Q4 2022 Luna Innovations Inc Earnings Call
Speaker 1: You
Speaker 2: Good afternoon and welcome to the Luna Innovations Incorporated fourth quarter and full year 2022 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. dan s Harry
Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.
Speaker 2: Please note this event is being recorded.
Speaker 2: I would now like to turn the conference over to Allison Woody, Senior Director of Administration. Please go ahead....
Speaker 3: Good afternoon and thank you for joining us today. Following Market Close today, we issued our fourth quarter and full year 2022 earnings press release. As usual, you can find the release and a presentation with supplemental information for the quarter posted to the investor relations section of our website.
Speaker 3: us to replay this call to our website. Some of our comments and discussions today are based on non-GAAP measures. These adjusted numbers exclude the effect of certain non-cash expenses and other items. The adjusted results are a supplement to the GAAP financial statement.
Speaker 3: Luna believes the presentation and exclusion of these items is useful to focus on what we deem to be a more reliable indicator of ongoing operating performance.
Speaker 3: 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 risk and uncertainties and are subject to changes at any time, including but not limited to statements about our expectations regarding future operating results.
Speaker 3: 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.
Speaker 3: 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.
Speaker 3: After our prepared remarks, Scott Gray, our President and Chief Executive Officer, Jean Nestro, our Chief Financial Officer, and Brian Soler, our Chief Technology Officer, will be available to take your questions. And at this time, I'd like to turn the call over to Scott.
Speaker 2: Good afternoon everyone and thank you for joining us today. I'm pleased to be here to discuss a year of significant accomplishment.
Speaker 2: as well as our 2022 fourth quarter and full year results.
Speaker 4: I'll also share our 2023 outlook.
Speaker 4: Before I get into the details of the fourth quarter, I'd like to reflect on the year we just closed and comment on what we see for the current fiscal year.
Speaker 4: Certainly, 2022 was a year of significant execution and achievement.
Speaker 4: Overall, I would characterize 2022 as a transformational year for Luna.
Speaker 4: Incredibly, it has been a full year since we announced the divestiture of Luna Labs and the acquisition of Leos.
Speaker 4: You will remember that that divestiture, in particular,
Speaker 4: was a critical element of execution on our strategy to focus our capital on fiber optic measurement and sensing solutions.
Speaker 4: As you may remember, when we set our strategic plan, we knew that we would need to divest assets that weren't a fit for pure play fiber optics company and invest in initiatives and assets that were a strategic fit and that would support acceleration of growth. The Luna Labs transaction...
Speaker 4: represented the sale of the last non-core asset in the Luna portfolio.
Speaker 4: It also eliminated the limitations that were present as a result of the Luna Labs reliance on the SBIR program. So, not only did the vestiture allow us to become a pure play in fiber optics, it also removed a natural governor to our growth.
Speaker 4: We also added important capabilities to our portfolio with the acquisition of LEO sensing.
Speaker 4: A set of assets that we knew would put us in a position to lead the market in fiber-optic-based sensing solutions for infrastructure, energy, and industrial applications.
Speaker 4: In addition, with Leos based in Germany, this acquisition broadened our European footprint.
Speaker 4: As a result, we enter 2023 with Luna positioned as a global fiber optics leader.
Speaker 4: We have a more significant international presence, and we are poised to further capitalize on all of the opportunities available in our ever-expanding markets.
Speaker 4: In addition to the last two transactions I just discussed
Speaker 4: We also did considerable work to optimize LUMA's operations across our various locations.
Speaker 4: To reframe, we acquired two substantial international assets during COVID.
Speaker 4: Integration is hard enough in normal times, but even more challenging during a global pandemic.
Speaker 4: I'm extremely proud that we were able to assess, acquire, and integrate these two companies all without the advantage of face-to-face interactions.
Speaker 4: While remarkable, we did have some need to optimize our acquisitions.
Speaker 4: We made significant progress through 2022 towards refining our integration.
Speaker 4: Each of the members of my leadership team have spent time in the UK and Germany.
Speaker 4: as well as all the other Luna locations.
Speaker 4: Through the integration work, we gained an understanding about the operating process and with that, made necessary changes.
Speaker 4: We've gotten closer to our employees and made determinations about whether we had all the right people in the right seats.
Speaker 4: We have formulated a more detailed yet holistic view of the company.
Speaker 4: Unify these businesses that have executed against our philosophy of one Luna.
Speaker 4: This is critical to our ability to optimize the whole, thereby increasing efficiencies and preparing for significant scalability.
Speaker 4: To drive the kind of growth we believe we're capable of, we need to ensure that our team understands and embraces our vision and culture, understands our approach, and has clear line of sight to their role in serving our customers with excellence.
Speaker 4: The ultimate purpose of our work is to strengthen the infrastructure of our leading global organization with world-class capabilities.
Speaker 4: Our investments in infrastructure and systems, as well as added capabilities from recent acquisitions, position us for a strong future in an expanding market with incredible potential.
Speaker 4: We're headed into 2023 with intense focus on and high expectations for organizational optimization, large customer wins, and market advancement.
Speaker 4: We'll talk more about the outlook for 2023 later, but right now I'll turn our focus to a review of the financial performance for Q4 and the full fiscal year 2022.
Speaker 4: I'll also touch upon a few business highlights before I turn the call over to Gene.
Speaker 4: For the fourth quarter of 2022, we recorded total revenues of $31.7 million, an increase of 31% compared to the prior year period. For the foreign exchange, revenue was $32.5 million, up 34%.
Speaker 4: versus last year's fourth quarter. Our gross margin was 61% in Q4 2022 versus 58% for the three months ended December 31st, 2021.
Speaker 4: Adjusted EBITDA was $4.7 million for the final quarter of 2022, compared to $3.1 million last year.
Speaker 4: Our adjusted earnings per share for the three months ended December 31, 2022 was 8 cents, matching the EPS figure from the prior year period.
Speaker 4: For the full year of 2022, we grew total revenues by 25% to $109.5 million. On a constant currency basis, we grew to $111.9 million, an increase of 28% and the midpoint of our guidance range.
Speaker 4: I'm pleased that the growth was driven not only by last year's acquisition, but also by very strong growth in our legacy businesses.
Speaker 4: Adjusted EBITDA was $12.1 million for the 12 months ended December 31, 2022, compared to $7.6 million for the prior year.
Speaker 4: This put us at the top end of the 10 to 12 million dollar range we projected for 2022.
Speaker 4: You can see that the strategic changes we made resulted in a stronger flow through of our top-line growth to profit.
Speaker 4: Adjusted EPS was 21 cents for the year ended December 31, 2022, compared to 17 cents for the prior year. Through last year, you heard me say that investment was critical to both our top and bottom line growth.
Speaker 4: Our financials are proving that case. We're delivering top line growth and our gross margin and adjusted EBITDA demonstrate that we are creating pull through leverage to the bottom line.
Speaker 4: We have continued strong execution against our strategy and have enjoyed consecutive quarters of positive leverage.
Speaker 4: We fully expect to carry that momentum forward into 2023.
Speaker 4: Before we look too far into the future, I want to share some year-end highlights from the businesses.
Speaker 4: By now, I realize that this may become an old hat to you, but I'd like to take the opportunity each quarter to remind everyone that our capabilities fall into two categories. First, fiber optic sensing. And second, communications testing.
Speaker 4: Let's start again with sensing.
Speaker 4: where we use fiber as the physical sensor to create smart materials and structures.
Speaker 4: This includes pairing the following instruments that we manufacture with fiber sensors that allow distributed measurement and monitoring of physical assets like stress, strain, temperature, pressure, and more.
Speaker 4: Odyssey for short range high resolution applications.
Speaker 4: Hyperion for long range discrete applications.
Speaker 4: DAS for long range continuous acoustic monitoring.
Speaker 4: DTS for long-range continuous temperature and strain monitoring, and terahertz, a technique that leverages fiber optic technology to produce terahertz waves used to measure layer thickness and density of opaque materials.
Speaker 4: Growth in Q4 in our sensing vertical, which includes both OptiSense and LEOs, was 16% compared to the same period last year.
Speaker 4: Growth was supported by the acquisitive revenues generated in Q4 by LEO sensing which we acquired in March of last year.
Speaker 4: Looking only at the project side of the sensing business, where revenues are generated through larger sales that directly or indirectly support large field deploy projects, revenue grew about 10% on a year over year basis.
Speaker 4: This was a tough comp related to Q4 2021 based on the historically high level of revenues and growth achieved in that quarter. Also, as we've discussed on our last several calls, the project-related business is an area of significant growth.
Speaker 4: But the associated revenues can be lumpier in nature. We've taken and continue to take measures to smooth out these lumps by improving our overall project management approach.
Speaker 4: Growth in the non-project portion of our sensing business, which includes sales of our legacy Odyssey, Hyperion, and Terahertz products, was up 26 percent, driven by the strong continuing secular drivers that support growth in this market.
Speaker 4: Overall, our growth strategy and sensing is continuing to drive market adoption of our technologies in a number of key focus areas, including infrastructure, aerospace, energy, and industrial applications of our terahertz technology.
Speaker 4: Let me share just a few examples of recent successes that we've had in this portion of the business to help you understand why we're optimistic about the future.
Speaker 4: We were awarded multiple large power cable monitoring contracts in North America.
Speaker 4: including partnering with Dominion Energy to provide monitoring services for the largest offshore wind project in the United States.
Speaker 4: Our products will be used to monitor the project's export cable system, which will transport power to shore. Once fully operational, this system will displace as much as 5 million metric tons of carbon dioxide emissions annually.
Speaker 4: We are proud to count this amongst our growing list of global flagship installations. We also won a large contract with P.T. Freeport Indonesia, one of the world's leading gold and copper mining companies.
Speaker 4: We will provide an early warning monitoring system for the earthen levees that rely in the mining operations.
Speaker 4: Our technologies will greatly enhance the safety of those structures. Winning the PT Freeport contract is particularly exciting because it builds on work we started last year in the mining industry.
Speaker 4: As I mentioned then, Luna has a preeminent solution for protection of tailings, dams, and levees used globally by mining companies.
Speaker 4: The potential in this industry is significant for us.
Speaker 4: We won a large contract with a major organization in Europe for deployment of fire detection systems for battery storage facilities.
Speaker 4: Similar to the PT Freeport win, we know that our technology can greatly enhance the safety of our customers' operation.
Speaker 4: And, as a final example, we secured additional pipeline monitoring awards in Texas, Nigeria, Mexico and Saudi Arabia in Q4, demonstrating our global reach. I'd also like to share a quick note on progress in terahertz.
Speaker 4: Terahertz revenue grew 47% year over year in Q4, where deployments in manufacturing for automotive EVs and industrial adhesives continue to be major drivers.
With all of the activity I just outlined, it's safe to say that we feel very good about the future growth potential of this business and are looking forward to continuing to share updates as we make strategic progress in these critical growth areas.
Now, moving on to the communications test vertical.
As a reminder, this area includes our high-end line of communications test products, such as the OVA and OVR, as well as our polarization measurement and control modules and the RioLaser business. This business is now 50% test and measurement equipment for communications testing devices.
and 50% optical components and laser modules, a combination that lends to a variety of photonic applications, such as medical devices, sensing systems, and lidar.
Revenues in this vertical in Q4 2022 grew 59% versus 2021.
On last quarter's call, I talked about a recent large order from our OBR 6200 product for support of the global fleet of F-35 aircraft. I also mentioned we were expecting additional significant follow-on orders.
So, I'm happy to report that in December we did indeed receive a large follow-on order for our OBR 6200 from our partner, Northrop Grumman.
The agreement includes an initial receipt of $3.4 million incremental multi-unit purchase order for the OBR6200 portable backscatter reflectometer.
We're excited to continue expanding our strong relationship with Northrop Grumman, and we look forward to continuing our work with them, providing critical testing and monitoring technology for the aerospace and defense industries.
As we've discussed before, large recurring orders such as this are a testament to and foundational to the success of our growth strategy.
Another very important highlight since we were last together is our announcement that we signed a 14.2 million dollar contract with our long-standing partner Intuitive Surgical. Deliveries on this significant order began in December and we are moving forward on the program with no delays.
We also had a very strong sales quarter for polarization modules, recording 27% year-over-year growth.
The growth was driven by strong sales associated with the larger OEM contracts I just mentioned in addition to strong sales of our gyroscope coils for navigation applications.
As a final highlight for the comms test vertical, I'll note that in Q4 we received multiple large OEM orders for our Rio line of tunable lasers, totaling over $3 million for applications in LIDAR and space-based communications.
I also want to provide an update on the ongoing effects of the supply chain challenges. As many others are, we are still experiencing pandemic-related delays in supply chain. The supply chain pressure that we experienced in 2021 carried over into 2022.
For example, issues with semiconductor part availability combined with increasing lead times and prices have not abated, though we have seen some improvement.
Our team is managing this as best as possible, but we have felt and expect to continue to feel the effects of Disruptions in the global supply chain for at least a few more quarters.
We've created a bit of buffer for ourselves to ensure that we continue to get products to our customers as quickly as possible. You will notice this on our balance sheet in the inventory account.
created a bit of buffer for ourselves to ensure that we continue to get products to our customers as quickly as possible. You will notice this on our balance sheet in the inventory account.
What does this all mean for us as we head into 2023? Because of the foundational work we did in 2022, we've entered 2023 with a strong leadership team and organizational structure, proven systems, and best practices.
Our charge for 2023 will be to continue to drive operating excellence that will help to set the stage for greater expansion into new markets where we can deliver our superior capabilities and capture share.
With a united team and an expanded sales force, we will drive forward in the pursuit of additional large multi-unit orders and the expansion of existing customer accounts.
We're more confident than ever about our strategic direction and excited about the opportunities ahead. We're beginning to reap the rewards of our shift to become a pure play fiber optics company. And we're optimistic about the opportunities in front of us and growth we expect to drive. We are just getting started and our future is very bright.
Knowing this, we are issuing our 2023 outlook ranges, which are total revenues of $125-130 million, adjusted EBITDA of $14-18 million, and first quarter 2023 revenue of $23-25 million. As I share this outlook with you, I want to remind you that
Even with our recent growth, we remain a cyclical business. Like many companies in our industry, we are weighted towards the second half of the year.
Q1 historically has been our softest quarter, followed by steady acceleration through the remainder of the year. So please keep that in mind as you consider the ranges we're providing today.
Before I hand things over to Gene, I want to mention a few more items of interest. I recently attended OFC.
A premier trade show event hosted in San Diego for telecom and data center optics.
As I walked the floor, it was as busy a scene as I've ever seen in the last 10 years.
That kind of activity is proof positive of what's going on in the market and the opportunities available to us. I'm also happy to share with you that Luna will host its first ever investor day this spring in New York.
Details will be issued soon, so I look forward to seeing many of you to share even more about where we're headed.
I want to wrap up the way I started. 2022 was a transformational year for Luna.
I believe we sit in rarified air as a company that set a five-year strategic plan and actually delivered against it in the middle of a pandemic.
Our steady execution against this plan allow us to be in the position we are today, a pure play fiber optic company.
If you're wondering what comes next, I hope you'll consider attending our investor day. I'm happy to take questions about any of the topics I've discussed today, but for now, I'll turn the call over to Gene. Gene?
Thank you, Scott. As we just heard from Scott, 2022 was a year of significant achievement. The financials and business highlights he shared demonstrate our strategic focus and the abundance of our long-term opportunities. As he mentioned, we made incredible strides last year by completing the divestiture of Luna Labs.
finalizing the integration of OptiSense, managing the onboarding of Leos, and now operating as a pure play fiber optics company.
It marked the culmination of our work against our five-year strategy and puts us in an incredibly strong position for 2023 and beyond.
You may remember me saying at last year end that putting a scalable foundation in place was critical to our ability to efficiently drive both organic and acquisitive growth.
We spent much of this past year laying this groundwork and, while we still have some work to do, we are happy with our progress and look to create synergies we can leverage going forward.
We are proud of the fact that we accomplished all of this while continuing to manage through the residual complications of the COVID pandemic.
I am particularly proud of the entire finance team without whom we would not have been able to accomplish all of this work. There was an incredible amount of heavy lifting that had to be done behind the scenes throughout 2022 in order for us to be where we are today.
With a strong foundation, consolidated operations, and expanded capacity, we are well prepared for market expansion and continued growth.
With that as context, I'll turn our attention to fourth quarter and full year results.
Revenues for Q4 2022 increased 31% to $31.7 million on a GAAP basis.
On a constant currency basis, revenue increased 34% to $32.5 million.
The increase in revenues was driven largely by the LEOs acquisition and strength in communications test products.
Our gross profit increased to $19.3 million for the quarter compared to $14.1 million for the same quarter last year, representing a gross margin of 61% this quarter versus 58% in Q4 last year.
The increase in gross margin was primarily due to mix, as product sales comprised a higher portion of our total sales this quarter versus Q4-21.
Going forward, we continue to expect our gross margin to be approximately 60%.
Operating expenses were $17.9 million compared to $13.1 million in Q4-21.
The primary drivers of this increase were LEOS, which was not included in prior year's Q4, employee costs, product redesigns, and IT spend. Our operating profit was $1.5 million and 4.6% of revenue compared to $1 million and 4.3% in the prior year quarter.
As we've mentioned before, adjusted EBITDA is a key metric reflecting our underlying operations.
Adjusted EBITDA for the quarter ended was $4.7 million.
an increase of $1.6 million from last year's Q4. For the full year, revenues increased 25% to $109.5 million on a GAAP basis and increased 28% to $111.9 million using constant currency. We are pleased that annual revenue was within our guidance, especially considering the increase in revenue.
$66.5 million for the year compared to $51.6 million last year, representing a gross margin of 61% versus 59% last year. The increase in gross margin was primarily due to revenue mix.
As I mentioned previously, we expect our gross margin to be approximately 60% going forward.
Operating expenses for the year were $68.4 million versus $54.1 million last year. LEOs and its associated amortization added $9.5 million.
The remainder of the increase was due to employee costs, commissions on higher sales, and product redesigns as we continue to prepare Luna for its future growth.
For the full year, operating loss of $1.9 million improved $700,000 from the prior year.
year operating loss of 1.9 million improved 700,000 from the prior year. Let me move now to the balance sheet.
We ended the quarter and year with $6 million of cash and cash equivalents compared to $17.1 million at the end of 2021 as we funded the LEOs acquisition with cash and debt.
Our working capital was $54.2 million on December 31st compared to $49.8 million on December 31st, 2021. Our working capital increased slightly due to the full year impact of the LEOs acquisition, as well as an increase in inventory due to expected product redesigns and the lingering effects of COVID on our supply chain.
Our total debt outstanding is $23.2 million as of December 31, 2022.
Overall, and as Scott mentioned, we had a solid performance in Q4 and the full year.
Let me now address our outlook for 2023. As you heard Scott say earlier, our outlook ranges are total revenues of $125 to $130 million, adjusted EBITDA of $14 to $18 million, and first quarter 2023 revenue outlook
of $23 to $25 million. With that, I will turn the call back over to Scott.
Thank you, Gene. Brian , Gene and I would be happy to take any questions at this time. Chad, please open the call for questions. Thank you, sir. We will now begin our question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And the first question will be from Jim Moroney from Singular Research. Please go ahead. Yes, thank you for taking my call, gentlemen.
I have a few questions. Let's just start with the supply side headwinds that you mentioned in the call. I think from previous calls you mentioned that the supply side constraints were actually coming from the clients and not so much from Luna. Is that still the case? Or is that a problem?
or is Luna also experiencing supply-side constraints?
Yeah, you know, I think the answer is both, Jim. We are, most of what we experience is delays on the project side, and they are supply delays related to our customers on the project base. But we have seen supply issues.
And why I talked about on our side was, you know, we have quite a bit of cash tied up on the balance sheet due to loading inventory higher than we normally would because of being able to chase down some of the parts that we need. So we're able to get them. We're having to buy a lot more.
them and pay a higher price. Brian is that fair or do you want to? Yeah I think that that's accurate I mean we've seen as Scott mentioned some easing and that easing has mostly been on the project side and the impact on our customer base and works you know still experiencing delays in
in procurement and board development longer than, you know, much longer than typical, but that's been the case for the last 18 months.
So, yeah, it's really both with a little bit of easing on the customer side.
Okay, good. Thank you for that insight. And is that what's kind of weighing in on the bottom line are these additional costs? Because the revenue growth seems to be there. I think it does have the acquisition in there in that revenue growth. But in terms of the adjusted EPS being flat, is it?
Is the additional cost or in a way, the bottom line, is that what we're seeing there?
So if you take a look at this year.
And you look at our headcount and you would take where we ended last year plus Leos. We actually have, you know, when you add those two together, a headcount reduction. So we were looking and keeping our headcount in line and our costs in line. So I don't think that's the case. It's...
Just timing I think of when you look at some of these expenses that come in. I'm not sure are you looking at year over year or quarter or? Just the 4Q EPS being flat, the adjusted.
So I guess it's other operating costs rather. We're certainly experiencing more operating costs, we're experiencing higher prices. We did increase a lot of our ASPs, but some of these project-based deliveries, you know,
Jim have been out there for quite some time so there's no chance to increase some of those but we bought things throughout the year so we have experienced a higher cost that I think is reflected in that adjusted DPS flatness that you're seeing.
Yeah, okay, thank you for that caller. And also, it may have been addressed in prior calls, I can't recall, but has there ever been any thought as far as providing segment?
Yeah, OK, thank you for that color. And also it's been addressed in prior calls. I can't recall, but you know, has there ever been any thought as a combining of the
Maybe, you know, between the sensing and testing, or even geographically if you're expanding into Europe . I don't know if it's ever been addressed before. I don't know whether we talked about it publicly. We internally talked about it. It's just not the way that we manage the business.
We break out and we show, I think we show the different revenues as it relates to geographically. We show the US and Asia, Europe and the rest of North America and South America, like Canada, things like that. So we break some things out geographically.
But as it relates to some of the sensing and coms test business, many of that commingles. And that's not how we really manage the business, so that's not why we report. We don't report it out that way because that's not how we really manage it. We have sales guys that really go across both of those segments, so we really don't
run it as a segment-oriented business.
Right, I guess in the end of the day it's all fiber optics, right? So it's both your place, fiber optics company. It really is, it's just we're using them differently. And there's a customer that would be buying an OBR as well as buying a Hyperion system to be on a piece of infrastructure, whether it's a bridge or a tunnel.
So, it's hard to say, and that may come through in one sale, so you have to go into that PO and break it out and say, well this was, and that's just not, we're managing that from a customer basis rather than from a segment basis. All right, fair enough. And given that your focus is being a pure play fiber optics company, then what's your appetite for 2023 in terms of acquisition? Are you looking to prop-
We are constantly looking, I would say, eyes down range and looking at things. Any time you go and you're bidding on a project, for example, and you have three, four, two, three others at the table, you'd like to say that there's only one at the table, and that's Luna. So I think we continue to look at things to gain more market share.
But we believe in the organic growth that we experience here and will continue to experience. So we don't feel like we need to be in a rush on anything, but certainly our looking to the future in organic growth would certainly be a part of our strategy.
Okay, very good. Thank you for that insight then John . I'll pass the poll over to the others. Thanks Jim. Thank you and the next question is from Alex Henderson from Needham. Please go ahead.
Great, thanks. So it's a little difficult looking at the history of the company to ascertain what the
seasonal patterns are and some of your expenses given how much has changed over the years. Can you talk a little bit about you know you've said that the seasonally weak on the revenue side and we're back half-weighted but is that also then going to impact the gross margins.
which would then be under a little bit of seasonal pressure and similarly if I look at the sales and marketing R&D lines, I'm assuming those are relatively stable on the R&D side and generally tick down a little bit on the sales and marketing side. Is that kind of the right seasonal pattern we should be thinking about?
Yeah, you know, we believe, you know, Alex, we believe that, you know, the high 50s and we say 60% on the gross margin is where we will even in some of those down, you know, in the cyclical quarters that we have, we'll still be able to maintain that. You know, the variables are your sales expenses and things like that as it relates to commissions and things like that. When our war is over, we support you, we will. And as you see this one quarter of a billion dollars is being delivered for the limited period of time that I have with the sales, the Croselar, rolling out their fairgrounds and things like that.
That kind of self-governance itself. I think you can look at steady R&D costs. We continue to steadily plug a lot of our investment into our R&D for redesign of current products and new products. So I think you can continue to see that. But the gross margin pull through, we don't see.
that dipping really below where we're setting is at that at that bottom so And and you know the the operational expenses move around a little bit You know we said that in q3 when we announced q3 that you know that was we even when you go back to q2 You know we said that was a high watermark wherever it was in q2 of last year, and then we dipped down
with some things in Q3, but we said it stabilizes in that, I don't have it in front of me, 16 and a half-ish or somewhere in that range, 16 and a half, 17. So some quarters we'll experience a little bit more and some less, given how we're pushing some expenses around. But in general, it will stay pretty steady, Alex.
Similarly, if I look at the seasonal commentary, the year over year growth rates shouldn't be seasonal generally. It implies that the year over year growth rates shouldn't be seasonal generally.
a couple of percent at the low end and a little over 10% at the high end. And then it accelerates over the course of the year to get to, I think it's 15% at the low end. So can you talk a little bit about what the mechanics are around that? Thanks. Yeah, we talk about this kind of mid to upper teens, 15 to 20%.
organic growth. We just have never experienced that type of growth year over year in Q1. It just doesn't come. We talk about that type of organic growth on an annual basis. Q1 is always difficult. You know the test and measurement space where the
where people just don't spend money in Q1 and we continue to see that. We even see it on the project-based side where people just don't deploy in Q1. So it just ends up being a much smaller year-over-year organic growth, Q1 over Q1. And that goes back for several years.
But on average, when we look at annual growth, we do feel like that 15 to 20% growth is good numbers.
Just as a reminder, the first quarter, is that your period of your normal annual pay increases? It is. It is. And how's your turnover and how your attrition rates look and what kind of annual increase should we be thinking of modeling in for those expenses?
Just as a reminder, the first quarter, is that your period of your normal annual pay increases? It is, it is. And how's your turnover and how your attrition rates look and what kind of annual increase should we be thinking of modeling in for those expenses? Yeah, we expect.
to be adding people as we go through this year, as we're growing our business, especially internationally. I would say the best way to look at it is, if you take a look at this year.
We were about, and I'll just tell you how we look at it internally. We were a little bit above 62% full year on the OpEx side. We think next year we'll probably be in the mid 50s, 55-56 somewhere in that range as a percent. And when you...
And it should grow so you should see you know q1 to q2 to q3 to q4 creep up a little bit as we're adding adding people in there and Certainly commissions so when you step back and take a look at our opex roughly You know close to 70% of our of our opex is headcount related whether it's you know bonus salary stock comp etcetera
And then 6% is amortization and 5% or 6% is commission. So on higher sales, it'll ramp up that way. So I hope that helps with your answer. We also track to make sure, especially now with everything that's going on, we want to make sure we stay in line with our OpEx. So.
Our sales per employee is something that we track and look at and in 2021 it was a 280,000 per employee, 2022 it was 315,000 and we think next year it should be in the mid 300,000. One more clarification, so the growth rate in the fourth quarter, I believe that was partially organic, partially inorganic. If you're in the mid mid 800,000, you're not going to know what's here and now whatever else you're looking for, this is probably part of our long term prospects and that's what we're talking about. We're going to strive to get more customers right out of the box or and Berlin's in my first career, we knew we are our own shade, we are our plan. Oftentimes people would speak our stereo voice, we would speak the audio voice, we would
give us either a pro forma growth rate, what the growth rate would have been had you had the same assets in the year ago or a split and or a split between organic and inorganic growth case.
I'd have to look that up Alex. I don't you know I'd have to look to see what Say Leo's did in Q4 of 21. I I don't I don't particularly Know that offhand Can get back to me on it Yeah, I'll get I'll get I'll get back to you on that and and we can look at what that is
So one last question, then we'll see the floor. So can you talk a little bit about how the pipeline is developed over the course of the year? I know that when we talked to guys at it at OSC, it sounded like things are in pretty good shape. Have you seen any changes in that with the turbulence we've been seeing here in 1Q in terms of pipeline strength? Yeah, we have not.
Pipeline continues to build at about that same rate. Book to bills throughout the course of 22 ran between 1.1 and 1.2. Product book to bill, if you take our small contract revenues out, was close to 1.2 for the year. So that's historically pretty strong for Luna.
not really driven by supply chain pre-buying or anything like that.
strong growth. And Q1 on the order book side you know off to a good start so continuing along that trajectory.
And Q1 on the order book side is off to a good start. So continuing along that trajectory. Thanks so much. Thanks, Alex.
And the next question is from Paul Essy from William Woodruff and Company. Please go ahead. Thank you for taking my questions. You may have touched on it a little bit but I want to talk a little bit about the sales and marketing. I guess with Leo she had mentioned that you're trying to beef up that the marketing.
after some of your install base in that monitoring area.
Yeah.
Yeah, I'll take a stab and then I'll let Brian , you know, kind of add to that Paul. The sales and marketing is in these last two acquisitions that we've done is something that we're focused on. You know, the OptiSense acquisition was part of a much, much larger organization.
in Kinetic and then the same with Leos being owned by NKT. So a lot of those assets, if you will, those people, resided up at the parent. So it is an aggressive push that we have to do to get additional sales and particularly marketing in Europe . So we are pushing hard on that and growing that.
So that is a focus of what we are working on. Yeah. Hey, Paul, this is Brian . That is bearing fruit. On the sales side of the equation, if you look at that project business and the integration we've done between the last two acquisitions, the book to bill in quarter four was
over 1.6. So the bookings, so we really are seeing the fruit of those labors.
The additions we've made in the integration we've done and it's showing up in the bookings, but as we've discussed in the past You know those orders will be scheduled out over in some cases 18 months So, you know We didn't see as much of the fruit of that from a revenue perspective in quarter four here in the first half of the of This year, but you know, that's all being laid in
And it's a part of that growth curve that we see and as Scott discussed, part of the reason, you know, we'll see a little bit lower growth in the first half and more in the second.
It's a part of that growth curve that we see and as Scott discussed, part of the reason you know we'll see a little bit lower growth in the first half and more in the second. You're welcome.
Okay, and then the cross selling, how does that handle? Is there someone that's the point person or do they just trade leads back and forth? Yeah, you know, that announcement of the Dominion Energy deal is important from a couple of ways. That was in the pipeline of Leos.
And, um, and we delivered that, but we brought with that and pitch dominion, why they should also want, uh, the strain sensing, uh, from, from opposite as we know with the acoustic. So that is an example of, of bringing together both the Leos and opposite capabilities into a project. So that is some cross selling. Yeah. And all of our sales leaders in that side of the business.
that everyone you know is very integrated as well and also along those lines if you've gone back into the install base what was what's been the reception and trying to get some of the monitoring business? Yeah the reception's been very very good in fact we just finished the commissioning on one of the world's longest oil and gas pipelines in Turkey and once we were able to complete that I think we have 50-plus systems on that pipeline.
We went back to that installation to talk about service.
installations over the course of the next three, four, five years and very highly regarded. The Dominion Power news that we discussed in our press release and on the call here today, is a story in terms of really strong reception for that ongoing service portion of the monitoring contract.
Okay, one last question. The infrastructure building, not the broadband which has its own issues, but the brick and mortar, the dams, the traffic patterns. What's your strategy here and what would be the timing of these funds being released over the next year or two and what type of impact?
May that happen, have on you and then also, again, long question, but how does the monitoring tie in with that program? Most of that is going to include our monitoring capabilities. In fact, I'd say, when I say most, it's probably more accurate to say all or nearly all. Our strategy there is to follow the...
close attention to that as you might imagine. To make sure that we're aware of any and all RFPs that could respond to whether it be infrastructure, roadway.
You know, etc. And timing wise that's it's rolling out a little slower maybe than we would have expected You know, we were thinking early part of this year mid part of this year We'd start to see a little bit more impact on that But you know frankly I'd have to say that the expectation has probably moved out towards the later part of this year into next year
Before you start seeing a material impact, but. You know, it is coming, the projects will be let and they will start and will be participating. In those, so yeah, it's truly unbelievable how. How these guys, you know, in many ways are difficult in rolling things out. I guess you know, you expect it with the federal government maybe, but but.
You know we stand there, we have teams in front of them, they certainly know that we have capabilities, they've talked to us about it, they just don't have the money yet. And I don't fully appreciate or understand the delay, but we certainly stand ready with it. And monitoring is a huge piece of that, we really believe that that will play an impactful role in us going forward.
Thanks for taking the questions. Thanks, Paul. And once again, if you have a question, please press star then 1.
The next question is from Dave Kang from B. Riley FBR. Please go ahead. Thank you. First question is, Brian , you talked about Book to Bill. I'm just wondering what that was for fourth quarter and also if you can talk about the backlog situation. Should we expect Book to Bill to be over one in the next quarter?
in first quarter? Yes, so as I said, throughout the year last year it was running between 1.1 and 1.2. Fourth quarter was a little bit lower. We just had a, it was really more driven by the revenues bumping up.
So from a book to bill perspective, it was more like between 1.01 and 1.05. We netted the year out total 1.14 and just on the product side 1.17. So still really strong for the year. A lot of activity between now and the end of the quarter, but we expect a strong look to this year.
with some of the businesses we have.
Got it. And then just quickly on this year's projection, I think you talked about this year being back unloaded as usual. So should we expect like 3565 or maybe 4060, any color on that? Yeah, you know, historically, we've gone out, you know, kind of 4456 ish.
Probably in that low 40s, I would say, is where we end up being.
Got it. And then regarding 10% customers, did you have 10% customers last year and who could be 10% customers this year? No, we don't have any 10% customers. No, yeah, no, no, no, we don't have that type of exposure. in NO of where to go, welcome to NO 92, ignition operation, and then also, the
I think the larger customers drift up into the 5 to 7% range, but we don't have a major concentration in the top.
you know 10 not for a full year. Got it so not even like a Lockheed or Northrop like your 10% cut? No, not Lockheed, Northrop, Intuitive, not on an annualized basis. It'll be 5 or 7 percent. Yeah, nothing that gets up to 10. Got it. Alright, thank you.
Not for a full year. Got it. So not even like a Lockheed or Northrop? No, no. Not Lockheed, Northrop, Intuitive. Not on an annualized basis. It'll be 5 or 7%. Yeah, nothing that gets up to 10%. Got it. All right, thank you. All right, thanks Dave.
The next question is from Michael Haymaker, a private investor. Please go ahead. Michael Haymaker Yep, thanks. Hey, I noticed that you came in at kind of the low end of the full year revenue outlook and I'm wondering if that's just revenue that's been deferred into this coming year or if it's revenue that's been lost.
Yeah, you know, we have a lot of, we gave guidance, you know, you have to put a stake in the ground as far as what you consider on the FX effect. And that's why we go out with this constant currency. You know, constant currency, we were right around 112 is the midpoint of the range that we gave a year ago. We gave guidance range of 109 to 115. Certainly we continue to see as adding LEOs continue to have a little bit more lumpiness but during a lot of hawk efficiency we can, in general, inadequate
with the project base. But on a constant currency to finish 32.5 for the Q4 and 112 annually in the middle of our range and pulling the 12 million of EBITDA, we feel pretty good with Asia locked down all year still on COVID throughout all 2022.
go out and announce that constant currency because when we gave the guidance range, there's no way for us to know what the foreign exchange is going to do. So that's why we kind of lay it out that way.
Great, great. I noticed inventories are up so is there a revenue recognition timing kind of thing that's... Let's just see.
I noticed inventories are up so is there a revenue recognition timing kind of thing that's going to make things look a little better in Q1.
otherwise would or? Well, you know, I think, you know, and that's why I mentioned inventory is up in many cases due to some of the supply issues, you know, issues that we've had and we're inventorying things. That could be a finished good inventory that's waiting to be delivered on the project side that has that up and that certainly is the case as well as some parts that we're buying, you know, six months, a year's worth. We never had to do that in the past.
I don't know where we finished, I think mid 30s probably on the inventory side. That's high for us and we recognize that but it is, we've never done that before mainly due to some of these issues that we're having on the project side with the finished goods and on the part side on the product side. So, but if you can get that inventory out, is that up for the Q1?
It's upside for 2023. We talk about Q1 being on the softer side. So love to flush it out in Q1 for sure. I think we certainly see it staging out in 2023, which is why we have it.
And my last question, last time I think you mentioned you had about six deals in the red zone that were going to be repeatable and recurring revenue and that kind of thing. And I saw you got Dominion, obviously that was a great one, and Intuitive Surgical. I saw something in the release about silicon photonics, a new laser, is that going to be one of those? Yeah, well when you look at the Intuitive Surgical, you'll see that they're going to be looking at it at the end. Yeah. Intuitive Surgical. E-A-M. E-A-M. E-A-M. E-A-M. E-A-M. E-A-M. E-A-M. E-A-M. E-A-M. E-A-M. E-A-M.
with certainly one of those bigger customers that we've been selling to for years and placed that 14 and a half million dollar order on us over 18 months. The follow along with the F-35 with Northrop Grumman was another one of those. You have the big programs like some of the mining.
dam issues that are out there, where we talked about with Dominion on the windmill. There's a couple, there's probably, there's still three or four hanging out there that have not come in. Some on the EV battery manufacturing, some on the medical side. So we have some big things still lingering out there. We will certainly announce those when the windmill is out.
I guess I'm searching for some good news for everybody. Yeah, yeah. And I haven't looked closely at it. We're kind of tied up here in prep. But I'm many times surprised whether it goes one direction or the other, because it was a really good year for us. And we're kind of tied up here in prep.
with some of the things that we've been able to achieve. I say transformational, I don't take transformational lightly. In that divestiture of the Luna Labs and removing that and becoming a pure play, this is the full execution of a five year plan that we put together five years ago and really feel good about delivering on that with all the other side static that was going on throughout the last five years, so.
Yeah, it's a big accomplishment. So is there another five-year plan coming then for the next five years? Certainly certainly and I and I welcome you Michael to come to the to the investor day that we're going to have in In New York and and we'll certainly do some press releases before that and lay some things out But that'll be a real well laid out version It's not just hearing from me but hearing from the depth of this team that I have here and
and really a well laid out investor day that we have lined up. So I think we should be able to lay out and give you insight into what these next three to five years look like and what we think it looks like and why we're so excited about what we believe that can prove. Great. All right. Thanks for answering my questions. Appreciate it. Thank you. And ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Scott Grave for any closing remarks.
Well, thanks everyone for joining us today. To our investors, please feel free. Reach out to Gene, Brian , Allison or me with any questions and really mark it on your calendar. We'll get some details out, but don't forget we're going to be hosting this investor day first ever this spring and we'd love to see as many of you as possible and we will drop out the details of that in a press release so that you can get it on your calendars. We're kind of coming to you, if you will, up in New York.
and we hope to see a lot of you there. So Chad, I'll let that be the conclusion of today's earnings call. And thank you so much, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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