Q4 2021 Luna Innovations Inc Earnings Call
Good day and thank you for standing by welcome to the Luna innovations incorporated fourth quarter 2021 conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation towards the question and answer session.
That's a question during the session you will need to press star one on your telephone. Please be advised today's conference is being recorded if you require in Florida assistance. Please press Star Zero, Oh don't like to hand, the conference over to your Speaker today Allison Woody Director of administration. Please go ahead.
Thank you good morning, and thank you for joining US today. This morning, we issued our fourth quarter and full year 'twenty 'twenty. One earnings press release. In addition, we also issued two additional press releases one announcing the completion of the divestiture of Luna labs and the other announcing the acquisition of Leah sensing.
In addition, as usual 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 at Luna Inc. 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. These adjusted numbers exclude the effect of certain noncash expenses and other items. The adjusted results are a supplement to the GAAP financial statements Luna believes the presentation and exclusion of these items is useful to focus on what we deem to be a more reliable.
Later of ongoing operating performance.
Before we proceed with our presentation today, let us 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 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 are available in the company's SEC filings, which can be found on the SEC website and our website, we disclaim any obligation to update any such factors or to announce publicly the results.
If 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 Graeff, our president and Chief Executive Officer, Jean <unk>, Our Chief Financial Officer, and Brian Solar our Chief operating officer will be available to take your questions and at this time I'd like to turn the call over to Scott.
Good morning, everyone and thanks for taking the time to join our call. We've certainly been very busy over the past few months and I am incredibly excited to share more details with you about the announcements. We made this morning for that reason my comments will be a bit longer than usual this morning.
Of course, we'll talk about the results for 2021, which despite some tough COVID-19 related challenges showed good top line growth and importantly showed tremendous increase in demand for our products and capabilities.
Nearly five years ago, when I took the seat we set a strategic plan and we haven't taken our eyes off of executing on that plan, even during the height of the Covid pandemic.
We said, we were going to transform Luna into a company with a vision of enabling the future with fiber.
That meant that we would divest the assets that no longer fit and we would invest in and acquire those that fit strategically and would accelerate our growth as I look back over these five years, we've divested three assets and acquired five all of which underscore Luna as move to being a.
Global fiber optic leader.
I'll talk about the balance sheet in a moment, but I do want to point out that all of our investments over these past five years in both our business and in M&A had been funded by using our balance sheet through cash and bank debt.
To support our vision I have shared with you many times the talent recruitment and development is critical we have and continue to build Luna for the future you'll see that in the additions that we made in our management team, including recently convincing a 40 year industry veteran to come out of retirement to help.
US lead a few of our key businesses.
We positioned our balance sheet to accommodate for these changes careful deployment.
Deployment of capital has been and continues to be critical to Luna success.
In addition to M&A, we also deployed capital to implement key new systems to support our growth gene Astro and his team have done an outstanding job of managing the financial aspects of our transactions.
All while overseeing the implementation of these new office systems and.
And today I'm excited I'm, particularly proud of the two strategic announcements we made just this morning the.
The completion of the sale of Luna labs, and the acquisition of Leo sensing.
These two transactions reflects strong execution of our core strategy to enable the future with fiber.
Let me comment first on the significance of the Luna Labs divestiture. This is an incredibly important move for us the sale of Luna Labs marks a final step in the simplification of our portfolio something we announced several years ago. When we set our strategy to focus our capital and our resources.
On the fiber optics markets and this deal is one of the most transformational transactions that this company has ever done.
In addition to representing the sale of the last non core asset in the lunar portfolio. This move also eliminates the limitations on Luna that were present as a result of Luna labs reliance on the <unk> program.
So the.
The divestiture of Luna labs, both makes Luna innovations a pure play in fiber based technologies and it also removes one of the inherent governors to our growth now Lightwave is Luna.
As for Leos, when we announced the opt a sense about a year ago. We told you. The data acquisition was truly transformational for Luna at that time. Many of you asked me offline. So what else and I said that we had some things going on but we werent in a position to talk about them Leo's was that some.
<unk>.
Leo brings to us a capability that we did not previously have it is the missing arrow in our quiver and that has to be a leader in temperature and strain sensing.
I hope now that it all makes sense the moves that we've made in my comments in prior public forums.
It should now be crystal clear, what Luna has been working on positioning ourselves.
To be a global fiber optic leader.
In sum when I look at these past five years I'm very proud of Luna strategic execution talent recruitment and capital management accomplishments.
We will talk more about the transactions in a minute, but let me now share some thoughts on the quarter and the year.
I've had the great pleasure to meet most of you and hopefully you know by now that I am someone with high expectations. Both of myself and my team I also believe in transparency and sharing what we did well and what we can improve upon hopefully you've heard that from me during the past five years.
In reviewing our 2021 accomplishments to prepare for this call I was struck by how much of a truly mixed year. It was in many ways. We had an incredible 2021 and accomplished some very significant operational goals, including fully integrating opt a sense entering new markets and.
Renting a new financial system.
And yet we also experienced some challenges ironically throughout 2020 Luna was fortunate to avoid most of the negative impact from COVID-19 , but like so many others as we entered and move through 2021, the continuing pandemic and associated deterioration of supply chain did indeed.
To affect our ability to manufacture and deliver our products as a result, we didn't accomplish everything we wanted to and we didn't grow at the pace that we know we can despite all this we still reported double digit revenue and adjusted EBITDA growth for the full year.
We've enhanced leadership in key areas and redesigned the organization to better position Luna for the future.
So when I look at Luna businesses from our foundational and an operational level, our businesses are stronger than ever the initiatives that we undertook during the past 18 months have placed us in a position to more fully capitalize on new infrastructure aerospace <unk> an emerging opportunity.
<unk> like electric vehicles.
I do want to mention the balance sheet and use of cash we've deployed capital carefully and we will continue to do so but there are a number of initiatives. We have earmarked that require capital investments in order to accelerate our growth. These include a robust M&A pipeline and investing in continued talent recruitment.
Deployment, particularly with respect to seasoned engineers and sales and marketing professionals. So you will continue to see us invest.
I'll highlight a couple of our initiatives in more detail in a moment, but first let me begin with a quick review of the financial performance for the fourth quarter and full year.
Then I'll touch on 2022 outlook and Jim will provide a bit more detail as a reminder, Luna labs is included as discontinued operations.
For the fourth quarter of 2021, we recorded total revenues of $24 2 million, which is a 26% increase over the prior year quarter.
This is a solid accomplishment when you consider that Q4 of 2020 contains a large Lockheed Martin order and was a record quarter for Luna at that time.
Correspondingly, our operating income was $1 million compared.
Compared to a loss in Q4 2020 of 600000.
Our gross margin was 58% in Q4 2021 versus 61% in the comparable quarter last year. This margin rate was anticipated and largely resulting from the early stages of integrating acquisitions as well as moving Luna labs to discontinued operations.
This all resulted in an adjusted EBITDA in Q4, 2021 to $3 1 million as well as an increase in adjusted EPS to <unk> <unk> when compared to Q4 2020.
So all in all a very good finish to the end of the year coming in at the top end of our guidance.
Last year's Q4 call I mentioned that 2021 would be a year, where lunar focused on building, an even stronger foundation on which to drive growth well into the future.
We are a very different company today than we were four quarters ago stronger in many ways and well positioned for near mid and long term growth the.
The moves that we made to refocus the organization on our vision, enabling the future with fiber position us well to capture market opportunities now and into the future.
One of these moves culminated in our announcement. This morning, the closing on the sale of Luna Labs. This is a critical step in refocusing our organization entirely on fiber solutions. We are excited for the management group, who will run the new labs and know they will thrive as a separate private company with a <unk>.
Great team.
Another such move was this morning's announcement on the acquisition of Leo sensing.
Leo sensing is a recognized global leader in fiber optic distributed monitoring solutions for power cable pipelines oilfield services security highways and railways as well as industrial fire detection systems.
Distributed temperature and strain sensing technology will allow luna to rapidly generate expansion opportunities in multiple markets some of which we already serve like infrastructure and energy and some new markets like power cable monitoring and fire detection. The transaction will allow for further expansion into these high <unk>.
Both markets and is expected to accelerate our data services and Iot strategy.
There are a number of compelling reasons why this acquisition makes sense.
It provides lunar with important distributed temperature and strained intellectual property products and expertise.
Leo strongly complements and enhances our existing offerings.
It brings a diverse blue chip customer base, which represents a significant opportunity for cross sell between the two companies.
This will enhance our existing highly skilled sales force and our broad intellectual property portfolio with the acquisition of <unk> intellectual property Lewdness total portfolio will include approximately 800 patents active and pending.
This acquisition allows us to further expand our global operational presence.
Building upon an already strong international customer base and sales capability in some this is a truly compelling acquisition and an important additional milestone for the Luna team, we're bringing together two businesses with strong adjacencies in a large combined opportunity Leo <unk>.
<unk> has been driven by world class industry, leading technology and a very talented team of employees.
Together with Luna as global fiber optic leadership Leos allows us to capitalize on significant technology enhancements and market opportunities.
Ill, let Jim cover the transaction details in his remarks, but as you can tell from my voice. We're all very excited to welcome Lee us to the Luna team.
And finally, we continue to make the necessary investments in our infrastructure.
Both from an operating expense standpoint, as well as from a capital investment standpoint.
These are critical to ensuring that we are in the strongest possible position to capture the opportunities that we see in front of us with five G light weighting EV and safety sensing applications for the industrial and mining industries, we clearly have work to do including a steady focus on execution.
But there are a number of accomplishments in our two business units sensing and communications test that I would like to highlight for you.
Despite the pandemic companies continue to need our technologies the implementation of <unk> a topic. We've shared with you for years now combined with new sustainable methods of transportation like EV and a continued focus on safety and security across industries confirms Louis position.
As a trusted technology provider for our customers.
As an example of the quickening pace. So the <unk> rollout, let me share a story from some of my recent business travels as I was in my hotel room I turned off my Wi Fi at the hotel because the <unk> Ultra wideband with 10 times faster than the Wi Fi provided at the hotel.
I am proud that Luna products enable the transition to <unk>.
As I mentioned on last year's call, we had plans to invest strategically so that we can continue to grow to scale significantly well into the future.
And we did opt.
After sense and another smaller acquisition were completed at the end of 2020 and provided us with important distributed acoustics sensing technology, and a complementary blue chip customer footprint as well as expanding our global reach.
We expanded our leadership talent with new hires into some recently expanded roles better supporting growth now and in the future.
And we continue to move from sales of one or two units per order toward larger multi unit blanket orders as you have heard me mentioned before we have a good number of significant customers in the aerospace automotive EV and industrial process control industries.
Luna products can do what no one else is Ken and therefore Luna has already been selected for many of these important projects.
With respect to our sensing business, we had several accomplishments during Q4, which I'd like to highlight.
As a reminder, our fiber sensing products, the Odyssey Hyperion and <unk> focus on the integration of optical fiber sensors in and on advanced materials and structures.
And our key rate products used terahertz waves to see through opaque materials to measure thickness and density for process control applications.
Mentioned highlights from the fourth quarter here are a few key accomplishments first we completed a major deployment in the mining industry associated with the health monitoring of tailings dams.
Mining is a complex process involving extraction of materials out of the Earth. Those materials are washed which in turn creates slurry or wastewater. It's similar process to the old time panning for gold.
Slurry or wastewater flows into a big aquifer, where it becomes sediment those aqua <unk> are built with structures known as tailings dams.
One of those dams brakes as happened recently in both Chile, and Brazil, there can be a significant impact on communities and even loss of life. Therefore, it is imperative that the mining company monitors these tailings dams for safety and longevity.
There are thousands of these dams worldwide and therefore, an enormous opportunity to Luna.
Second we successfully deployed fiber optic based 24 seven acoustic monitoring system for the Roosevelt Bridge in Florida, using our high period.
Youll recall that I mentioned installation of such a system a quarter or two ago.
Third we installed perimeter sensing systems on sections of the EU border.
Instability in certain regions is driving some foreign governments to invest in more broader control and patrol.
This is a great example of one of the applications of the distributed acoustic system, we acquired with Op defense.
Fourth we delivered systems to the Japanese government for earthquake and tsunami monitoring.
And finally Luna technology has been deployed in the oil and gas market.
Our sensing equipment, which has placed on oil drilling rigs measure strain on the riser that takes oil from the bottom of the ocean through the ship or the rig.
We receive these orders on a regular basis. So its good to see those now deployed in larger measure.
And I'd be remiss, if I didn't touch on the terahertz business, which we consider part of sensing we posted strong bookings and significant new strategic wins in Q4 for our products.
We've done great work in the EV battery industrial adhesives, and tire manufacturing markets I share. These examples of success from last quarter to highlight the vast opportunity we have in this business.
Imagine the growth we will capture when we go from doing one or two of these projects are quarter to dozens we already have multiple examples of this for example, we've shared our success with Lockheed going from delivering a couple of units per year to over 100, and our partnership with Megan which positions us to <unk>.
That's right the commercial aerospace market with overheat and fire detection systems.
We have a half a dozen other partnerships like this that are close to having a significant financial impact.
For the full year, our sensing business achieved approximately 68% revenue growth. The sensing business also did extremely well integrating the das products into our portfolio.
<unk> grew the topline nearly 40% in 2021 versus the previous year.
And we completed the integration of the tactical back office component of the acquisitions.
Looking ahead to this year 2022, we have four key areas of focus for our sensing business first organization development in <unk> and now in Laos second deepening existing strategic partnerships and engaging some new partners third progress in Maine.
Markets of energy and aerospace as well as emerging applications in automotive EV and fourth new products.
<unk> enhancements as well as entirely new products.
Now, let's move on to the comps test business remember that this business focuses on the ever growing need for more bandwidth in communications networks.
Optical fiber is a key enabler to high speed communications and our progress in this segment feed the need for speed.
For the fourth quarter 2021, we received new orders for our comms test equipment, including from a prominent options trading floor to ensure that the fiber optic linked to and from each high speed trading data center is within the required length specifications to meet SEC regulations.
For the fourth quarter, we received the largest order that we've ever received for the Rio semiconductor laser.
And we accomplished several strategic wins in the area of polarization control products for medical applications. As a reminder, this is part of the general photonics portfolio out of our keno location.
For over for overall 2021, there are two accomplishments worth mentioning on this call first the completed deployments of all systems for Lockheed's first order of our newest portable ovr product those were all completed in the first half of the year and our customer has indicated they are.
<unk> happy with the performance and second the integration of the REO laser facility into our North American operations. We now have our polarization control and REO laser product lines being overseen by the same general manager as part of that organization redesign that I mentioned.
And in 2022 comps test teams will be focused on leveraging the laser production facility in Santa Clara for additional customer shipments throughout lunar as applications and businesses.
Advancing our progress with larger blanket type orders for polarization, while increasing orders in the medical arena.
Focusing on delivering continued success in aerospace with our 6200 platform Silicon Photonics in high speed component products and of course execution execution execution.
Before I turn the call over to gene I want to cover our outlook for 2022 at a high level.
As always we spent considerable time planning and budgeting for 2022.
This year the third year of this pandemic is especially challenging as we try to gauge the macro environmental puts and takes that have an effect on our customer and as a result on Luna This business.
And while the exact numbers are particularly challenging to predict for 2022, we as an organization. We remain very excited about where we're heading and the vast number of opportunities that lie in front of US let me make that clear again, we as an organization remain very excited about where we're heading and the.
Does that lie in front of us.
We're also providing quarterly guidance at the top line for at least the first quarter to help those of you building financial models. This may help to provide you with some insight in the quarterly cadence throughout 2022.
Today, we are issuing our 2022 outlook range, which includes the Leo business as of mid March those ranges are total revenues of $109 million to $115 million, which represents a 25% to 31% growth.
Adjusted EBITDA of $10 million to $12 million, representing a 32% the 30% to 58% growth.
And first quarter 2022 revenue outlook of $20 million to $22 million.
As I've underscored several times today Luna has a different organization than it was even a year ago. Therefore, some of the cadence as well as prior historical financial trends that youre used to might be slightly different going forward.
Jean will go into the details, but I want to highlight a couple of our assumptions here first that we still believe the delivery of our top and bottom line financial performance will be greater as we move from Q1 to Q4 throughout the year, we provided the topline for the first quarter as a helpful Guide for you in understanding that cadence.
<unk>.
Second our outlook is tied to the best information that we have as of this moment I've always told you that we gain additional insight into customer demands supply chain effects and other macro environmental factors, we will incorporate those into our assumptions and update you accordingly.
You saw us provide that added level of insight during our Q3 call last year.
In summary, 2021 as the second year of this pandemic has been another challenging year for all of us.
Luna included.
I know that Luna is clarity about its vision and purpose have served us well and we've navigated the uncertainty and positioned ourselves to capitalize on future opportunities.
I am grateful to and proud of the Luna team for their focus and work and remind them that we need to maintain focus and must importantly execute against our goals.
The expectations of myself and my executive team are very high as we drive the organization to deliver against our goals and now I'll hand, the call over to Jim.
Thank you Scott.
You just heard that both the fourth quarter and the full year 2021, we're incredibly busy too.
<unk> 2021 was a year characterized by execution against our strategy, including doing a lot of the groundwork that allowed us to complete the two transactions we announced this morning.
We accomplished so much this year implementing new systems hiring the talent, we need to capture the growth opportunities. We see ahead of us and working on both these significant transactions.
All while managing the daily challenges created by the Covid pandemic.
As I've mentioned many times recently, we have been focused on putting into place the people processes and platforms that will allow us to scale significantly without further significant investment in back office infrastructure.
Putting the scalable foundation in place is critical to efficiently drive both organic and acquisitive growth as.
As we exited the year the bulk of the heavy lifting in establishing these systems and processes is done of.
Of course, we will always maintain a culture of continuous improvement, but we do believe we have the important systems and people in place.
To be sure. The next year requires a lot of work and focus we need to execute on our annual plan, while also integrating our acquisitions.
We now have a larger geographic footprint and are a more multinational company. We have to continue to invest in R&D engineering marketing and sales. These functions are critical to our future growth.
Our work is not over.
But our opportunities are abundant and our future is very bright.
With that as context, I'll now shift to cover our fourth quarter results.
As Scott noted our revenues for Q4, 2021 were $24 2 million compared to revenues of $19 3 million for Q4, 2020, representing a 26% year over year increase the.
The increase in revenues year over year was driven largely by the <unk> business, which we had for a full quarter in Q4 2021 versus less than a month in Q4 2020.
Remember that Q4 of 2020 also contained a large Lockheed Martin order, we expected to have a follow on order in Q4 2021, but due to COVID-19 related delays. The follow on order is now expected in 2022.
Our gross profit increased to $14 1 million for the quarter compared to $11 8 million for the same quarter last year, representing a gross margin of 58% in Q4 2021 compared to 61% in Q4 2020.
Remember that Q4, 2020 was an exceptionally strong quarter for us and included less than a month of up to <unk>.
Our Q4 2021 gross margin reflects a full year run rate, including an entire quarter of op defense.
Keep in mind that <unk> sales often include installation and field service, which have lower markups, and therefore, lower gross margins than product sales. So while we capture more revenue dollars. It does lower the margin percentage slightly.
Ill up defense May compress total gross margin percentage a bit the gross margin dollar contribution from op defense is very significant.
Operating expenses were $13 1 million compared to $12 5 million in Q4 2020.
Operating expense as a percent of revenue declined year over year to 54% of revenue in Q4 2021 from 65% of revenue in Q4 2020 some.
Some of the moving pieces within operating expenses, our integration and deal related costs, which were 249000 in Q4 2021 versus $2 2 million in Q4 2020.
Amortization of intangibles, which were 760000 in Q4 2021 versus 478000 in Q4, 2020, and a full quarter of <unk> operating expenses in Q4 2021.
Our operating profit increased to $1 million in Q4, 2021 compared to a loss of 600000 in Q4 of last year.
As a reminder, since <unk> was acquired in December 2020, Q4, 2020 had expenses in that quarter without the benefit of associated revenue due to the holidays at the end of December .
Net income from continuing operations for Q4, 2021 was $1 5 million or <unk> on a per share basis.
<unk> to a net loss from continuing operations of 945000 for Q4 2020.
Income tax expense for Q4, 2021 was primarily impacted by equity compensation R&D tax credits and discontinued operations for.
For the full year 2021, we recorded a tax benefit of $2 million due to our pre tax loss and the deductions related to equity compensation.
A key metric, reflecting our underlying operations is adjusted EBITDA as Scott mentioned adjusted EBITDA increased to $3 1 million for the fourth quarter 2021, a slight increase compared to Q4 2020 of approximately $3 million.
Let me move now to the balance sheet.
We ended the quarter and year was $17 1 million of cash and cash equivalents compared to $15 4 million at the end of 2020.
Our working capital was $49 8 million on December 31, compared to $45 4 million on December 31, 2020, our working capital increased slightly due to the full year impact of the <unk> acquisition.
Our total debt outstanding is $15 8 million as of December 31, 2021. This is comprised of $8 3 million in term debt and $7 $5 million draw on our revolver.
At yearend, we had access to an additional $7 5 million in the revolving credit facility.
As a reminder, subsequent to year end, we utilized our balance sheet, both cash and debt to acquire Leo sensing.
Overall and as Scott mentioned this was not the financial performance. We had originally anticipated, but it is solid performance against our revised outlook. We provided after moving Luna labs to disc ops and I'm pleased that we achieved the top end of revenue and adjusted EBITDA ranges.
Let me now address our outlook for 2020 to note that our 2022 outlook takes into consideration the Luna labs divestiture as well as the acquisition of Leo sensing, which will be a stub period for the quarter given the timing of the close.
First we anticipate 2022 total revenues to be in the range of 109 million to $115 million, which represents a 25% to 31% growth compared to fiscal 2021.
We anticipate 2022 adjusted EBITDA to be in the range of $10 million to $12 million, which represents 32% to 58% growth compared to 2021.
And finally and new for this quarter, we are providing a revenue outlook for the first quarter. While we are not promising that we will continue to do so we felt it was important to provide you with transparency into the first quarter of the year.
Our expectations for revenue in Q1 of 2022 or 20% to $22 million.
We are assuming that the COVID-19 impact for the first half of 2022 is similar to the last half of 2021, and then improves in the second half of 2022 and that our supply chain gradually improves throughout 2022.
With that I will turn the call back over to Scott.
Jean <unk>.
I wanted to just sum up by saying that the key megatrends that support Luna as future growth continue to be relevant and strong fiber <unk> light weighting electric vehicles and structural safety monitoring to mention a few.
These represent incredible opportunities for us and the strategic moves and investments. We've made during the past 24 months have helped us to create a strong contemporary and scalable foundation and a team to oversee it to take full advantage of opportunities as they arise This foundation will allow.
US to drive both organic and acquisitive growth for the longer term, we have a superior product portfolio with products that are needed by companies regardless of events like a pandemic. We continue to believe in our potential and hope that you do as well.
Thank you to all our investors partners and customers for your patience. This year as we work through to develop our organization into the strong company. It is today.
And thank you as always to the Luna team for your accomplishments and for continuing to be supportive of each other through this pandemic, Brian gene and I would be happy to take any questions. At this time, so Mary I'd like to now open it up for Q&A.
Thank you as a reminder, Jack a question you will need to press star one on your telephone to withdraw your question first.
Please standby, while we compile the Q&A roster.
Your first question comes from the line of Barry Sine from Spartan Capital. Your line is open.
Hello Hello.
Your line is now open.
Hi can you hear me I think I was muted yes.
Hey, Barry.
Sorry about that hey, good morning folks.
Couple of questions. If you don't mind first of all.
On the revenue guidance for 2022, I think you said 109 to $1 $15 million.
As you know a number of companies, including yours have been impacted by global supply chain issues and that really has to.
Aspects to it first of all your own challenges getting parts and I think you added it easily they do last year. For example, but also your customers' challenges where maybe they couldnt take an order because of their supply chain issues.
How.
Much confidence do you have on that guidance in terms of supply chain issues and I guess to ask the question in another way what is the likelihood that we get to October you say you know, what we're not going to make guidance because of supply chain.
Yeah. Good question, Barry I think we really took that into account as you know from historically it has been less about <unk>.
Supply chain issues with us and like you said, it's a supply chain issue with our customers, who are saying, hey don't ship that I'm not ready for whatever it may be because we end up being a cog in a bigger wheel for those guys. So we took a lot of that into account looked at the first half of the year I think.
We gradually work our way into the back half of the year, we took that into account when we laid out the 109 to $1 15.
Right now we factored some of that and we learned some lessons from 2021, and we feel really good about the guidance that we gave again.
All I can do and I said it on my call. All I can do is give guidance with what I see in front of me right now.
We talk to customers, we did everything we could do and really understanding where they are when do they feel like things will pull out.
And factored that in but with what I see today in all the information we spent a lot of time doing it and the 109 to $1 15, we really feel good about that being a guidance that we can carry throughout the year and stand behind.
Again learning some lessons from 2021.
Okay, and then on the acquisition I think its finance Leo satellites.
Yes.
The could you give us the.
2021 revenue and EBITDA.
No what youre, bringing on board on that business.
The full year revenue in U S dollars would be around <unk>.
16 mill no I think it was $13 million in U S dollars I think $12 billion in euros is what they is what they did.
Katie will go out I think it's gone out with a press release and they kind of spell that out that I believe it was right around 12 million euros 13, U S dollar or something like that Barry.
We're kind of flat EBITDA side.
So, but we do see some synergies in that from rolling them into Luna.
Okay, and then in the slide deck that you put out.
Note that with that acquisition you now have all of the modalities.
Quite sure what that means but I guess that means you'll have all the technologies that you need does that mean that from that perspective from a.
M&A perspective in terms of future transactions that Youre youre, good where you are from a product portfolio and I know you said in the script that Youre still acquisitive.
What would the focus be more on customers and geographies.
Yes, I think thats right.
This was important in a lot of people mentioned offline. So so when we did offer a sense of does that complete everything and the one thing that we kept saying was kind of the temperature.
And some of the strain that Leo Springs to the table that was something that in many of our customers. We would go to and sell a system too but they needed.
A more elaborate temperature solution.
And then we could provide with the off defense technologies. So many times.
We would either go out and bring <unk> to the table or we'd go out and buy a leo system and try and incorporate it into our overall solution to that customer. So it was a customer that we got to know a company that we got to know because we brought them to the table and got to know their technology.
And that's how we've done a lot of our acquisitions and that we've got to know them prior to doing the transaction. So I think this certainly like I said. This is this completes the the.
The final arrow in the quiver.
We're always going to look if you can grow faster through acquisition, but but this from a product standpoint, I think completes our portfolio do you agree Brian Yes, I agree.
With that completely.
From a from the distributor.
Distributed sensing business.
Perspective, as we say in the release and the material modalities or no cover between.
Acoustics strain temperature and our other discrete.
Offerings. So we have the basic building blocks now so it.
It doesn't really affect necessarily the strategic M&A side of the business. It just means that we don't have to go looking to fill those basic building blocks now will be looking for things with more adjacencies things that would perhaps accelerate our growth more as you mentioned customer bases and geographies.
And Barry we talked about.
The ongoing monitoring and being part of that call. It recurring revenue stream and and we did some of that started getting into that we talked about that.
And every time you get in that you look at at a build or buy and we knew we had additional technologies, but in acquiring <unk> and Lee us their software package that they brought and the advance of the day already made on that ongoing monitoring is really critical to where we were going so it <unk>.
<unk>.
A technology that we needed, but also brings a level of software that that that's.
<unk>.
What we needed to bring to Luna.
Okay. My last question, if I could just get your sense on your thoughts on buybacks I know, that's a board decision, but if you could comment.
The stock is now and the progress you've made and you've got some pretty solid guidance out there what should investors think about and expect for a minute in terms of share buyback activity. This year.
Yeah, I think we'll continue to it's an ongoing conversation that we have with our board and we look at what's the best use of our capital I think putting it to work.
Here in looking at some of these deals that we've done like I talked about we divested three assets over the last five years and acquired five so we're looking at growing the business from that perspective, what's the best use of our capital. So we will continue to talk about all of those those different.
There's different things that the board, we talk about stock buyback, we talk about dividends all those good things.
And we always.
Discuss what's the best use of our capital right now we believe the best use of our capital was to go out and continue to grow the top line.
Organically through investments in ourselves as well as being acquisitive.
Okay. Thank you very much.
Yep. Thanks, Sir.
Our next question comes from the line of Alex Henderson from Needham Your line is open.
Great. Thanks.
Hoping you could talk a little bit about the magnitude and.
The scope of the larger programs that you have in the pipeline.
Maybe not specifically an individual's sense, but rather.
In a broader sense, how many of them are there and if you were to aggregate them what the revenue contribution from those might look like.
To give some sense of the pipeline.
The opportunity there.
Yeah.
I mentioned on it a little bit we talked about really some of the some of the organic growth that we see coming from Luna is going from selling onesie twosies of these things to selling dozens and big orders, we're respecting the things and I think the first move that we talked about was where we got specced into the F 35 with <unk>.
Lockheed Martin So yeah that was of the magnitude of 100 plus unit order when they talk about being specced in and needing say 10 of these things a month for the foreseeable future. So 10, a month for 10 years. So if you look at that that's an annual revenue of $7 million to $10 million per year, and then when you look at it.
Talked about this partnership that we have with Meg right and Thats the.
The public bid that Airbus is out on the <unk> hundred 20, and they are looking for I E.
The heat detection fire suppression system, we're working with Meg at on that and and moving forward that that being specced into the <unk> hundred 20.
That's a 10 year 300 plus million dollar kind of order, that's a $30 million revenue kind of opportunity for us when it gets up and going.
I talk about there is probably another half dozen.
I think when I look at it.
Five six different deals that are out there inside the red zone.
These are these are deals that are no longer a jump ball. These are not deals that we say well we still have to win we have won those we have been selected we just need to bring them over the finish line and those are of the similar magnitude that I would say to Lockheed Martin those are of this seven to 10 million dollar type of of annual <unk>.
Revenue type deals and I talk about five or six of them.
Alex So those are those are the meaningful growth when we talk about the confidence level of the growth that we believe we can have here at Luna those are the things that don't require quotas and bag carrying those are not additional sales guys to bring those over those of us working those blue sheets here.
Myself out in front of them, Brian out in front of them to bring those over the finish line. So.
That's a major impact in what we look like over the next call. It couple of two three to five years that is.
Is getting those up and going I'm, not saying getting the win I think the wins will come sooner than that I think the magnitude of that.
We will come in the next say three years and I think that is.
That's in the $30 million to $50 million of annual revenue.
And some of those deals.
Combined going forward I hope that answers your question I can't get into one and so on.
The detail, but it gave you a little bit more color.
It does it sounds like you.
You are talking about potentially.
Having as much as 70% of your annual.
Revenue run rate in what I would describe as recurring related businesses.
Not necessarily by the end of this year, but at some point in the next year or two.
Is there some other businesses underneath the current business.
That youre doing that would add to that.
Percentage of magnitude.
Other words.
Stuff that's already in hand, other than say, the Lockheed business, which you've already identified.
Yeah, I think the deals that we're talking about the ones that we talk about right now public certainly Lockheed and that remember that's one plane. That's the F 35, and we looked at the F 22, and we look at the <unk> 30, if you look at a lot of planes.
With not just Lockheed with Northrop Grumman and others. So there's a lot of near term.
We are very far along and we will be able to talk in more detail here in the next.
Coming weeks and months of the progress.
Related to our partnership with <unk>.
Many folks have listened to the Meg at earning.
Earnings release, and they talk about it we certainly don't want to get out ahead of Meg it but.
We will talk about that here soon.
And where that is but continuing to work with a lot of partners that were already working with.
Like I said this is not theres always new opportunities, but these are ones that are not.
They're not in the funnel. They are things that we are actively negotiating and I think I think you can quickly see luna being in that 50 plus percent of its revenue in reoccurring revenue.
Some major changes in the company's fundamentals.
If you get to this.
I wanted to go back to the taxes.
Comment.
Obviously, it's nice to get a credit.
In 'twenty, one could you give us some guidance of what youre, assuming in terms of tax for modeling purposes for 2002.
Yes, we're still with all these moving parts, we're still working through that with our with our tax advisers.
Best way I can say that as our statutory rate is around 25, 26% based on the states that we're in and the foreign operations are around like 24 to 25, and so I don't have a great answer right now because we're still working that up these transactions are kind of hot off the press.
Going back to two.
Inside the Red zone deals for a second.
Anything.
What do you think the cadence is in bringing those from inside the red zone to pull to recognize revenue.
Is that going to feather in over the course of the year or is it going to go there and over a longer period.
How do we think about that feathering in.
I think some of them will start to show up here.
In 2022, I mean, I think the meaningful.
Movement to revenue will happen in 2023, and maybe 2024 keep in mind when you get into some of these environments that we're in.
And not today, but years ago Luna was selling one off to say a guy on a bench or whatever it may be and then several years ago. We started getting into manufacturing lines now when you talk about getting spec into battery manufacturing are you talking about getting specced into commercial aerospace. These are things that need to be repeatable rely.
<unk> and just break proof.
Cannot go down and when you are talking about getting to that point. So it's continuing to work.
Development stage with some of these folks in their environment. They send it back and it's like yes.
It stopped working it's like Okay, well did your iPhone work when you throw it into the Ocean and tried to go down 300 meters Oh no. It didn't okay. We got to work with that we can do that it's just going to take a little bit of time till I make your iPhone work at 300 meters and Thats. The kind of thing that we continue to work with some of these folks when they tell us the environment that it's in we just need to.
Know what environment are you talking about if youre talking about so let us know we can work with that we just need to know that the environment. So it's getting into those type of things that just take a little bit of time to work with them in their steering committees as part of their partnerships and collaborate with them to be specced in the when you talk.
'bout getting specced in it is not a.
Our company customer relationship it is a partnership when youre getting into this and we're on.
We're signing confidentiality agreements that that.
I got to give away my first born if I, let up and we're down in their environment working with them. So those will feather in over the next one to two years and hopefully be up and running.
After that.
Great.
Thank you very much and congratulations on the transactions.
So we're making great progress thanks.
Thanks, Alex appreciate it.
Our next question comes from the line of Jim, Maryland, Some singular research your line is open.
Great. Good morning, Johnson, <unk> Johnson, and then I have a few questions.
Yes.
Yeah, and forgive me if I repeat what was discussed already perhaps I'm just looking for more clarification. So.
Let's start with the guidance. So in regards to the revenue guidance of 109 to $1 15.
That's a $20 million to $30 million jump from from the $87 5 million.
And your guidance is reflecting the transactions so the divestiture as well as the acquisition.
So I'm just trying to get a sense of that $20 million to $30 million grow.
How much of it is tied to the divestiture and acquisition and how much of it is.
Attributed to organic growth. So are you able to parse out between between the two.
Yes, we always have a difficult time, a little bit doing that.
Leo.
As it sits in Cologne, Germany will as part of NK T. Photonics part NK T. Photonics is part of the parent company NK T. So it was already a division of a division. So we look at rolling that in and running that.
With Optus sense as one transaction. So we immediately have started the integration of how we're going to manage that so it's really hard to break out.
How much of that is.
His legacy Luna versus.
The acquisition. We also are certainly hedging ourselves, we're also saying hey.
Got $22 million of increase off the 87 to 109.
I said on the call earlier that someone asked I think.
Leo did about $12 million Euro last year.
We look at rolling them in I think the organic will be somewhere I said, it before mid to upper teens low twenties organically.
I look at.
Getting some integration done some some synergies that will be done in Laos, but.
But I also want to make sure I don't get out ahead of myself.
21 was a was a little bit of a bite me Astro Luna I'm not used to getting on a call and not doing what I say I was going to do and there are factors that went into that certainly supply chain and the pandemic in delta and all this kind of crazy <expletive> , but I can tell you that.
That it was something that we learned from it so don't get out ahead of ourselves, let's make sure we get this behind us so.
By saying, we can be 20 to close to $30 million over last year. We believe that's good growth. We believe this 25% to 35% year over year top line growth is good but it factors in some things that may still be lingering from the <unk>.
<unk>.
Alright, Okay, and so if we can just continue with that thought so just in regards to the supply side.
What exactly is the issue. The fact that you can't get parts because there's factories that are shut down or is it the logistical thing in which you know port congestion or road transportation, what exactly on the supply side is the impact in the business and and how or is it what are you hearing in terms of it being.
Cleaned up and.
Going forward.
Yes.
I'll, let Brian way weigh in on that he is kind of all over that supply issue, but like I said before.
Lot of the supply issue is at our customer it's not necessarily us we buy in bulk and we have.
Typically we have the parts in order to make the system that we do the problem that we are and that's why you run.
We've been running at a book to build.
One one and one two in previous quarters, where we typically run right around one on a book to bill because a lot of the orders are in and they are sitting on the dock waiting to be shipped we have a customer, saying I'm not ready for it yet so.
So it's less a supply issue on our side and more with our customers and I'll, let Brian can elaborate on alright, and then I have a follow up question to that point, but if I could here Brian .
Sure.
Jim Yes, so it comes down to all of you all of the above on the product and supply side for in terms of delivery.
The limitation of materials certain materials within our supply chain makes it harder on it.
For us to build and deliver to our customers we are still seeing.
No.
Delivery times.
Increasing from a lead time perspective for parts, we need up to even in some cases $50 52 weeks, so that hasnt really eased yet we do see that easing the second part of the year, but.
Really going back to 2020, we started new sourcing strategies, increasing our partner engagement really improving our supply chain flexibility diversification within our supply chain.
To be able to build resilience to this.
So we're.
We're certainly being affected by it it hasn't improved in the last quarter or so, but we do see.
We do see some hope and some light on the horizon in terms of the situation for later in the year, especially now that we see COVID-19 .
Globally is having less of an impact than it did even a month or two ago.
That helps on the mobilization of resources side as well, we need to get our people in the field.
To affect our projects and the associated revenues.
<unk>.
We're not out of the woods yet but.
And we have some of that of course considered in our plan and our forecasts but.
We do see some easing in the relative near term.
Right and this is on the customer and as opposed to your side of the business spend right.
On both on both.
Okay, and so if we can just talk a little bit about more about the customer base on the pipeline. So.
I'm, just kidding I'm, just getting like conflicting.
Comments.
And maybe if you could just clarify a little bit about that so.
It seems like you guys are still tied to the aerospace in regards to the Lockheed Martin and perhaps new opportunities in the commercial area.
Space, you brought up Airbus I'm.
I'm not sure if theres any traction with Boeing.
I'm also hearing like the growth is going to be in the mining sector as well as infrastructure with bridges and so forth. So I was just trying to get a sense of where.
Where you guys are are going on like is it continuing to be the focus on aerospace and Lockheed Martin program or is it going to get into these other other sectors. So if could just comment on that.
Yeah.
I don't look at it as conflicting I look at it is the same technology being used in different applications.
Been working for with Meg per year. So that was a relationship that started with micron optics before we acquired them. In 2018. This is a long term relationship that takes time, if you want to get specced into the <unk> hundred <unk>. It doesn't happen by applying this morning and getting an answer this afternoon. So it takes years to work.
With these folks we certainly are all over infrastructure as well Jim.
With all the things going on with the U S government on bridges tunnels dams I tried to give an example of where the same technology is being used in different applications and and that's just kind of where we are we're not chasing every rabbit in the field, but these are huge opportunities when I get on a dam, we get on a dam in Brazil.
And there is thousands of dams that had the exact same application I'm certainly going to chase. It if I can get specced into the F 35, I am going to chase. It if I can get specced into the Airbus I am going to chase it and you might say well that's gosh, that's infrastructure as well as aerospace it is but it's the same technology.
And again like I said I'm not chasing every rabbit for onesie Twosies I'm looking at big partnerships that that we can land that get that recurring revenue to be a meaningful percentage of our annual revenue, that's where I'm going.
Okay very good.
And so then if I could just follow up on that so what are you hearing from the customers now I know that youre not going to base your business based on the latest news events, but what are you hearing from the defense sector in terms of.
Spending in the years going forward of course.
I'm talking about reflecting the current situation in Europe .
The infrastructure spending.
The return to travel and commercial aerospace.
What are you hearing from your customers in terms of what they are anticipating spending both in the defense sector.
Commercial aerospace as well as infrastructure.
Well I think what youre going to see in 2022 is you're going to see that those those sectors really start to turn back on.
Those specific areas in 2021.
Had a few bright spots, but military defense in particular in aerospace in 2021.
Does not.
Not one of our higher performing segments now from a new orders in the door perspective, 2021 was still a very good year and we pointed that out here during our remarks, so I don't want to say it wasn't but but 2022 will really be bolstered by the additional activity, we'll see with the infrastructure Bill and those associated dollars they'll start.
Flowing Q3, Q4 timeframe, we think and on the aerospace and defense side, where last year we.
Mentioned in our remarks, we were expecting some larger follow on orders from 2020, while they didn't happen in 'twenty, one due to kind of broad delays in the system well, we will see those in 2022 and in fact, we've already had a lot of activity.
January and February leading up to March here on that front, so those will be some additive.
<unk>.
Tailwind for Us and I think 22 will be a good year.
Okay, and that's built into that revenue guidance as well as the beta than it is.
Yes, yes.
Yes.
Okay. Thank you gentlemen, alright, thanks, Jimmy Thanks.
Again, if you would like to ask a question press star one on your telephone.
Our next question comes from the line of Dave Kang from B Riley Your line is open.
Hi, yes, good morning.
First question is I may have missed it did you talk about the gross margin up on Leo's.
We did not break that out.
We'll have to get we'll get our hands around that right now they are running kind of high <unk> low <unk>, we just have to get our hands around as they were part of a larger organization and NK T and NK T. Photonics was pushing a lot of costs down to that we just need to get our hands around that date, but right now what we're seeing is probably.
Hi, <unk>.
Got it and then.
Regarding our sensing versus Comcast what was the mix last year and then.
What are you what.
What are your expectations this year as far as that mix is concerned.
Well it will only increase Brian do you have the mix is probably I don't know.
65, 35, something like that yes, the mix.
Was <unk>.
60, 40 in 'twenty one.
Fully increase Leo said now it also Italy us as part of this it will flip up to 65.
Mid <unk>, maybe even pushed a little higher than that 65 35.
So if you look at the one $110 $65 35 to $77 40 as far as dollar wise probably.
Roughly $40, 740%.
Yeah, and then regarding your EBITDA, but what kind of margins are you assuming I mean, I was thinking more like high <unk> to maybe even 60%, but it sounds like it might be a little door with <unk>.
Acquisition.
Did you say.
Adjusted EBITDA.
What kind of margins are you gross margin gross margin yeah.
Gross.
Margin.
We're still looking at high <unk> as.
As we head into this year so.
We have various initiatives in place cost out or working with vendors. We're looking at footprint. So there's a lot of initiatives going on this year that when you balance that plus what we're seeing on the supply side with cost increases we think we can more than more than offset that so the end of the day we're thinking.
Hi, Hi, <unk>.
And then EBITDA percentage look our target is to get it up.
The 20%, but we're going to have to work our way up there percentage wise, we do as I mentioned in my comments, we become more multinational company, we still have to build out some of our functions internationally, whether it's quality purchasing and things like that so so this year right now.
We'll be up year on year for EBITDA and EBIT percentage I think this year our.
Our adjusted EBITDA was around 9% and I think we will see a couple of percentage points increase on that.
Next year, Yes, I think running in a 10 somewhere between 10% to 12% of the EBITDA pull through is what we're guiding to I know a lot of you out there we'd like to see 'twenty.
20% pull through.
I know some of you have.
Contacted me directly that they'd like to see that I would like to see that too I think it just takes some time to work that through when you're as acquisitive. As we are we just need to get through and get our sea legs underneath us here and make sure we drive towards that but I can tell you internally that is where we're driving we have some some lingering costs that are still.
Involved here from.
From some transactions that are that have gone on and we need to get some efficiencies out of that but I think you will see us.
Strive towards that especially mid teens.
On kind of even where we were prior to.
To the <unk> acquisition so.
We will we will we have our eye on it and we are driving driving towards that.
Got it and my last question is I believe regarding supply chain impact. It was about four $5 million in third quarter, what was that in fourth quarter and what are what is your assumption.
For the first quarter.
On the supply issues.
Yes.
Yes, I think the first half of the year, we assume that it was still lingering.
Is how we rolled it in and I think you see that in us being able to give a little bit of a look see there into Q1 and guiding 20% to 22.
There is still some lingering things going on we talked about our book to Bill riding higher than where we historically have been weak for the last four or five years pre COVID-19 or pre Apis sense have run.
Really right at that one.
One a little little north of one maybe but.
With some of the supply things going on with our customers.
Running that book to Bill more at one one and even north of one one so I think we continue to see that right Brian in the first half that's how we modeled it in.
We think the second half of the year a lot of that will free up.
But the first half of the year, we're assuming it'll be similar to Q4, we don't assume it is going to change dramatically in the first half of 2022 than it was in.
In Q4 Q3 is the one that really hit us.
On that supply side, remember I talked about not being able to get a <unk> and some other things that we were one two in Q3, Yes, Q4 was closer to that one one and we're expecting that for the first quarter or two here this year.
Got it thank you.
Thanks, Dave.
Our next question comes from the line of Eric Katzman from Stifel. Your line is open.
Yes, guys. Thanks for taking the questions just two if I may.
It's just off of Dave's questions on the guidance and you mentioned the first half of the year in the prepared remarks that you're going to have a little bit of the supply chain issues, but just trying to get a sense of your Q1.
20% to $22 million revenue guide would you then.
That's the low point for the year and then we would start to see that.
Slowly improving and obviously the second half of the year, we'll see a more meaningful step up.
Most certainly.
I have always said forest better than three better than two better than want it from a quarter perspective Q1 is always.
By far our softest quarter. So that's why I wanted to give a little insight I don't typically give quarterly guidance, but I wanted to give some insight into Q1, because it is soft and it is by far our softest. So yes, you will see an uptick.
And that's been that's been that way as long as I've been here.
For some reason budgets don't get released whatever it may be Q1 is.
I don't think we're unique in that and in the test and measurement space, but but Q1 is certainly our lightest.
Okay.
And then maybe just switching over to the deal you announced layoffs. This morning, what are the plans for integration I know you said integrations underway and then maybe how did you arrive at the purchase price and then maybe just what the what are the financial criteria that you look at when you're doing acquisitions I know you.
About the strategic sense for the temperature and strengthen sensing, but just wanted to get your thoughts there.
Yeah. This is something.
That we've been talking to for I mean, I, probably first met with the NK T folks maybe three years ago.
And started talking with them in.
I'm talking about.
How it could fit within within Luna This talks.
One point of <unk>.
K T photonics, the entire organization and then really what fit was the leos product line.
In Cologne, So we've really got to know them. This one unlike <unk>, where we were locked down in Covid, we could visit the facility we can start talking to the.
The leadership team, we already have communicated to that leadership team on who within Luna Theyre going to report to.
Their direct reports have already been in contact with them. So this is a lot. We are all over the integration of this right out of the gate.
<unk>.
With.
How we determined purchase price that that's that's.
That's us directly we don't use.
Stifel was involved in this transaction from a investment banking standpoint, because <unk> had a relationship with them, but this was a direct one on one.
With those guys and really coming up with what made sense for us when could we roll this in and what did we see so.
We're excited about filling that in we've been using the <unk> product for for a number of years and.
Is just super critical in this strategic position.
<unk> positioned for growth for us.
There is no no easy customer to sell to the one you already sell to and Leo sells to the same customers. We sell to so it was like op defense as well when we did that acquisition kind of rolling in and making a smooth transition into into integrating them into lunar.
One company is.
Is where I believe you have to get to to recognize the fullest potential.
Thank you good luck.
Alright, Hey, thanks, Eric.
Again, if you would like to ask a question. It seems your press star one on your telephone.
We have no further questions at this time now I will turn the call back over to Scott Graeff, President and CEO Greg.
Great. Thanks, Mary Thanks, everyone for joining us today to our investors feel please feel free to reach out to Jim Allison or myself with any questions. We look forward to speaking with many of you soon and hope to be able to see you in person during this year.
This concludes our call today.
Thank you very much. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
[music].
Okay.
Yes.
Yeah.