Q1 2022 Luna Innovations Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the Q1 2022 Luna innovations incorporated earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded.
To ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today Allison Woody Director of administration. Please go ahead.
Thank you.
Morning, and thank you for joining US today. This morning, we issued our first quarter 2022 earnings press release. 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.
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 in order to focus on what we deem to be a more reliable indicator 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.
The bad or expectations regarding future operating results or the ongoing prospects of the company.
Actual results may differ materially as a result of a variety of factors more complete information regarding forward looking statements risks and uncertainties is available in the 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 of any revisions to any of the forward looking statements to reflect future events or developments, except as required by law. After our prepared remarks, Scott Graeff, our president and Chief Executive Officer, Jim <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.
This first quarter was again full of accomplishments for Luna operationally and financially.
I'm incredibly proud the team for delivering a solid start.
<unk> to 2022 with first quarter results coming in above our expectations.
This recent first quarter includes puts and takes when compared to last year's Q1.
Jean and I will review some of these in our remarks and after we do I hope Youll see that Luna is underlying operational performance is very strong.
For Q1, 2022 we reported total revenues up 7%.
And above the first quarter guidance range, we provided on our Q4 call.
Gross margin expanded to 64% compared to 58% in Q1, 2021 Jean will talk more about this in a moment.
Adjusted EBITDA increased by 400000, and adjusted EPS came in at five cents, a full two cents higher than Q1 of last year.
So let me provide a little color on the puts and takes I just mentioned and what gives me confidence about lunar as future.
Then I'll provide an update on the business lines.
First recall that in December 2020, we closed on the acquisition of op distance with only two weeks left in that year.
At the time of the closing and as we said on our earnings calls opt defense exit 'twenty 'twenty with a large backlog because the revenue recognition from this business depends on delivery and installation of products with.
With the virus raging in December 2020, and availability of vaccinations, only beginning opt a sense had been unable to deliver and install before year end.
As vaccines became available in the World opened up Apis since made significant progress in clearing out the backlog and getting deliveries made to customers. During Q1, 2021 before Delta challenge deliveries again.
In addition, the opt defense business was historically on a different fiscal year, then Luna, where lunar is Q1 was off distances Q4 and strongest quarter.
These combined factors created unusually high Q1 for opt a sense in 2020 one.
When the team and I sat down to review operations and budget for this year. We planned for this knowing that the comparison of our Q1 'twenty two to last year's Q1 would be challenging that is why I'm. So pleased that the team drove solid top and bottom line growth this quarter.
A few additional reminders as context for Q1, 'twenty, two and comparisons against last year's corresponding quarter first the difficult comparison to Bobby opt a sense that I just highlighted second the impact of the investments that we've made and continue to make in order to be best positioned for future growth more about.
In a minute and third the fact that leaves our most recent acquisition only contributed two weeks to the quarter based on the timing of the acquisition close to underscore overall the performance of the business in Q1 and start to 2022 was very solid.
I want to speak for a moment to the investments we've been making as they are critical to our long term success and how we think about and measure that progress.
You heard me say in our Q4 call that 2021 was a year of blocking and tackling we put into place many of the processes and systems that will allow us to scale well into the future.
I told you that we made these investments because as we look to the future we see significant opportunities for strong and rapid growth and so these investments helped to ensure that we are well positioned to capitalize on that growth and can scale appropriately.
On the Q4 call I also mentioned that you should expect to see us continue to invest in our business as we progress through this year and into 2022, and we have done just that.
So when I look at the performance at the end of 2021 and in the beginning of 'twenty 'twenty. Two we're extremely pleased and excited about the technologies products and talent that we've acquired.
We're also pleased with the pay off we've seen from the organic internal investments about which you've heard us talk.
As a result of this I'm not using operating leverage as a metric to measure our M&A because at this point, we're still investing in our future.
Instead, I'm looking at operating efficiency.
How well is the organization performing overall.
Had the acquisitions integrated well into Luna is culture.
We have the right people in place and do they have the right tools required to perform at the highest levels is the sales force right sized what is our backlog do we understand our customers' challenges and are we addressing customers' needs while servicing them with excellence as CEO .
Those are the questions that I want to make sure that we address because if we get the operating efficiency right than.
And then the operating leverage and increasing profitability will quickly follow we are focused on this and are seeing the results. For example, divesting Luna labs frees us up to grow and take on larger contracts and orders simply put we are no longer constrained as a small business.
Since the Limiters imposed on us as a government Spi our contractor are gone so.
So while the divestiture creates a bit of short term top and bottom line GAAP. The freedom created has just begun to result in some larger orders and larger contracts.
In coming quarters, you'll see us build on the traction that we've already begun.
In addition, with respect to our pipeline and backlog across nearly all businesses.
It was what our CLO, Brian solar characterized as a knockout quarter.
As an example for our terahertz products, our order backlog is no longer the typical 14 week lead time, but instead, we are booked through year end 2022 due to the rapid increase in demand for these products.
This impressive accomplishment is a result of tremendous focus and execution by the team.
As we move forward. In addition to continuing the effort on selling Luna is terahertz capabilities. The team is also working on a significant expansion of manufacturing capacity, which is expected to increase four fold within the next year.
There are similar significant pipelines for several of our other product lines.
As you know we've now acquired two organizations leos and after sense and had been working to fully integrate them I've been out meeting with the engineering and sales teams and solving for rupee, our senior Vice President head of sales has been working nonstop to ensure that our sales forces our approach.
Shortly integrated incentivized and highly motivated.
So that now beginning in 2022 we've been able to incorporate the technologies and products from what were previously three distinct companies into one compelling Luna offering.
Let me illustrate what I mean, the dash or distributed acoustic sensing system and expertise that we acquired with Optus sense.
Combined with Leos is leading temperature and strain sensing technology, and Louis one product and technology improvements create an offering to the customer that is more compelling than ever before lunar is no longer only a test and measurement business that generates revenue by shipping boxes off the dock rely.
Mostly on turns in any given quarter with lower levels of backlog. We're now also selling systems and solutions, which are delivered over longer periods of time and are often repeat in nature and come in much larger dollar amounts for.
For example, when a customer comes to us lunar can now provide them with the hardware install the software and run the data analytics and we're now the biggest player in the distributed fiber sensing market there.
The work that we've done an M&A has filled out the breadth of Louis capabilities and allowed us to bundle solutions. This now allows us to do more strategic selling which in turn supports stronger growth.
It broadens, our playing field relative to test and measurement greatly expands the market for our products and results and strategic sales and customer stickiness.
Especially with the combination of leos and after sense, the hardware software and data analytics that we provide creates long term customer relationships.
One example of how we're seeing this evolved just over the past 12 months is by looking at both percentage of repeat customers as well as the size of our larger orders.
When we look at the size of our larger orders in dollars that has doubled over the past 12 months.
So we are continuously focused on building out capacity, thus my comments about investing for our future.
In sum with all three of these leading entities now integrated we're working with customers to do the installations as quickly as possible while continuously innovating our product offerings and fulfilling larger blanket orders the powerful combination capabilities from Luna plus off.
A sense plus leos truly positions us as a world class leader in fiber optic sensing.
Now I'd like to briefly cover some highlights for the first quarter.
For the first quarter of 2022 total revenues were up 7% to 22, and a half million compared to the prior year's quarter.
In sensing revenues overall were flat year over year, but given the dynamic in the first quarter comparison opt a sense that I described earlier, if we exclude that business revenues grew in the solid double digits.
In communications testing revenues grew double digits compared to Q1, 'twenty one driven by record sales for Luna is high speed Communications test instruments. The O V E N O b are.
Overall commercial demand continues to be strong in both sensing and comms test segments and we are looking at a record backlog overall as we exited Q1 driven by another quarter of book to Bill of 1.2.
And we delivered adjusted EBITDA of one 7 million in Q1, 'twenty, two a 400000 increase compared to the prior year quarter.
Adjusted EPS increased by two cents to five cents in Q1, 'twenty two compared to last year's Q1.
Jean will provide more financial details on the quarter, but before I turn it over to him I want to highlight some exciting accomplishments and opportunities in our two business units sensing and communications test.
As you've heard me mentioned before we have a good number of significant customers in the aerospace automotive EV infrastructure and industrial process control industries.
For our sensing business Odyssey, Hyperion terahertz opt a sense and now leaves products.
[laughter].
We made significant progress this quarter in a number of areas with customer orders and expanding existing accounts.
I'll highlight a few of these first we quickly got our newest team members at Leos working globally with our legacy sales teams to identify opportunities to bring a combined solution to customers and I'm happy to say this early work on identifying topline synergies is going very well for <unk>.
Occasions, like power cable and pipeline monitoring.
I am more confident than ever in our ability to take one plus one and make three with the addition of leos to our portfolio second you may remember us speaking about a very large customer order for our Phoenix lasers that we received in 2019.
That order was on a four year delivery schedule and I'm pleased to say that that we have not only met that schedule, but are likely to complete these deliveries by the end of this calendar year about a year ahead of that original schedule stay tuned for some more news on this front in the coming weeks.
Third you'll recall, our multiyear partnership with Megan in regards to work with Airbus, We're making good progress with that partnership and hope to be sharing an update with you sometime this summer.
And fourth our terahertz products continue to rapidly penetrate industrial process control applications like the production of EV batteries.
In Q1, we continued to successfully penetrate this and several other fast growing industrial applications.
Switching to communications testing you may have seen the release earlier this month and now announcing that we secured.
But.
An incremental multi unit purchase water for Ob are 6200.
The portable backscatter reflectometer through a continued strong relationship with Lockheed Martin.
You'll recall that Lockheed is using the Ob are 6200 for Sustainment of the F 35 airplanes.
This demonstrates lunar strong partnership with customers and the traction we've had these leading products.
Shipments on this order will start in the second half of this quarter. Our comps test segment includes both instruments and control modules and OEM lasers.
Sales of modules and lasers account for slightly more than half of all communications test business.
During Q1 'twenty, two we saw growth with several larger strategic wins.
Notable wins include our orders fulfilled for Luna is tunable filters with Rio laser products for customers in medical fiber sensing aerospace and industrial markets and for fast growing applications, such as Lidar in the case of the REO laser.
And there are further growth opportunities for modules to be sold to customers in green energy medical imaging fiber optic gyros as well as the space and satellite communication industries to name a few there's one comment I want to make relating to supply chain, we're still managing pandemic caused delays in both.
Supply chain and that of our customers.
Particularly in availability of printed circuit assemblies.
Delays are specifically caused by semiconductor part availability combined with increasing lead times and prices.
The Luna team is doing its best to manage through this including where possible design changes to replace unavailable components and pre ordering in larger quantities than we would have in the past.
So while there is significant demand from our customers for Luna products, we have felt and expect to continue.
The feel the effects from sourcing of semiconductor parts in order to complete customer orders.
The industry consensus is that these shortages will continue through 2022.
We believe we have sufficient supply to fulfill customer orders for the near term and are focused on managing this impact.
On a related note lunar new composition as a pure play in fiber sensing and measurement combined with our relatively larger size. As a result of recent M&A now allows us to evaluate and optimize our sourcing in a more strategic manner. The team is working on aligning products and categories.
In evaluating vendors in order to best maximize our ability to source efficiently and cost effectively.
We will also we will expect that this will create a more scalable structure and helped to identify and eliminate any bottleneck in our supply chain.
There is no question that the strategic moves we've made over the past 18 months already have had a positive impact on Luna.
One of our key priorities will always be the prudent and thoughtful deployment of capital that hasn't changed but right now and for the near term, we're very focused on the execution to grow our existing businesses.
Before I turn the call over to gene I, just want to reiterate that based on the solid start to 'twenty 'twenty. Two we are again reaffirming the 2022 outlook that we provided on our Q4 call as a reminder that guidance for 'twenty 'twenty. Two is total revenue of one O $9 million to $115 million and.
At EBITDA of $10 million to $12 million.
In addition to help you our shareholders with understanding the new quarterly cadence for Luna given the recent mix of acquisitions and divestitures. We are once again, providing quarterly top line guidance for Q2, 2022 we anticipate revenues in the range of 25 to 27 million.
Yeah.
In summary, the year for Luna is off to a great start and we remain optimistic about 2022 and beyond.
As always I am grateful to the Luna team for their focus and hard work.
And I continue to be confident that Luna has the right strategy and we'll continue to make significant progress against it as we progress through this year.
We continue to be sharply focused on our purpose to enable the future with fiber and we will continue to make the changes necessary to capture the opportunities in front of us I'll now hand, the call over to gene for more financial details on the quarter Jamie.
Thank you Scott before I proceed I want to highlight three topics.
Our reported numbers for Q1 2022 include two weeks of Lee as our most recent acquisition.
Second we have fully lapped the acquisitions of up to sense, a new rich technology. So the results for both companies are now included in organic results and third and perhaps most importantly, I want to reiterate Scott's comments about operating efficiency, that's an important term efficiency.
And what I mean, when I say efficiency is that Luna will continue to invest in capabilities and talent to support our growth while at the same time, streamlining and right sizing where appropriate.
For example, as our products move more frequently from the laboratory to the manufacturing floor in the field, we need to invest in modification of those products and the manner in which we're manufacturing them.
While we are constantly looking to remove redundancies and inefficiencies as we integrate our acquisitions. We are also identifying areas where investments are needed in order to sufficiently support future growth, both near and long term.
Now that we are in this growth phase, we think about operating efficiency rather than leverage because we're investing in the right in key areas for Luna future.
With that as context, let's move on to reviewing this quarter's financials.
As Scott noted our Q1 2022 revenues were $22 5 million compared to revenues of 21 million for Q1, 2021 representing a 7% year over year increase.
The increase is primarily due to revenue generated by our <unk> acquisition.
Gross profit increased to $14 3 million for the quarter compared to $12 3 million for the same quarter last year, representing a gross margin of 64% in Q1 2022 compared to 58% in Q1 2021 the.
The improvement was primarily due to product mix for the quarter in.
In Q1, 2022, we had higher sales of higher margin products in both our sensing and test and measurement products relative to Q1, 2021, which had a higher portion of project revenue.
I want to note here that we do not anticipate a gross margin run rate in the mid sixties going forward, but rather in the high 50% range as we previously stated.
Operating expenses were $16 6 million in Q1 'twenty two as a result of the continued investments we've made and are making to prepare for our next stage of growth. In addition included in the $16 6 million is 700000 of Leos Opex $1 8 million of deal costs related to the acquisition.
Of Leos, and 800000 of amortization related to intangible assets.
We recognized an operating loss of $2 4 million in Q1 2022 compared to an operating loss of $1 6 million in Q1 of last year.
Net loss from continuing operations for Q1, 2022 was $1 3 million during the quarter, we recorded a $10 9 million gain on the sale of Luna labs, including this gain net income for Q1, 'twenty two was $9 6 million or <unk> 30 per share.
Adjusted EBITDA for Q1, 2022 was $1 7 million up 400000 compared to Q1 2021 of.
Correspondingly adjusted EPS increased to five cents in Q1 2022 compared to three in the prior quarter.
Income tax benefit for Q1, 2022 was $1 1 million and was primarily impacted by stock compensation in the lease acquisition, we estimate our 2022 effective tax rate to be in the 22% to 25% range.
Let me now move onto the balance sheet.
We ended the quarter with $10 8 million of cash and cash equivalents compared to $17 1 million at the end of 'twenty 'twenty. One the decrease in cash is due to our acquisition of Leos in March which we funded with the proceeds from the sale of Luna labs existing cash and our revolver.
Our working capital was $47 4 million at March 31, 2022, compared to $49 8 million at year end 2021.
We have a debt facility comprised of two separate financing vehicles, a term facility and our revolver facility at the end of Q1 'twenty. Two we had total debt outstanding of $22 $3 million of that amount $7 3 million in term debt and 15 million was drawn on our revolver.
As a result of the solid start to 2022 and based on what we see already for Q2, we are reaffirming the 2022 outlook that we originally provided on the Q4 2021 call. As a reminder, that 2022 outlook is total revenue of $109 million to $115 million for the full year 2000.
'twenty two.
Adjusted EBITDA of $10 million to $12 million for the full year 2022, and as Scott mentioned, we're providing Q2 2022 revenues in the range of $25 million to $27 million.
With that I will turn the call back over to Scott to open it up for Q&A Scott. Thank.
Thank you Jan at this time I'd like to open the call for questions, Brian Solar Chief operating officers with gene and me at this time and available to address any questions that you may have Tanya. Please open the Q&A line.
Certainly as a reminder to ask a question you will need to press Star then one on your Touchtone telephone.
As a reminder to ask a question. Please press Star then one on your Touchtone telephone and our first question comes from.
Barry sine of Spartan capital Your line is open hey.
Yeah. Good morning, good way to start the weekend.
Couple of questions. If you don't mind first on the list the acquisition.
A number of questions to get us more acquainted with that if you could discuss the product line maybe size it a little bit what was their historic organic growth are the integration status, especially on the topline cross selling between the sales forces and then you know what kind of long term.
Does this now a percent for the company as a whole.
Yeah, Hey, Barry I'll start it off and and I'll, let Brian .
Brian Solar and gene jump in as need be you know leo's was with something a little bit different than say off the sense. For example, you know it was a.
Division pretty much under one roof there in Germany.
Did not come with the big senior.
C C suite type titles that debt off the sense came with.
They those folks all stated NK T. So that allowed us to immediately I mean out of the gate on the the original the first all hands meeting we were able to identify right out of the gate with who the different folks reported two inside of Luna as organizations, so that from an integration of into the structure.
Into our organizational structure with much cleaner.
Then some of the other acquisitions, just because it didn't come with with some of those bigger titles.
So that's worked out really really well they've already been here we've been there.
So that's kind of hit the ground running.
We see those those top line synergies that I mentioned earlier right out of the gate. We there were there were customers that that they were kind of in a holding pattern on because they didn't have some of the expertise that we had vice versa. There's some things that that customers wanted temperature that we couldn't fulfill so we were immediately able to see.
Some of those synergies right out of the gate.
So we see this together, it's really blending into our European operations, you know after sense and Lee us are really running as one organization blended over there.
And.
So continue to drive that Brian if you want to talk about the product and how it's fitting in and some of those growth opportunities that you've seen while being over there.
Sure.
And hey, good morning.
The strategy, we've been executing in terms of our distributed sensing products has been to add.
Modalities, and where performance that that really fill out our portfolio suite with Leo's, what we bring is a long range sensing system.
World class in the market in measuring temperature for instance over a very long ranges with fiber fiber sensors. We can also add with the acquisition distributed strain measurement capability over long ranges. So when combined with the off defense products and Luna legacy products really.
Have the suite now.
Nearly fully covered there will always be areas, we want to improve but now we can really bring a fulsome solution to the market they've.
Had a focus historically on infrastructure tunnels.
Power cable monitoring where lunar.
Luna has not had those longer range solutions in house. So we're marrying those now with our legacy in Das solutions to bring a full.
Suite to the to the market we've already identified as we've gotten our teams working dozens of opportunities that require both what Luna already had in terms of das.
And these are these leos products. So we can actually combine them and even early days here out of the gate drive some some early synergies through fronting these low low hanging fruit that historically.
They've actually been running over the last several.
Several years in those growth rate mid teens kind of growth rates and everybody's kind of had a little impact from COVID-19. So it doesn't necessarily account for the last 18 months, but we expect to get them back on a growth path that similar similar to Luna and.
We've seen even in the early days here as I've mentioned, we've seen the capability to do that.
So does that put Luna as a whole on a kind of a mid teens long term growth.
<unk> yeah.
Yeah, you know when we had.
When we had the Luna labs business with US we believed we had a mid to upper teens growth business, Barry and now with the divestiture of Luna labs, and the pickup of off the sense and Leos and we believe that is a high teens to low twenties and that's all.
Ganic and that's over the next.
12 24 months.
And obviously getting out of Covid and supply chain constraints.
Certainly certainly you know and.
We certainly are our hedging ourselves a hard on that especially from a guidance perspective, just being careful with that but.
But we do believe that what we're seeing in the book to Bill in the amount of business.
Certainly that that is where we believe we should be.
Okay. My second question, you mentioned that you're not just shipping no longer just shipping boxes off the loading dock you now have a services component.
To your revenue stream, so maybe more visibility on that because you know that presumably has higher margin potential what exactly are you doing presumably those are recurring contracts what kind of margins of those carry and what percent of revenue is that a is that today.
Yeah, well you know you've heard us talk about it for several years.
About that we believed we needed to be in the pockets of our customers and providing them that service after the installation.
And when we talked about this we did kick off a program internally that was moving slow slowly.
But in the acquisition of opposites and Lee Us they had already been doing this so it really kickstarted across all of our all of our products in moving to this not only you know kind of the box sale, but the installation the servicing.
And the data analytics so.
It's still a small portion of our revenue right now, but it is a huge opportunity for us that will carry a larger margin for US you know you've seen it this quarter just like we saw in I think it was maybe Q3 last year, we'd be pop ing and we show a 60% to 64% gross margin then it.
It goes down to 58, we believe overall, we're trying to guide to that upper fifties low sixty's is where it will be average wise.
It really does relate to that product mix. If we have you know a quarter more a quarter that's bigger on having some service revenue. It does carry a higher revenue higher margin. So.
But it's a smaller portion right now.
I don't know, Brian if you want to talk a little bit more about how you know these guys were well sophisticated in this in this position and it's what excited US about these acquisitions that they already had the 24 seven monitoring in place, yes, So just to add a little bit maybe more detailed out there if you look at the.
The revenue mix for us.
Just look at this year for instance, annualized about fifth $45 $50 million of that revenue is going to have a a.
<unk> flavor to it which is to say that we will deliver hardware software and service to our larger projects say, a pipeline or a bridge or tunnel et cetera, so of that 50 million predominantly still.
Hardware and software, but you might see 15%, 20% of that actually service in terms of field installation and turn up.
And what we're trying to do from a strategic perspective is to take that service element and make it purely recurring so that we stand today, that's not strictly speaking a recurring revenue element because it comes with the system and the project delivery. Once that's done we go onto the next one but we do have about 5% of our total revenue.
And kind of a purely recurring flavor today that is to say after the project is done.
And as it lives on for years in the field it produces revenue for Luna through.
Service warranty software et cetera, and that's what we're looking to grow so we're looking to take that 5% over the next couple of years make it 10% just as a starting point.
Okay and then my last question I think I hear you say that you're investing in increasing your manufacturing capability I think you said a forex.
So where are you doing that are you knocking out walls you could you do that in your existing footprint and if I combine that with the comment you made on terahertz being sold out through year end, obviously you'd want to take a look at increasing capacity. There. So can you give us a little more color on what you're doing manufacturer.
During and also include the impact on capital spending as a result of that.
Yeah sure you know if you remember when we when we sold the Pico metrics business two to May come back in 2017.
We held on to that terahertz piece of that business out in Ann Arbor.
And folks like Steve Williamson, who were key in instrumental we just felt like it was being starved a little bit and so we invested some money into that because when we would talk to customers who were using the terahertz system. They were overwhelmed they thought it was the greatest thing ever and it just took some time to get some processes in place.
And to engineer out some things of the laser and do some things and and sure enough that those investments are paying off in spades now you've heard me mention.
<unk>.
We now are our quoting delivery times well into Q1 of 2023 for the terahertz products and that's not because we can't get parts. We can get all the parts of the world. The problem is capacity. So we have to increase capacity. So we're doing that we're building out additional facilities.
Our Atlanta facility to make the terahertz products to make the laser so and we were able to make about one of those a week.
In Q3 will make two of those are weak.
And in Q4 or into Q1 really into Q1, we're going to make four of those are weak. We have all these processes set up that that.
You know, our our senior Vice President operations, Jackie Klein has been all over setting up these processes, but that's that's the real expansion.
And being able to quadruple our output of these terahertz you know we are.
Seeing more business than than than we can handle right now.
And we see it continuing to grow once we've been able to get that that product really out get the right sales approach to it the right marketing approach.
Put more engineers around it so we're seeing macro the real laser.
You know again, we're quoting many many quarters out for the for the Rio laser Theres a lot of opportunity there that we're expanding our facilities to be able to handle this.
It's a good problem to have.
And does that include expansion in Virginia, and then also the Capex impact on manufacturing expansion.
Yes, Barry it's gene.
Just to highlight a couple of things that Scott said, there you know there's two major areas. This year that are kind of require more than our normal capex and apps.
Building out not just our terahertz product and moving that to to Atlanta, but also our laser side.
So normally we're about we've been running about 1% of revenue. So we would normally be about $1 million or so dollars. This year. This year, we'll probably double that maybe even a little more depending on the timing.
And then going forward, we're modeling instead of the one to one and a half where modeling more like a 2% going forward because we do see a lot of growth.
Coming down in the pipeline.
Okay, Great. Those are my questions. Thank you gentlemen, thanks Barry.
And our next question comes from Alex Henderson of Needham Your line is open.
Good morning, Alex.
Hello.
Yeah can you hear me again Alex.
Yes.
Yes, my headset wasn't working properly headed off mute.
Hi, guys.
So just following up on that last question and I apologize for the Speaker Pons, who said that wasn't working properly.
But.
Can you quantify the terahertz.
The size of that business.
Today just.
Just.
To help scale it for us.
Yeah.
It's still it's a smaller portion of our overall revenue. If you look at where we guided I would say, it's right in that 10% range or so.
A little bit less maybe but but growing you know kind of in that call. It 8% to 10% of our overall business is in the terahertz. So.
But it's coming off of a small number and it's in the last two years, it's in essence doubled year over year.
Well that sounds like a if you're getting the four week from one a week that that's a pretty big increase in the 'twenty three revenue stream on a year over year basis.
If I'm doing my math right that alone could give you a double digit increase in revenues.
Yeah, I mean, I think if we continue to be and again like we've talked about before and I tried to mention on the call here going going getting away from the onesie twosies in being boxcars into into selling multiple units getting specced in.
To a lot of these these organizations is what's driving some of this I mean these are no longer someone's, placing an order for one unit. We're now getting orders for 810 units the terahertz product sells.
In the mid 150 range or so.
So getting an order for 810 units is a is a meaningful is a meaningful order.
Yeah, just going back to the visibility on that so that's.
That's a pretty big increase in capacity.
Youre sold out through year end as you get into the first quarter of next year and I didn't realize this is starting to look out.
Beyond a reasonable level of or the thought process, but do you think you will have.
You know a half a year plus of visibility to that business. So that you can be confident that that production will be.
Adequately Utah.
Utilized in 2023 2024 timeframe.
Yeah, Hey, Alex it's Brian we do.
The nature of the customers that are the big customers that are filling the capacity.
Are such that we have really strong visibility into where these systems are going what they are being used for why they're needed and how many.
They need so yeah, we have really nice visibility into that.
You talked about increasing your AR.
Capacity.
On inventory.
Hi.
Ordering more and purchasing commitments.
Can you talk about the.
<unk>.
The degree to which that inventory that you're bringing in is a safe to stock, let's hypothetically say we went into it.
A recession globally would you have any risk.
That inventory having obsolescence.
Or is this stuff that is just so fungible that youre not at risk at all on that inventory carry.
Yeah, our inventory is primarily.
Electronic.
Wards and other electronic components, and so theres a couple of things going on to answer your question directly we don't think so because we see what's not like we're ordering two years' worth we're just ordering out a little further than we normally would but also you know Scott alluded to in his comments as we.
See this growth.
Coming over the next couple of years, we're doing a lot on our procurement side of operations and so we're putting in a more global view and working on combining our buys and and working with.
Some other other vendors.
To utilize our buying power. So there's a lot going on in the inventory right now so I think you'll see we're up a little bit on inventory right now, but we expect that too to hold steady the inventory as our sales are increasing.
And we start to consolidate some of our commodity codes and things like that.
Just going back to EMEA, given the macro conditions there.
Can you talk about any exposure you think you might have to a meaningful slowdown in that economy.
Yes, a lot of times, you remember with the products that we're selling.
Or are kind of the the next thing that people are doing so it's for safety, it's for efficiency and so certainly we would that could impact us, but a lot of these things we don't really see.
Having a huge impact and you know when you look at our overall sales EMEA is roughly around 20%, but we're not seeing that right now.
Coming through the sales team coming through or orders or coming through our backlog.
Just just to be clear you price in dollars in EMEA.
For the most part it's a little bit.
<unk> business is.
More in the euro, but a lot of the opt a sense again, when you're in the oil and gas industry. A lot of that is in the U S. Dollar.
So no currency impact from the double digit decline in the euro currency versus the dollar we have we have seen a little a little bit there I think it may be a couple of hundred thousand, but but nothing super significant at the moment.
Going back to the backlog for a second and then I'll cede the floor.
So the backlog is that a function of supply chain.
Causing delays in shipments or is that just simply you've got a very robust orders because you've got great products I assume it's probably a mixture of it could you talk a little bit about.
That record backlog in the one two book to Bill the mix between change in duration versus a real order growth.
Answer the first part of that it's not related to supply chain, it's more related to a really robust pipeline for orders.
So no duration issues, there, though gee I can't get the part and therefore I'm going to order further out we're not we're not yeah, we're not seeing any of that Alex perfect great. Okay, I'll cede the floor. Thanks alright.
Alright, Thanks, Alex.
And our next question comes from Chris Sakai of singular research. Your line is open.
Hi, good morning.
Hey, Chris.
It.
Just I had a question on.
The growth of the book to Bill ratio now what were the main drivers there.
And how much do you expect that to grow.
With Lee Leos.
Coming into full swing next quarter.
Yeah.
I think we've mentioned before historically.
<unk> has run at a at a flat one book to Bill.
As long as I can recall certainly the last five years and really that has.
Obviously with Covid and some other things going on.
It has crept up but we're now seeing more of a a one point to where a lot of demand for our business and and just not you know not able to get it necessarily off the dock with some larger orders.
Shifting from just a box seller.
Two solution seller and needing to get out into the field and things like that we do see that book to Bill Leo Springs at same kind of dynamic to it that opt a sense brought a solution type of sale.
You know where.
Where it requires it's a bigger order and it requires getting out to install not just getting the product off the dock, but actually getting out into the field and doing the installation and things like that so we do see that going up Brian If you want to talk a little bit about you know, we obviously track by business by by location what are what our book to Bill.
<unk> is an and.
It's larger in some areas and lowered others.
So I don't know if you want to give a little more color on that Brian I know you have yes, sure the way our business runs and the seasonality actually tends to be a little lower book to Bill in Q1, as we harvest the higher book to bills. We have at the end of the year in Q4 of.
You can see is a little bit of that shift in the business Scott was talking about here and that.
We're still for quarter, one here in that 1.2 range, which means where we're booking.
Business.
For not only delivery in this quarter, but for for the balance of the year.
Sitting backlog for for Q1 was in the 40 45 $46 million range.
Certainly there will be quarters, where we you know we try to harvest that and.
Celebrate the actuation of that revenue, but in general as the business has shifted towards a larger portion being more of a project nature, you're just going to see more larger orders that that will affect over a longer period of time versus the.
The legacy business, where you know we'd get an order in on.
On any given day and typically had the capability to ship that out and recognize the revenue within within a week.
And theres nothing wrong with either they're both good but it's the mix that's really driven the higher book to Bill.
Okay great.
And to go on the acquisition of Leo's, you know how is that being integrated.
Are you seeing any extra costs in Q2 from that.
Yeah, I like I said earlier I mean, we that was a an immediate integration into Luna as organization, we had identified the four or five key business.
Business unit heads, there and rolled them right into to Luna is existing from a sales marketing engineering.
Operations perspective rolled immediately into our organization and those are key leaders were on site the day that we announced it.
To all those folks so that is done really really well and moved a lot more quickly than some of our other acquisitions like I said since they it rolled in it was so synergistic with our with our.
With our optics center business.
It was it was it was.
Critical to move quickly on that Brian I don't know if you want to talk about we continue to still you know when I say, we're fully integrated we're integrated from a from a structure perspective, there's still some things that need to be done from a from an it perspective to make sure. We get on all the same system from a finance perspective to get on the same systems, but this is moved very quickly in <unk>.
<unk> to identify immediate synergies.
You've heard me say before when we look at these are these acquisitions.
I don't like using the word synergy to justify any purchase price, but obviously, we all we all want synergies from a cost perspective and from a from a revenue perspective going forward I, just don't like them when people try to use them to justify a certain price, which we will not do so we do believe that there are cost.
Synergies and we do believe there are revenue synergies that we're seeing immediately.
The teams are fully integrated into our management structure.
So all the functional elements in terms of sales marketing operations et.
Etc Engineering product development are all integrated within my team and.
Scott.
We've got everyone working together to go as I mentioned previously to go after those.
Low hanging fruits, if you will of the synergies and we've identified right out of the gate within the first couple of weeks we've identified.
Over a dozen opportunities where we can bring a combined solution. So that part is going really well you know we're operating under a TSA for a few more months to get the rest of the back office things fully fully connected inside lunar that just takes some time in terms of the ERP systems, and the finance systems et cetera, but all in all it's gone very smoothly.
Travel has certainly helped immensely and getting the teams working together and.
Yeah.
I personally in my whole team very excited about the addition of this team and these products to Luna, Chris It's gene.
You'll see a couple of hundred thousand.
Over the course of Q2 and Q3.
For third party integration expense that we'll have particularly around the <unk> side, we're using.
Video digital again, they helped us with up to sense and so there will be a little some some deal some integration costs, you'll see in Q2 and Q3.
Couple of hundred thousand probably.
Okay.
Great. Thanks for the answers.
And our next question comes from Dave Kang of B Riley.
Your line is open.
Alright. Thank you. Good morning. My first question is may have missed it but did you give the mix between sensing versus Comcast.
Which has a better pipeline.
I don't know if we give a mix I don't know.
We did not give the mix.
Typically its two thirds sensing and one third comms test.
Both pipelines both our backlogs are very strong you know with with the acquisition of Leos and it only represented a couple of weeks, but with opt a sense. You know, we certainly guide to sensing makes up about two thirds of the of the revenue.
And it and it was about 60 65, 64% or so so 65 35, Dave is is the mix between sensing to comms test, but both.
Backlog on both businesses both met market segments here are are very very strong.
Got it and regarding your 2022, our revenue outlook, how much of the OS.
Are you expecting to contribute.
We talked about that.
When we are when we announced the deal I think you know 2021.
You know they did somewhere in the 12.
12 million Euro type of a business in.
From a guidance perspective, we've kind of run that flat.
In our guidance, but we believe that there is opportunity now that we've gotten into it.
We put together these numbers and came out with the annual guidance.
For Luna.
Prior to really being able to bring them across the the.
The fence here and bring them in and they've spent their management team has been here.
Spending several days in deep dives and things like that with all of luminous management and down into into our organization. So we feel very very strongly about.
The value add that they will have to our topline.
And the synergies going forward with the other businesses that we have.
Got it and then my last question is regarding our supply chain I don't know if you talked about the impact both revenue as well as on your margins.
Yes.
Yeah, Hey, Dave.
From a revenue perspective, what we're seeing is about 5%.
At the topline.
We were anticipating a little bit more at the margin line, frankly, maybe 50 basis points.
50 to 100.
But what you saw in our results was that our combination of the team really getting on top of these issues and in the mix being as strong as it was towards higher margin business.
It's fair to say no impact at the margin line in quarter, one and we did.
In Q1 implement a price increase to help offset that did not see the full impact I don't think here yet in Q1 because.
Obviously, we have purchase orders in the pipeline so.
So again, a couple of things mitigating it with the price increase also with pulling our purchasing globally together and renegotiating some opportunities.
We're actually hoping to keep our material costs flat is not see a little bit of a benefit as we get through the year.
So.
Okay.
Got it thank you.
Alright, Thanks, Dave.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one our next question comes from Charles Knoles.
And then that Sir your line is open.
Hello, Scott.
And group.
The report of my death was an exaggeration by Mark Twain comes to mind, let's say the stock is up tremendously pre market.
<unk> chuckled, when I remember Scott, saying you can't go after every rabbit hole.
Back when I first went up to meet with Dave and Rob and Greg.
They told me about this let Abbott labs.
Lab study.
Where they can put the terahertz determined with a 100% accuracy the purity of pre packaged pharmaceuticals.
And that does seem like.
The way they check drugs one out of every thousand for human in every 10000 per veterinarian.
That would be a great thing, but it's just another rabbit hole I wanted you to know about.
I get nervous talking I'm really happy.
What youre doing the one question I sort of had.
With this money.
Extra that seems like you have I know, you're having to do a lot of incentive stock incentives to keep scientists and find new ones. I was just wondering if you do have any plans in your buybacks too while the stock is low.
To offset these incentives.
Yeah, well you know.
Thanks, Chuck I appreciate and I think what you're seeing and I know you've followed this for a long time and I think the hard work and dedication that was put in.
All through the years by by folks like Steve Williamson.
Who really is the inventor and brains behind a lot of this.
What he did early on with guys we have the greggs.
That are out there that have done phenomenal work the work that Rob supported for years.
You can't underestimate.
The many hours that Earl dueling put into this.
It was it was you had to be a believer in this and and I'm, telling you boy. What we're seeing now is this is just taking off and being beat becoming instrumental to the customers that we're working with.
Some of the big Big companies out there. This is a critical piece to be measuring.
Not just thickness, but density in real time on their production lines. So this really really is is paying off in regards to stock buyback.
Believe me, we would love to do.
Some of those things. We just you know these things that we've done recently these acquisitions that we've done we chose to take the approach of funding those off of our own balance sheet. So using cash plus any kind of divestiture that we could do and this all started back in 17, when we divested Pico metrics and you know and since then.
And then opto using that cash to redeploy.
In our space.
To reiterate this fiber optics fiber is the future.
Enabling the future with fiber has been our north star. If you will so I don't we're really not in a position right now.
We're in a comfortable position with our balance sheet. We just don't believe that would be a good use of our cash right now to do that from it from an from a from a lockdown perspective look these things have to happen we have to make sure. The market is crazy out there with the phone calls that we all get.
You know in in in trying to entice us away.
And big companies are paying big incentives to to to make you hold to walk away from what you're walking away from and so you have to firm up the foundation pieces. You know these things that that we have you know guys like gene and Brian and solvent. These are foundation blocks of the company along with.
And many many others in the organization, we we reached down deep in the organization to try to keep them seated and not return those calls and we'll continue to do that we have to do that that's and in the company's best interest and certainly in the shareholders' best interest to make sure that there is no cracks in the foundation. So we will continue to do that and.
And then there'll be a time when when it makes sense to you know as you know historically we have done.
Stock buybacks.
You know repurchased but but now is not the time to do that we got to make sure that that foundation.
Not doesn't have one hairline crack in it and that's that's that's my focus right now.
Charles its Jean I would tell you something you can get excited about today is with all these acquisitions and I've known you followed the company for a long time, where we're at today is we have the D. A S technology, the Dts technology and the classic lunar stressed and strained technology.
And we believe we're the only company that has all of those and so we have products today and IP today for all three of those and then what we have are the engineers experts in all three of these through all the acquisitions, we have the expertise and the engineering and on the manufacturing side to combine <unk> and <unk>.
Well up to solutions for customers in the future. So we have products and IP for today and we have.
The people and the talent that we need for what is going to be coming down. So I would just pass that onto you.
Yeah, I've enjoyed reading the buyers of all of your cash quite accomplished.
I hope you have some fun too.
Yeah.
Yeah.
Let's get out of this pandemic and maybe we will get back to fund, but right now there's a lot of and I think you know again setting that strategy was the best thing that we've done five years ago to be able to to really stay the course through this and put the processes in place you know look I mean, we've done.
What is it five or six acquisitions and three divestitures over the last five years. So we stay focused on what we're trying to do to make this a pure play and I think I think we're there.
Thank you.
Great. Thank you.
Again, ladies and gentlemen, if you do have a question. Please press Star then one.
And I'm showing no further questions I would now like to turn the conference back to Scott Graeff for closing remarks.
Alright, Thank you everyone for joining us today with a great start to 2022 and the team's executing well we are optimistic about this year and our long term potential. We continue to believe that we are on the right side of a market shift in trends towards light weighting and five G.
And we're seeing Luna as offerings, helping to accelerate these trends.
So we will continue to invest in our business, ensuring we have the right leaders and that they are appropriately supported and empowered.
With that thank you for your attention on today's call and I hope to see some of you next week in California at the B Riley conference feel free to reach out with any questions.
Tanya that concludes this earnings call.
Thank you, ladies and gentlemen, thank you for participating.
You may now disconnect.