Q3 2022 Luna Innovations Inc Earnings Call
Good afternoon, and welcome to the Q3 2022 Luna innovations incorporated earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Allison Woody Director of administration. Please go ahead.
Good afternoon, and thank you for joining us today after the stock market close today, we issued our third quarter 2022 earnings Press release. In addition, we posted to the Investor Relations section of our website a presentation with supplemental information for the quarter. If you do not have a copy of your release or the supplemental materials. Please.
Check our website at <unk> Dot Com, we will also post a replay of this call through our website.
Some of our comments and discussions today are based on non-GAAP measures. These adjusted numbers exclude the effect of certain noncash expenses and other items. The adjusted result are a supplement to the GAAP financial statements.
He 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 uncle.
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 <unk>.
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 and any revisions to any of the forward looking statements to reflect future.
Or developments, except as required by law.
After our prepared remarks, Scott Graeff, President and Chief Executive Officer, along with Chief Financial Officer, Jim that stroke, and Chief Technology Officer, Brian Solar will be available to take your questions. At this time I'd like to turn the call over to Scott.
Good afternoon, everyone and thanks for taking the time to join our call I'm excited to be with you today announcing quarterly results demonstrating strong top and bottom line growth and progress against our operational goals. This quarter's strong performance underscores that we have the right long term strategy.
And that we are continuing to capitalize on the opportunities in front of us.
On calls during the first half of this year I outlined how the investments we've made and continue to make are critically important is setting us up for future growth.
These include investments in both infrastructure and systems as well as adding capabilities through our recent acquisitions.
You will see some of the benefit of those investments and acquisitions start to come to fruition in this quarter's results.
To support future growth I've made some internal changes, adding ever Hartman as head of human resources, naming Brian Soller, as Chief Technology Officer, and EVP of corporate development and.
And moving Jackie Klein head of operations and solvent Faruqi head of sales to report directly to me in addition to gene and Allison.
We have a strong executive team now in place to help us grow Luna into the future.
On earnings calls earlier. This year you may remember that I mentioned, we still have some work to do in our project based business.
The sense and Leafs, which in prior quarters had experienced delays in several large customers taking delivery of products.
I'm happy to say that most of the delayed projects are back on track, meaning we are able to complete the install and booked the revenue in the corresponding quarter.
In addition to creating customer stickiness. These larger project based sales gave us good clarity into future shipments.
Our book to Bill for Q3 helps us feel confident about reaffirming our 2022 outlook more on that in a moment.
Jim Brian and I each visit our overseas operations recently.
And in fact, I just returned from a visit to both our German and UK offices.
The team is excited about the growth opportunities and leveraging Luna as assets to create that customer stickiness.
And it is clear that there is a great deal of value to be unlocked in the combination of assets and IP from Leo's and off the sense and the existing assets at Luna.
We remain very optimistic about the increasing potential in these assets and excited about the future.
With that I'd like now to move to on to discuss highlights of the third quarter financials, and then provide an update on operational accomplishments.
For the third quarter of 2022 total revenues were up 43% to $29 2 million compared to the prior year's quarter on a constant currency basis revenues were $30 1 million or up 48%.
On a purely organic basis, our total revenues grew 25% in Q3 2022 versus the prior year period.
For the first nine months revenues were up 23% versus the same period in 2021 on a constant currency basis total revenues increased 25%.
We continue to experience strong demand for our lunar products in fact, we realized robust bookings growth in the third quarter 2022 versus last year.
Our gross margin was 58% versus 62% in the prior year third quarter.
While gross profit increased in Q3, 'twenty two versus last year. The decline in the margin rate was largely due to product mix based on the project based sales I mentioned earlier.
We do however expect that the blended margin rate for the full year 2022 will normalize somewhere around 60%.
We reported adjusted operating income of $4 2 million for Q3, 'twenty two versus one 7 million for Q3 21.
Adjusted EBITDA was $4 5 million in Q3, 2022 more than double compared to last year's adjusted EBITDA of $2 1 million and finally, adjusted EPS was nine cents per share tripling. The three since we reported in Q3 2021.
Before I moved to talk about the businesses in more detail I want to emphasize the great work and the challenges that the team has worked to mitigate if not overcome completely so far this year.
Our mission remains the same to build our capability as a company with blue chip customers and to solidify Luna as a clear leader fully focused on enabling the future with fiber.
We will continue to invest capital in our businesses through this year and beyond because as I've said in the past the opportunities are virtually limitless and as always we will continue to be prudent manager managers of our expense structure.
But it's all about investing in the right areas at the right time and capitalizing on opportunities for rapid sustainable growth now, let me discuss the businesses in more detail.
As a reminder, Luna reports as one segment, but our capabilities fall into two categories fiber optic sensing and communications testing.
For the third quarter 2022, our revenue growth was driven by a full quarter of <unk> contribution and solid sales in the legacy businesses of sensing and comms test.
As I mentioned, our bookings growth once again exceeded our revenue growth in Q3, 2022.
So, let's first discuss sensing where we use the fiber as the physical sensor to create a smart materials and structures. This includes Odyssey for short range high resolution applications Hyperion for long range discrete applications das.
<unk> acquired through off defense for long range continuous acoustic monitoring D. T S.
Wired through leos for long range continuous temperature and strained monitoring and terahertz a technique that leverages fiber technology to produce terahertz waves used to measure layer thickness and density of opaque materials.
We achieved very strong double digit growth in revenue versus Q3 last year, driven both by a full quarter of leos as well as strong demand for legacy Luna products in fact, Luna legacy Odyssey, Hyperion and terahertz product lines, each contributed strong double digit sales growth.
Our progress relative to strategic growth areas within sensing continues to yield results.
We achieved several key strategic wins in Q3 in infrastructure security and energy markets.
And bookings for tear hurts more than doubled in Q3 2022 versus the same quarter last year and is up strong double digits for the first nine months of 2022 compared to the prior year period.
While terahertz revenues remain a smaller fraction of our total sensing revenues. The growth. We are experiencing these applications is a strong indicator that our strategy to get out of the lab and focus on growth in higher volume production and monitoring applications is starting to have a positive impact.
Our distributed fiber sensing solutions contributed strong double digit revenue growth in Q3.
As we mentioned on our last call we experienced project delays that pushed approximately $2 8 million in this segment to the second half of the year some of which we recognized in Q3.
We continue to streamline the leos and off the census project based sales approach as the assets continue to become fully integrated into Luna.
Our Q3 results are proof positive that we are making strong progress and these acquisitions continued to be a key strategic part of Luna as overall offerings and growth.
I wanted to highlight a few key wins in sensing as we continued to experience market acceptance and adoption of our fiber sensing technology into monitoring applications for critical infrastructure.
We won a project for a large offshore wind farm that combines both our dash and D. T. S solutions to monitor the high voltage cables for safety and Operability, adding significant value to the overall operation.
We want an international airport perimeter security project in Eastern Europe , adding to our list of major infrastructure security wins, we are monitoring significant size perimeter with a single redundant system that provides early warning of intruders to cameras in real time, we.
We're awarded a contract to monitor a water storage tank farm in the Middle East where water is a precious commodity and these sites are critical to our nation's water operation.
We continue to provide security systems for oil and gas operators in high risk operating locations with New awards in the middle East at well pads sites for perimeter security.
We want our leak detection contract for a water pipeline in the Western U S oil and gas operations produced significantly more water than oil from the ground and this often toxic byproduct needs to be piped away and disposed of correctly.
After some recent high profile leaks that were costly and controversial the industry is seeking to better monitor these lines with leak detection.
Fiber optics, and specifically lunar as unique products are one of the few technologies that can handle the highly transient nature of these pipelines and finally, the continued successful penetration of industrial process monitoring markets with our terahertz product as I mentioned earlier.
Moving to Comms test revenues grew as expected in Q3 2022.
We made strong progress from an operational standpoint.
As a reminder, this area includes our high end line of communications test products, such as the O V E N O B R as well as our polarization measurement and control suite and the REO laser business that we acquired through off the sense.
With the addition of recent acquisitions. This business is now approximately 50% test and measurement and 50% optical components and laser modules. The latter of which are used for a variety of photonic applications, such as medical devices sensing systems and lidar.
Our.
On our last call we discussed a major win for our fiber test equipment, securing a large multi unit Ob are 62 owner order with Lockheed Martin in continued support of the F 35 aircraft.
Deliveries of these units began in Q3 and will continue through year end, we are expecting significant further follow on orders for this application soon and we'll keep you updated on our progress as this is an important element of Luna is growth within the comms test area.
Another very important highlight for this segment includes our announcement last month that we signed a $14 2 million dollar multi year contract with our long standing partner intuitive surgical.
This new agreement provides for the supply of critical Photonics sub systems manufactured by Luna and specced in as part of the F. D. A approval process for intuitive next generation robotic surgical system.
This is a great example of how many of our products are becoming critical components in large and growing market applications, such as surgical robotics and it speaks directly to our growth potential.
We are excited to expand our relationship with intuitive surgical and support his visionary leadership in improving human health and surgical outcomes.
Luna is honored to help advance this leadership by supplying critical technologies over the years to come.
And finally within Comms test, we also had solid double digit sales growth in Q3, 2022 for Luna polarization modules driven by strong sales associated with the intuitive surgical contract that I, just mentioned as well as strong sales of our gyroscope coils.
For military navigation applications.
I want to provide an update on the ongoing effects of the supply chain challenges.
We are still experiencing pandemic caused delays in supply chain and particularly in printed circuit assemblies delays are specifically caused by semiconductor part availability combined with increasing lead times and prices.
The Luna team continues to manage this as best as possible, including design changes to replace unavailable components and preordering in larger quantities than we would have in the past.
So while there is significant demand for customers for Luna products, we have felt and expect to continue to feel the effects from sourcing of semiconductor parts in order to complete customer orders. The industry consensus is that these shortages will continue into 2020 three we believe we.
Have sufficient supply to fulfill customer orders for the near term and are working hard on managing this impact as much as possible.
While we aren't prepared to talk to provide 2023 guidance until our Q4 call with only two months left to go in the year I did want to highlight three areas of focus for us next year.
First we are actively exploring new markets to add growth long term more on that in 2023 and as I've said many times in the past the options for our technologies are virtually limitless. It is up to us to prioritize and catalog capitalize on those opportunities.
<unk> appropriately.
Second we continue to make progress on integrating systems from the various acquisitions, we are driving hard to complete what we call one Luna and.
And third we are starting to see our strategy pay off as we consistently win larger orders as we've discussed over the past several years and expect this to continue into next year.
A few recent examples of large customers that will move the needle for Luna in 2023 include Lockheed Martin Northrop Grumman Airbus and intuitive surgical.
We remain committed to serving these partners and all of our customers with excellence and our sales teams will continue to be trained and incentivized to sell our lunar suite of solutions as opposed to simply individual products.
In summary, this quarter underscores the customer demand for Luna products remains strong despite ongoing global challenges with supply chain and sourcing.
And while I am very pleased with the third quarter results and proud of the Luna team I also know that we can't rest on these results.
As I mentioned on last quarter's call. We still have some work to do to grow profitability, particularly of the acquisitions at a pace that is acceptable to both me and my executive team. This quarter's results are a good start to getting there.
You should know me well enough by now to know that I'm never satisfied and then team and I will keep pushing the organization to execute against our long term objectives to capitalize on opportunities and to perform to excellence, while delivering strong growth to our shareholders bottom line, we continue to.
Focus on blocking and tackling and accomplishing our goals.
So with only two months of the year left and three quarters behind us we feel comfortable reaffirming our outlook of total revenues of one O $9 million to $115 million and adjusted EBITDA of $10 million to $12 million.
I do want to make one observation about the size of the revenue range. As you are aware our recent acquisitions primarily include large project based orders.
While the majority of these transactions are already included in the backlog the timing of the installation is largely controlled by our customers.
Therefore, the revenue recognition can swing from one period to the next this means that even with just six weeks left to go in the year revenue could shift to 2023 and is why we are keeping a broad revenue range.
I'll now hand, the call to gene for more of the financial details Jamie.
Thank you Scott as a CFO , it's always a great quarter. When you don't have a lot to explain and I'm very pleased that this quarter is just that a straightforward quarter with excellent results.
Q3 represents what we've been working so hard to accomplish during the past 18 months and gives you a glimpse of what kind of growth and results Luna is able to accomplish now and in the future on a more normalized basis. In fact, it was one year ago in Q3, 2021 that we moved and classify.
<unk> Luna labs as discontinued operations.
So when I provide comparison figures against last year I'm, referring to the reported numbers that exclude Luna labs revenue gross margin and operating expenses.
With that let's dive right into the financials.
As Scott mentioned, our revenues for Q3, 2022 were $29 2 million compared to revenues of $20 3 million for Q3, 2021 representing a 43% year over year increase a full quarter of leos and solid legacy Luna product performance in Q3, 2022.
Contributed nicely to top line growth.
Our reported revenues were impacted by the dollar to euro and dollar to pound exchange rates on a constant currency basis. Our revenue in Q3, 2022 was $30 1 million or a 48% year over year increase.
For the nine months ended September 32022, our revenue was negatively impacted 1.6 million by exchange rates on a constant currency basis, our nine month year to date revenue for 2022 is $79 4 million or a 25% year over year increase.
Within sensing year over year revenue growth of 80% was driven by our project based businesses after sense in leos and strong performance from Luna legacy products.
Within Comms test Q3, 2022 revenue grew 6% compared to the prior year quarter.
Gross profit was $16 9 million for Q3, 2022 compared to $12 6 million for the same quarter last year, representing a gross margin of 58% in Q3, 2022 compared to 62% in Q3 2021.
As Scott mentioned, while profit dollars grew the gross margin rate was impacted by mix as our project based businesses, where a higher percentage of total revenue as.
As we mentioned last quarter, we still expect to finish 2022 with a blended gross margin rate of somewhere around 60%.
Operating expenses were $15 4 million in Q3, 2022 versus $12 6 million in Q3 2021.
$2 3 million of this increase was driven by the Opex of leos and its associated amortization.
Over half of our year to date increase in operating expenses is related to leos, including its amortization.
I indicated on last quarter's call that Q2, 2022 was a high watermark for our Opex because it was our first full quarter with leos and didn't reflect the impact of cost synergies we began implementing.
The reduction in Opex this quarter versus last year was largely due to the result of Swift and preemptive measures taken proactively to reduce expenses.
We continue to focus on identifying areas of opportunity for increased expense efficiency without sacrificing infrastructure product quality or customer support and we are working to create a nimbler and more efficient Luna.
Moving on we recognized operating income of $1 5 million in Q3, 2022 compared to an operating loss of 10000 in Q3 of last year.
Net income for Q3, 2022 was $1 2 million or four cents per share compared to net income of 355000 or one cent per share for Q3, 2021.
And finally, adjusted EBITDA was $4 5 million for Q3, 2022 versus $2 1 million for Q3, 2021.
And adjusted EPS was <unk> <unk> per share for Q3 2022 versus three <unk> for the prior year quarter.
Let me move now to the balance sheet, we ended the quarter with approximately $7 9 million of cash and cash equivalents compared to $17 1 million at the end of 2021.
The decrease was largely due to the purchase of Leos, a proactive buildup in short term inventory to minimize supply chain disruption and the planned expansion and consolidation of production for terahertz products.
I'm proud to highlight here that the team has never missed a customer shipment date, even through the pandemic they've done an extraordinary job managing supply chain challenges.
Our working capital was $46 7 million on September 32022, compared to $49 8 million on December 31 2021.
At the end of the third quarter 2022 we had total debt outstanding of $21 $7 million of that amount $19 $5 million in term debt and $2 2 million was drawn on our revolver.
Investments over the past five years have all been funded by using our balance sheet through cash and bank debt.
And we have access to approximately 14 million and a revolving credit facility should we need it.
Given the points made by Scott about revenue recognition and project based order shifting I'm comfortable reaffirming the guidance discussed earlier.
We continue to focus on blocking and tackling to drive long term growth, while being prudent about expense management, particularly in light of the current economy. However, we will continue to invest where we believe it will generate growth opportunities for Luna long term with that I turn the call back over to Scott.
Thank you Jamie at this time, Brian Gene and I are available for questions. So Chad. Please open the call for Q&A.
Thank you. Thank you Sir we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone. So if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question will be from Alex Henderson from Needham and company. Please go ahead.
Oh, Okay, great. So congratulations guys nice print certainly Uh huh.
Our better than some of the other Prince I've seen over the course of the quarterly printing a period I wanted to ask you specifically about the counter piece.
To what extent you might've seen any.
Change in demand there, particularly you know after watching the by Avi print where they.
Held an analyst day on the 14th of September and then promptly missed the quarter after saying that they were on track for the quarter and guided down sharply.
When voters, Poland Telecom contest our investments.
So sure.
Have you seen any change in the trajectory of that business.
Yes.
Alex Thanks for the comments and in regards to this we see strong demand you know we stay very in touch with out in front of customers with our sales folks with our vendors and things like that in and we see strong support you know I mentioned.
That Northrop Grumman and Lockheed Martin are still driving very fast we've had some other companies in here.
It's really it's really driving forward with with with with what we're seeing.
That we had backlog.
202, and a half million dollars that we that we brought in.
And kantar.
Continued to see strong demand I listened to that call and Ah I was a little perplexed.
With with what they said mid September and then how they finished at the end of the quarter. So they.
They must be counting on some things that maybe slipped but it was it was unusual.
And Opex spend is yours out of Opex or is it more out of our capex.
I'm sorry, Alex you broke up there can you say it again.
Yeah, so with respect to via Bobby most of there.
He's come in from the Opex side of the enterprise is that they're working with.
Is your <unk>.
Sale coming out of Opex, whereas it's coming out of the Capex budgets of your clients.
Yeah, Hey, Alex this is Brian .
We're definitely on the Capex side, so the test equipment cycle flows through our customers Capex budgets. So that's part of the reason why the other thing we're seeing in that businesses don't forget as Scott mentioned in his remarks that the business is 50%.
Communications test equipment, and 50% modules in lasers for a variety of different industries.
And we.
No we had book to bill in that quarter of over two so the growth was a little light based on some timing things, but the bookings keep in mind, Alex that two and a half book to Bill factors in some of that is that that large intuitive order I think it was what was it normalized without that it was still 1.2 or so somewhere in that range. So.
One point.
We're proud of at one point to two and a half I would have to qualify that two and a half with that larger order, but yeah. He loved to see.
Love to see 14 million, that's going to come in over the next 18 months or so.
Totally impressed thank you so much.
I appreciate it.
Thank you and the next question will be from Chris Sakai with singular research. Please go ahead.
Yeah.
Uh Huh, I've got Dean and Brian .
Yeah, Hey, Chris I think I might know the answer to the question on what Youre going to say that of the growth the revenue growth this quarter.
Can you give any color as to how much would come off the fence and how much was from Leo.
Yeah.
We really don't we don't really don't manage the business that way you know those two are so synergistic together.
We really we really look at it that European project base revenue.
Kind of together with the Das systems, and the Dts I talked about an opportunity with Dominion energy.
Here in Virginia, where we're doing the the offshore wind farms and the cabling of that and that included both Dts and gas and we just ran it through one of for example, we just ran that through one of the the.
The organization. So it's hard to it's hard to answer that Brian how if you have a clear answer I don't look at it that way the way. It comes up to me is is a blended yeah. So we had hey, Chris. This is Bryan we had about 80% growth in that sensing segment.
But half of that came from the additional <unk> revenues.
So the other half was organic driven actually pretty strongly about defense that it had a good quarters.
Okay I think that's good to know and then.
Can you discuss it.
Or share any color about how the contract with intuitive surgical how long term is that that you you mentioned an army and.
Do you see them more similar partnerships like that in the future.
Yeah. You know intuitive is is a is a long relationship that we've had for gosh over 15 years, but and we divested that technology out.
I guess, probably 2014 or so and so they've continued they have to buy you know kind of the laser module back through us and that goes into their system. So like I talked about we are specced into their into their robot that's out there their robot. This next generation robot they call it ion.
That's that is only right now being sold in North America.
So when you look at you know the $14 million, which was probably over about an 18 month period.
That's just for North America, but being specced into an FDA approved product gives us comfort that we're doing something right now really working with them and getting that that over to them. We do have several I've talked about it on other calls certainly that we talk about having about a half a dozen of those type of.
Our relationships that are in the Red zone now how long it takes to get from the Red zone into the end zone.
That varies but what we do have a handful of those and have talked about the hopes of 15 20, 25% in the future in the next 234 years going into a year and having that bigger percentage of our revenue in these blanket deliverable type of orders. So we certainly see more of them I.
Mentioned, you know Lockheed Martin Northrop Grumman, a we talked about in the future Airbus providing the you know the solutions on the <unk> hundred 20.
And certainly intuitive place plays a large role in that as well. So there are several of these that are hanging out there that were driving to get them closed.
So that that really is what was an initiative of ours to get you know kind of I talk about being out of the lab doing the onesie twosies sales to really doing the you know the dozen or or 50 or 100 of these unit sales. That's the that's the key to the growth.
That really is the key to the growth when you get specced in with these larger opportunities.
And then you get those recurring every year.
Okay. Thanks, Thanks for that and then.
What drove the operating expenses lower in the quarter as compared to a year ago.
They werent than a year ago.
Quarter on quarter or on the Internet.
Sorry.
The percent of our revenue I believe.
Oh, yeah, yeah, as a percent of revenue year youre going to see those as a percent of revenue, Chris Youre going to see those gradually start to decline because theres a portion of those that are fixed, particularly like the amortization and.
And some of those other things are variability really.
His commission so when you see our revenue go higher you're going to see a certain portion of Opex go up because of commissions and again you know while we will go forward in and add people as we grow in the last few quarters as I mentioned, we did put in.
Our profitability type of plan, where we were managing our head count.
To levels that are appropriate based on the fact that we had three companies coming together. So there was there was a.
You know initiatives put in place to lower as well yeah I mean.
Chris when I look at.
You know that the proactive Miss that we took in Q2 after consummating the acquisition of Leos and the divestiture of Luna Labs in March of this year, we talked about it on the last call of us being proactive in the reduction of how we'd probably have peeled back maybe a seven 8% of our work.
Force back.
In the end of Q2, primarily due to some of the acquisitions and redundancy of positions, but we really were trying to be proactive in like gene said managing that profitability I mean, everyone wants and we talk about this 15% to 20% top line growth, but we believe that it's very important for that growth to be profitable growth.
And we felt like in genes went out there and said Q2s Opex was definitely a high watermark.
For us and that's why you saw that reduction from Q2 to Q3 and you see modest growth.
From Q3 of last year to Q3 of this year, we talked about last year. If you take out the leos opex out of that we talked about we felt like we had the.
The opex level that could could sustain additional growth that we didn't need the opex was a little bit ahead of the revenue that we saw coming and I think you see that come to fruition here in Q3, yes, and Chris what what we target when we do our budget is we will we target to grow our <unk>.
Opex.
Half the growth rate of revenue. So if revenue is targeted to grow 20%, we would target to grow opex at 10% and just a math of doing that falls more through the bottom line now what you will see quarter to quarter.
You will see slight movements here and there are certain.
Projects that were doing or or certain things like that so quarter to quarter, it's not an exact percentage, but certainly when you look at our full year, we expect that to be coming down as a percentage of revenue yeah.
Not not the first time you heard from me, Chris and we've done it all one off calls and on these earnings calls you know we have a if you if you.
You walked around our office you see the $26 20.
Number sitting around in that and that really is the 20% growth the 60% gross margin and ultimately the 20% pull through to to that operating income we have to adjust it due to some of the things that Jim talked about in relation to the acquisitions, but you know we're not.
We are as you see from this quarter. We can see you know we talked about the organic growth be in the 25% you know the other growth being close to 50%. We do see that organic growth you know that can be in that 15% to 20% range. We know that 60% gross margin. We have some work to do to get to the 20 on the adjusted operating.
Income.
But you can see sitting at wherever it is this quarter somewhere in that 15% range that that you know that we really are seeing the benefit of some of the things that we've done here in the past.
Okay, Yeah. Thanks for the answers and I'll look forward to next quarter.
Yep, great. Thanks, Chris.
And again, if you have a question. Please press Star then one.
The next question is from Dave Kang from B Riley FBR. Please go ahead.
Thank you good afternoon.
First question is regarding.
Some of the vertical that you saw.
Or can.
Can you tell us, which verticals are strong which ones are not.
We're not giving yes on some headache.
The verticals that we talk about from the sensing and communications test.
Yes.
Yeah, well as you saw from from this quarter both of them were strong this quarter.
The communications task from.
From from a lot of the everyday business that has grown.
Organically to some of the larger deals with the intuitive surgical with Lockheed Martin to the Northrop Grumman's we.
We see a lot of strength on that communications test side and this quarter. We saw a lot of some of the slippage that happened throughout the year that came to fruition on the sensing side.
<unk> business as well so we've seen we really see strong growth.
This quarter, we saw strong growth in both of those verticals.
Brian you want to add any more to that yeah.
Yeah, I mean, I color, yes, sure I mean, you saw the growth numbers for the two so dissenting sided equation definitely came on strong here in Q3 with that level of growth and as I said.
Half of it was organic so we've talked on previous calls about that.
Project businesses, taking a little bit of time too.
Normalized to our way of doing business at Luna and we're starting to see that now in Q3 was good.
A good example of that and then in the communications test vertical where we had lower revenue growth in the quarter still still grew.
We're seeing a lot of strength, there, especially in the order books, so timing wise.
Quite flow through in Q3, but.
With the intuitive surgical or falls into that category and that's a big one, but we had other large orders in the in the quarter as well and as we said in the remarks, we're expecting another follow on order for our test equipment for the F 35 aircrafts. So we're seeing good indications of continued strength there as well so.
Yeah.
As Scott said it was pretty strong in both yeah.
And I talked about on our last late last quarter's call Dave about the idea IQ that that we will enter into and are in the final stages almost at the signature stage of signing that I D. IQ.
With with Northrop Grumman and Lockheed Martin regarding the F 35, so that kind of locks us in.
We like where we've been able to hold our margins on that at much much larger quantities.
And I think that that that that contract will span over a three to five year period. So.
Very excited about that.
Got it and then just a couple of questions regarding terahertz or are we still getting just like the onesies and Twosies are finally getting some.
April Bobby Motors.
Yeah, we are seeing a larger orders in that I mean, as we you know I've talked about in the past it always starts out with one or two then it turns into five or six and it when it gets specced in and it continues to deliver a lot of the opportunities. We're working with now larger orders that require you know kind of hot spares.
These are these are on manufacturing lines.
That are out there theres a reason why we are moving production to our Atlanta office. It's all set up it's in the process will be fully integrated by the end of the year into Atlanta, and that was going from and I've talked about this in the past you know one a week. We're now at two a week and striving to two shortly within the next quarter.
There are to be it for a week.
And so that is a tremendous growth and its because we have the backlog already in place. We're quoting Q3 Q4 'twenty to 'twenty three on any orders that we're taking so the backlog on terahertz is is all there.
Yes.
And can you remind me what kind of margins they have above or below corporate average.
They're right around the average maybe you know kind of mid fifties right Bryan it's somewhere in there actually was the team has done a fantastic job getting some of the touch time labor out of assembly. So that's trending.
North of the corporate average yeah.
As you can imagine all the the big Buzz names out there that you can imagine we're working with really try to drive your price down when they when they say theyre going to place an order for a larger quantity but.
Once you know and you start getting specced into there we really do have some try to have some leverage at least with withholding tight with those margins. So if we were selling a one off one off is clearly in line with our with.
With the you know the.
Corporate average is.
When you get into larger quantities.
Can you hold the hold the line on that margin and I think we've done a great job of doing this.
Got it and then.
Earlier, you said.
Manufacturing lines.
Have you moved into the battery.
R.
Are we in the manufacturing or still kind of up to.
To the side at this point.
We are in manufacturing currently.
That's one of the biggest growth driver for that product line. This.
This year.
There are others coming behind it in other industries, but yeah no worries, we're in production and we're developing.
Delivering systems for that application today.
Got it and my last question is I think earlier or last quarter I think you said.
So you are planning four times, our capacity expansion is that still the case or maybe.
Something higher or what's the plan on that.
Okay.
I didn't hear the question.
We are still planning on many four times the.
Capacity, yet Oh, yeah, yeah, Yeah, I'm sorry, yeah. They were at two so we've doubled capacity we were one a week for four.
Earlier this year for the first nine months, we're now at two a week.
And and once the move is consummated and it gets up and running kind of mid mid next year, we will be it for a week. So we will quadruple capacity over a one year period, so alright.
Yes, and Dave to answer your follow on question.
That's basically two lines one shift.
So to your point, if we need to increase it more it's just adding adding another shift in training training the folks up.
Got it thank you.
Alright, thanks, guys.
The next question will be from Charles <unk>, a private investor. Please go ahead.
Hey, great quarter, I guess the joke in the day as.
I'm sure you all don't pay attention to this but the stocks trading at 83 $6 a share.
Okay.
Hum.
All of them meetings, you went to around the world the last couple of months.
Yeah no. They they they were great I think I mentioned.
I just got back you know I got back Sunday night.
So.
I was there all last week, Brian was there probably 30 days ago and I don't know.
Maybe it's a monthly yeah, a couple of weeks before after that so we do divide and conquer rather than all three of US rolling in there at the same time you know Brian will go for a week to 10 days Jean will go for weeks 10 days and I go so to meet with different people get let let folks ask different questions and things like that so really trying to rally the team together you know we talk about.
This one Luna I don't believe that feeling like you're part of one company. When you are around the world happens by accident I think you'd have to work hard at that so we spend a lot of time I know I spend a lot of time out in front of it in the Atlanta office in the L. A office or our Chino and in San Francisco, you know out of the offices.
Really trying to rollout what the company culture is.
Really making sure people feel comfortable and asking the questions and Theyre excited about what the vision is that people want to know what the strategy is and where they fit.
No it doesn't matter, where you fit you may say I'm, a small cog in the wheel, but people want to know what's the strategy and what does it mean to me how can I help so I think that only happens by being face to face.
Going into a into an office and leaving the door open and welcoming in for questions and then getting everyone. Together. So I think for at least where my trip I sensed everyone was very excited to be part of this one Luna.
Dream that yeah, Yeah, I would say you know what one thing that amazed me from both places I went and I visited Leo sent up to sense.
When you start talking to the people in production or the people in.
In engineering or customer service all of them were very interested about lunar all of them had great ideas for improvement and so it's just a testament to the employees that we acquired their interest in the company and their interest in all of US being successful that is the one thing that really stuck out to me.
Yeah.
Great I was sort of meaning the different places in the world Besides them.
The companies.
Mike.
Oh, Dubai thing last week.
Those events went and it would be great.
It appears on your news on your events business wire whoever it doesn't pick those things up it would be nice if.
On Yahoo. When you went and looked at.
Sorry.
They are this week here doing this.
Ted I haven't done that for too much.
Yes, and the other thing the other thing I sure wish you all would get this on zoom it that'd be a lot of fun to see your faces when you're talking about these accomplishments that tells a lot.
Yeah no.
Well you know, we certainly would do that Bryan you've gotten out a little bit and see what the reaction.
Brian has expanded out to the sales force out in the field and things like that so do you want do you want to comment yeah, and that's good feedback Chuck thanks for that.
<unk> has been a very active as you've been.
Following us glue.
With trade shows in the last few months South America, Dubai, All over North America, and it's been fantastic and in fact, we're really hitting our stride as it relates to combined.
Solution set that we have with what we call kind of a lunar as legacy products the art defense gas products in the the.
The leos.
Temperature and strained products, so being able to talk to customer base about all of those things in one solution is really getting some great traction we announced.
You know that we have.
And we landed a pretty sizeable offshore wind.
Job that will.
Start installation.
Early next year, and that's a combination of those products and so it's a it's been great to see that so it's gone very well.
Hey, Chuck as my wife.
Wife always says careful what you ask for so if you if you really wanted to see our face I mean, he may not you may not like what you get so.
No I've seen your interview you too good.
Hey, Charles Jean I don't know if you have that it's a shame you can't get that on Yahoo, but if you have access to Linkedin or Twitter or folks do post a lot of the trade show information and things like that and what you would want to do is follow a luna follow.
Ah Leos and follow up the sense, there's they're separate Twitter and Linkedin for those so.
Okay.
Sounds great.
Looking forward the next quarter.
Yeah, Thank you need to.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to Scott Graeff for any closing remarks.
Alright. Thank you everyone for joining us today appeal, certainly feel free to reach out to gene Allison, Brian or myself with any questions that you had that come out of this that you just didn't have a chance to ask here or have arisen out of out of this call and I certainly look forward to seeing maybe some of you at and we have several upcoming investor conferences.
And again I. Thank you for your time and interest in Luna innovations. So Chad I'll turn it back to you then and really that concludes the earnings call from my perspective.
Yes, and thank you Sir the conference has now concluded. Thank you all for attending today's presentation and you may now disconnect take care.
[music].