the bottom up.
And believe that the low end of our range is is you know is still a good guidance. I mean, we gave 80 183. We believe 80 183 is still is still the right number with what we see today you know I've always said, we sit down and evaluate everything rolled why we did it.
As late as yesterday, we were making sure that the latest information that we have is what we are.
We put out to you folks and so.
So that's what we know today, Dave and given what's going on and obviously, we have a presence in Europe with feet on the street in in Germany and.
France and the UK.
With what we know today.
We believe the guidance that we gave is you know is solid.
Got it and just a couple of more.
Regarding opex I mean.
Well I'll start trending up or mixture as things become more normalize I know a lot of companies there under spending up there with a lot of people are not traveling so both opex trend up next year and then how should we think about you know with Newbridge technology, there are and there are opex.
And lastly on tax you had a benefit last quarter, how should we think about tax rate going forward.
Yes sure. This is Gino I'll take those so.
Opex you know, what what we say and what we try to do is we look at Opex as a percent of revenue and so we try to lower opex as a percent of revenue year on year and so I think we'll still see that next year. Your point is very valid in you know weve.
Had more success this year or we beat our budget I would say on the Opex on the under spend like you said due to travel and we're running behind our original budget for Opex, but I think year on year the percentage of Opex as a percent of sales should it should be.
Improved slightly and so we see then correspondingly operating income going up you know long term.
Long term you know two three years, we think OPEC certainly can be in you know 13, 16% range somewhere like that if.
You know we manage it properly.
So hopefully that answers your question on the Opex and what was your other question again tax.
Oh, yes, so our tax rate.
We had negative 6%.
Tax rate because of our R&D credits for the full year with the R&D credit baked in it's probably going to be around.
Our team the sixteens, maybe 16.5% for the full year.
And then without the tax credits it would probably be in the 21% to 22%.
Range.
Yeah, Dave.
Yes.
Sure Dave I'm sure you took note that I did take some time to talk about in my prepared remarks about the the infrastructure that we have put in place you know we I was really trying to make the point that you know we have spent some things that that our foundational type of items that should allow for it for the growth that we see over.
Overtime.
To handle some of that so you should not see incremental growth in expenses based on the revenue that we.
We incur.
Got it thank you.
Again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your telephone.
Your next question comes from the line.
Ill from Northland Capital. Your line is now open.
Hi, good afternoon.
A couple of questions.
I think there was commentary around strength in silicon photonics orders in the quarter I Wonder.
You could provide any more color in terms of.
You know applications I assume mostly inside the data center, and maybe some telecom as well or.
Or customer types in terms of driving that strength.
Kind of run rate on current products or or anything new there and then I'll follow up.
Yeah, Hey, Tim it's Brian.
Yes, it was another good quarter solid quarter for gain.
Gain will be our product selling to customers working on silicon.
Silicon pretty.
Protonix type devices.
It's a mix of commercial and.
Academic type R&D.
The academic side can be just about anything.
Quantum computing.
It really advance photonics designs for communications et cetera, certainly nice applications there.
Several really nice orders for commercial customers as well.
Folks working primarily as you said on data center type applications.
A couple of the bigger names out there.
Pete customers of ours that Weve mentioned on these calls before and that we've worked with over the over the years and their names that you would you'd recognize several systems to the cloud service providers do either R&D or development first and for Silicon designs in house Theres really a good mix.
In Q3, and we have continued to see the activity level, there remain fairly strong I'd say consecutively for.
For six quarters now.
And that held up in Q3.
Great and that sort of leads me into my next question actually which.
Which is kind of another.
Correct.
The Q4 question your guidance does imply a pretty decent step up it sounds like.
The.
The new product Youre going into Lucky maybe elsewhere, there's going to be the primary driver there but.
Given that commentary just now sounds like silicon Scott for comments could contribute as well as.
As you look at a pretty decent sequential uptick into Q4 ownership can characterize.
What products might be a key in driving that.
Well look Tim.
Again, I'll, let Brian jump in on this one but you've been around long enough in this test and measurement telco space to know or data Datacom space that Q4 is the best quarter right. We always people are spending budget. You know, we you know people that that many ways drag on I mean, they pull the trigger.
We're starting to move up to selling multiple units of both the obey and Ob are.
In multi use and Brian do you want to add more in far as what you're seeing in this in the funnel and pipeline.
By all means but you know it is we've been around a long time that maybe not as long as you Tim but we've been around in Luna here 20 years, Brian I've been here, you know 18 of them and.
Q4, as you know Q4 is.
You know is a is a really good quarter, yes Q4.
Tends to be our strongest quarter in that segment.
Pretty good stretch as you pointed out sales of the 6200 product to Lockheed are going to be a big big part of the growth that we'll see in Q4.
But I will say that what we've seen so far.
Or we have indications of our another strong quarter for communications test business.
And that is consistent with what we've said I think throughout the year. When you look at the effects of the global market on our business communications.
I mean, the data center the foundries foundries that is data center.
Factures. The Oems are also there's still the gearing up and there's a lot of stress on the network. These days and so build outs are coming.
And we expect to see a good quarter and in Q4.
I should say we expected.
That segment to be a nice contributor to what we've already said about Q4, which is true.
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Thanks.
Again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your.
Thats tone telephone.
I'm showing no further question at this time I would now like to turn the conference.
France Baptist.
Well. Thank you everyone for joining us today, you've heard me say repeatedly that we believe we are on the right path with the right vision.
Given the environment, we are in I believe our financial and operational success. During these first nine months underscores this belief.
We continue to believe in our potential and that we're on the right side of a market shift in trends toward Lightweighting and Fiveg in fact, our capabilities can help to accelerate these trends.
Please feel free to reach out to Jean Allison or myself with any questions and we look forward to speaking with some of you. Soon thank you for your time and interest in Luna innovations.
And Mary that concludes our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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