Q2 2023 Luna Innovations Incorporated Earnings Call
Okay.
Good day My name is Jordan and I'll be your conference operator today at this time I would like to welcome everyone to the Q2 2023 Luna innovations incorporated earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question.
That answer session, if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the star key followed by the number one.
Allison Woody senior Director of administration, you May begin your conference.
Okay.
Good afternoon, and thank you for joining us today. This afternoon after market close we issued our Q2 2023 earnings press release as always you can find the release and supplemental presentation posted to the Investor Relations section of our website. If you do not have a copy of the release or the supplemental.
[noise] materials. Please check our website at Luna E. Dot Com, we will also post a replay of this call through our website.
Our comments and discussions today are based on non-GAAP measures. These adjusted numbers exclude the effect of certain noncash expenses and other items. The adjusted results are a supplement to the GAAP financial statements.
Luna believes the presentation and exclusion of these items is useful to focus on what we deem to be a more reliable indicator of ongoing operating performance.
Before we proceed with our presentation today, let us remind you that statements made on this conference call as well as in our public filings releases and websites, which are not historical facts may be forward looking statements that involve risks and uncertainties and are subject to changes at any time, including but not limited to statements about our edge.
Spectation regarding future operating results or the ongoing prospects of the company.
Actual results may differ materially as a result of a variety of factors more complete information regarding forward looking statements risks and uncertainties is available in the company's SEC filings, which can be found on the SEC website and our website, we disclaim any obligation to update any such factors or to announce publicly.
The results of any revisions to any of the forward looking statements to reflect future events or developments, except as required by law.
Sure I prepared remarks, Scott Graeff, our president and Chief Executive Officer, Jim that stroke, our Chief Financial Officer, and Brian Solar our Chief Technology Officer will be available to take your questions. At this time I'd like to turn the call over to Scott.
Good afternoon, everyone and thank you for joining us today it.
It's great to be back together after seeing so many of you at our May Investor Day in New York I look forward to sharing with you. Some of the progress. We've made since then and some of the dynamics, we're seeing in the market.
Importantly, my team and I continue to see an abundance of opportunities for our technology.
And as the largest player in fiber optics sensing, we believe we're well positioned to capture those prospects.
As you know if you attended our Investor Day, we entered this year as a pure play fiber optics company. After five years of execution against our strategy to focus on our core capabilities.
And as we began the second quarter of 2023, we lapped the sale of Luna labs, and the acquisition of layoffs.
Therefore, any growth we talk about going forward is organic growth.
We made good progress this quarter on many fronts.
I had to highlight one in particular it would be that we got much closer to.
And made major progress in several of our top strategic accounts.
We had some incredibly productive discussions with customers, both existing and new and some of those discussions led to agreements that had been quarters, if not years in the making.
Our sensing business of which a large component as those project based solutions grew incredibly well I will highlight some of our achievements in this business in just a moment.
In contrast, we saw pressure consistent with what we are seeing in some macro trends.
As a reminder, this business has more product based and more subject to slowdowns in discretionary spend.
She has slowed purchasing and some of the projects that we expected to move into procurement phase. This quarter are moving more slowly than we anticipated. We are hearing consistently that many of our peers as well as technology companies more broadly are experiencing similar dynamics.
Despite some of the current market forces, we continue to have confidence, which is supported by a strong sales pipeline and order intake as we entered the third quarter.
You may have seen in last week's press release that we continue to secure large multi unit follow on orders.
We are laser focused on the service and expansion of our strategic accounts across geographies and we continue to leverage our lead position in our primary markets.
As many of you know our last two acquisitions both of which are significant businesses are located in Europe .
As we've continued to refine our integration of these assets to ensure efficiency and to expand our growth opportunities. We recently named a managing director for our Europe Middle East and Africa region.
With an expanded European footprint significant international presence and more than a third of our employees outside the U S. It was clear that we needed to put in place a leader who could help us fully integrate our European locations and drive efficiencies leading to profitable growth.
In our European business.
Thomas older Meyer is an industry veteran coming to us with more than 30 years of experience.
Prior to our acquisition of Leos. He spent nearly 12 years as their CEO engaged in the development production and global sales of fiber optic distributed temperature sensors.
Having someone with deep history, and broad experience and technical environments, joining the team will be an incredible asset to our EMEA operations and the company as a whole.
Thomas is appointment in EMEA is an example of the types of investments that Luna will continue to make in order to support our growth we have spoken frequently about our need to invest in scalable platforms.
Process East and people in order to capture the opportunities we see.
For those of you who have followed Luna for some time you will remember that we have periodically had pressure on margins and earnings due to investments in the areas like engineering and sales.
Our highest priority is to continue to build value for the long term and we know that we will need to tolerate some lumpiness as we make the necessary investments.
We have a very clear long term vision and are focused on investments that will drive long term growth.
And profitability.
As you look at our balance sheet, you, probably see some of that Lumpiness reflected in our inventory numbers for the quarter the higher inventory levels resulted from our making strategic purchases to ensure that we are able to service new accounts as soon as they come through the doors, while also provisioning for nexgen platforms.
For several of our product lines.
In addition in some areas we continue to deal with the supply chain lag that began with the onset of Covid.
Let's turn now to some of the specifics of Q2 2023, including financial performance and a few business highlights.
After that I will turn the call over to Jamie for.
For the second quarter of 2023, we recorded total revenues of $29 2 million, an increase of 11% compared to the prior year period.
Our gross margin was 58%.
Adjusted EBITDA was two 7 million for the quarter versus $1 2 million in the prior year quarter.
Our adjusted earnings per share was <unk> <unk> for.
For the three months ended June 30th.
Now, let me share some specifics about each of our businesses.
Our sensing vertical had a very strong quarter, realizing 21% year over year growth.
The growth was driven primarily by strong performance in our distributed sensing products, which we often refer to as our project based business.
Product lines in those project based businesses grew in the strong double digits, realizing 43% year over year growth, which was driven by significant commercial progress in a number of different areas.
Including multiple large wins in our staple markets of pipeline and perimeter monitoring.
And significant wins in emerging applications, such as power cables industrial battery storage and mining.
For example, with power cables, we secured a nearly $2 million project for a monitoring system, combining our das and Dts products and industry, leading software for the largest power utility in Italy.
In the mining market. We won initial contracts in Q2 for the fire detection and conveyor belt monitoring with a partner in South Africa. This is an emerging market that we are investing in to grow.
Shifting focus to our terahertz business I am pleased to note that in Q2, we experienced triple digit revenue growth and record bookings.
Not surprisingly the automotive EV market continues to be the largest driver for this business. We were fortunate to secure a large follow on multi unit order in the EV battery market from our largest customer for this product line.
And.
Q2 was our first full quarter of production on the redesign terahertz systems. After successful transfer of production to our Atlanta facility.
Revenue in our communications test vertical was down 4% year over year.
As a reminder, revenue in this segment includes test instruments for telecommunications control modules for a variety of photonic applications and laser sources. Some of these areas were stronger than others and we believe that any slowness was due to macroeconomic factors.
On the positive side revenue for our REO offerings grew at a healthy 22% with satellite communications and Lidar applications continuing to drive growth.
Module revenues were down in Q2 compared to the prior year after growing at a healthy rate in recent quarters timing factors, including near term pressure on discretionary spending and inflated inventories at several large customers impacted revenue realization for the quarter.
We are encouraged by the fact that order intake has been strong.
We had multiple key wins in this area, including a seven figure blanket order for polarization modules from a major data center hyperscale or.
And significant OEM wins for new customers in multiple key growth segments, including defense systems Quants.
Quantum computing and medical applications.
We did experienced some spending delays for our higher end test equipment, especially from several of our larger government and defense customers.
Holding in the flattish performance in Q2.
We believe this is related to postponements and program spending rather than reductions.
We continue to have very positive conversations with customers, but I will share that many of those conversations span a longer period of time.
Because we are now selling more comprehensive solutions and driving larger multiple unit orders.
We have seen longer sales cycles as we've previously discussed.
But once we get the order and the books there is certainly real stickiness to it.
I am encouraged that sales pipelines are strengthening and the longer term outlook remains strong as we manage through some of the uncertainties, we face that I discussed.
All in all I wanted to express my optimism for Luna future, we are seeing greater than ever potential for users of our technologies.
We are aligned with macro trends in industries with vast market potential and I firmly believe that the opportunities ahead of us our abundance.
As we shared at our Investor day, we have set the stage for meaningful expansion.
We remain confident in our strategic direction, and we remain focused on scalability and capturing market share.
For Q3, we anticipate revenues in the range of 29 to 32 million and for the full year. Our guidance remains total revenue of $125 million to $130 million and adjusted EBITDA of $14 million to $18 million.
As you can see we are reaffirming our annual guidance. However, the back half of the year and particularly the fourth quarter are dependent on the timing of revenue recognition from some of those larger project based sales.
That in combination with some of the overall market uncertainty makes me more comfortable at the low end of our annual guidance range.
While I'm not happy about the impact that recent market uncertainty has had on Luna I want to express that on the whole I am proud of what we achieved this quarter, we've proven to be a nimble enterprise as we've continued to build and refine this structure, we need to drive the efficiency that will allow us to scale.
We have identified unique opportunities to collaborate with our customers on grander scale.
And to strengthen those partnerships, we're generating great momentum on targeted development projects that we believe will lead to long lasting high value relationships.
We have a positive outlook for long term growth and we are moving purposefully to capture the opportunities that lie ahead of us.
With that overview, let me turn the call over to Jim for his commentary on the quarter's financials.
Thank you Scott and good afternoon, everyone. As you just heard from Scott, We continue to drive the Luna business, even as we experienced some pressure in the sales cycles of some of our products.
This was the reason for some of the buildup in inventory that you see on our balance sheet.
More on the subject of inventory in a moment.
Let me start by providing some detail on our Q2 results as a reminder, now that we have lapped the sale of Luna labs, and the acquisition of <unk> all of our results are now on an organic basis.
Revenue this quarter was $29 2 million, an increase of 11% year over year. The increase was driven largely by performance in the sensing business, specifically organic growth from <unk>.
As Scott mentioned, we did see an impact from slowdowns and discretionary spend in our comps test business.
Gross profit for the quarter increased 6% to $16 9 million.
Our gross margin was 58% for the three months ended June 32023, compared to 61% for the three months ended June 32022.
Our gross profit increased in total due to the increased revenue from our sensing business.
Our gross margin decreased because the sensing business, which is primarily project based has lower gross margins than our products. So the net impact was an overall decrease in gross margin percentage.
Operating expenses were $17 1 million a decrease of 7%.
Its largely attributable to our continuous work to consolidate operations operate on standardized processes and platforms and drive efficiencies as we focus on our one lunar philosophy, we are able to better leverage our support functions.
Operating loss was 214000 for the three months ended June 30, compared to an operating loss of $2 5 million for the prior year period.
We had a net loss of $1 6 million compared to a loss of $2 4 million in the prior year period.
Adjusted EBITDA for the quarter was $2 7 million, an increase of 131% over the prior year period.
We ended the quarter with $3 3 million of cash and cash equivalents compared to $6 million at the end of 2022.
Our working capital was $63 8 million at the end of the quarter compared to $54 2 million at the end of 2022.
As I mentioned earlier, we are carrying a disproportionately large amount of inventory due to the lag on COVID-19 related supply issues, new product introductions and the expected increase in Q3 and Q4 sales the.
The operations team is continuing to focus on inventory levels lead times and improved forecasting to drive overall inventory levels lower.
Our total debt outstanding is $30 7 million as compared to the December 31, 2022 amount of $23 2 million. The increase was primarily due to tax payments related to the gain on the sale of Luna labs, and the increase in inventory to support second half sales.
Overall, we had a solid performance in the first half of the year I'm, particularly proud of the work. The teams have done on operating expenses and we will continue to look for ways to be more efficient as we drive strong growth on the top line.
With that I will turn the call back over to Scott.
Thank you Jane now, Brian Jane and I will be happy to take any questions that you may have so Jordan. Please open the call for Q&A.
Yeah.
Thank you.
At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just one brief moment to compile the Q&A roster.
Yeah.
Yeah.
Your first question comes from the line of Alex Henderson from Needham.
Your line is live.
Thanks.
So it just popped over from the Miami call.
I was listening to them talking about.
A gradual improvement in the comms test market.
They obviously went into of.
The weakness in the comms test market a lot earlier.
But they are now saying that.
With the.
The current quarter and their pipeline that they're actually seeing some improvement.
The willingness of service providers spend on operational Opex related.
Contest.
How long do you think the weakness in the contest.
Youre looking at the started so much later.
This is likely to last.
Do you think it is a short term kind of thing or do you think it takes two or three or four quarters to play out.
Can you characterize the term of that.
Yeah, sure well I believe it's going to be shorter, but I'm gonna, let Brian answer because he was most recently out with a couple of these customers and getting a feel.
So Brian do you want to yes, Hey, Alex as Brian just I think it's a shorter term.
Situation and remember for our Comms test business, we segment that out and the bigger customers and there are actually military defense customers and Thats, where we saw more softness than.
In the general communications kind of market. So yes, that's a good point to clarify that within our comps test. The end market that was a little softer was actually government spending in defense in particular.
And we actually see that likely to pick up here as the new government year starts later this year right.
Comments from military and Aero was that it was pretty strong.
Good visibility.
Pass that along.
In terms of the.
The back half of the year.
Can you characterize how you expect your spending to go do.
Dissipate given the strength of the back half.
Invest along with that growth or do you expect to provide more leverage.
Meaning to be more leverage on the Opex lines.
Yeah, we certainly believe the second half will be able to leverage more we have spent some of this upfront you saw it in the in the form of inventory and some other things. So we really believe and we've been we've been increasing that opex, but we believe that the opex has as somewhat leveled off and we believe we should be able to get.
Some leverage out of that in the second half of the year is that gene I think primary increase will probably be you know additional.
Commissions on the higher sales of variable stuck with there, but yes, Scott said nothing new.
No material change to it.
Great. Thanks.
Thanks, Alex.
Okay.
Your next question comes from the line of Dave Kang from B Riley.
Okay.
Thank you. Good afternoon. My first question is regarding your outlook.
Back out the first three quarters, you were implying fourth quarter revenue will be.
40 about $40 million.
It's pretty big sequential uptick from third quarter of what will drive that is that going to be mainly.
Sensing or do you as Brian alluded earlier.
Earlier that maybe Comcast both contributed.
Contributed some sequential growth in fourth quarter.
Third quarter.
Yeah, no. It's a good point, Dave we look at and if we look historically at Luna.
Anywhere between 42, and <unk> 44 somewhere in that range, 40% to 45 is is what we see.
In revenue that comes in <unk> versus <unk>.
I don't looking not necessarily at the number that needs to happen in Q4, although with the scalability that we've done we know that we can do larger numbers, but we've kind of look at it that way. We spent a lot of time going through the second half funnel with the sales guys in and things like that.
And I will let Brian talk a little bit to that but.
A lot of big deals out there a lot of sensing and multiple unit orders things like that that we see teeing up in in the in the second half of the year I felt it was it was worth being a little bit more.
Conservative here and in Q3 to make sure that we get back and really look at the second half with giving a little bit of topline there in Q3, Brian US Yeah, sure, Hey, Hey, Dave.
The math there.
Works out I think he got it right Q4 in order to achieve that.
If you look at last year Q4 versus what we're forecasting here for the rest of the year.
Frankly, both segments.
We will get back into that growth mode. So in growth.
While communications test and from from sensing.
And you know our visibility level is pretty high because.
As we've evolved over the last year and a half or so.
A lot of these orders tend to be on the larger side, we just announced the large order was an EV manufacturer that was in the mid seven figures. That's scheduled for the back half of the year, we tend to have a lot higher tick up in the defense business for a test equipment in the second half of the year in particular in Q4 as the new government year starts as I as I mentioned previously so.
Yes, really closely yeah, I think that's a fair point. There also is a lot of investment that goes in when you are able to convince and then bid and win.
Mid seven figure.
Deal that we just announced.
It does take a lot of upfront investment.
To get that sector to see the harvesting of that in the second half so.
We certainly anticipate that.
Yeah.
Got it and then a couple of questions on terahertz.
I was looking at my note then I think you were supposed to expand terahertz capacity by Forex during the quarter did you accomplish that and then second question on tariffs is that I think last quarter.
Your book are fully booked for the rest of this year.
So with additional second quarter bookings are you look beyond this year.
Yeah. Our goal is to get the ability to get to four and we have achieved that.
Last year, we're running excuse me last quarter.
Just to get caught up three three and a half will probably continue to run in that range with the ability to go to four when needed and we pulled deliveries in now so were booking into the latter part of this year into Q4.
With delivery dates and some of the some of those larger orders multiple unit orders have taken some of that that backlog out us as well so.
Okay.
Got it thank you.
Thanks, Dave.
Your next question comes from the line of Chris Sakai from singular research.
ISI, Scott, Jim and Bryan.
And for Jim.
Great can you guys talk more about your significant wins.
We're monitoring systems are these long term contracts and what sort of impact on revenue.
Okay.
Brian you want to talk about.
We haven't we have quite a few that we're landing.
Yes, so if you.
Look at the wins in quarter as we as we.
We mentioned Chris the.
Well, we kind of look at it as a core business, which is pipelines are perimeters, we had multiple strong wins there.
And the security side and airport several airports in Europe residential property in South Florida.
We landed several refineries utility in Italy, really really excited about the step into the mining the conveyor belt first significantly mining, which is an area that we view as a growth area. We did talk about the largest utility in <unk>, Italy, which is a power cable monitoring for the most part these.
Our.
Multimillion dollar wins that sort of a positive impact on revenue to answer your question.
They're for the most part in year scheduled in year and.
They are a combination of hardware delivery.
Sensor cables and software.
Okay.
Okay sounds good.
Are you seeing I know you guys recently have had some new for the EV battery production monitoring.
Are you seeing a pickup there in demand as far as.
Concurrently with demand for electric vehicles.
Yeah, absolutely yeah. The demand there is really the main driver of demand behind our terahertz solution, we talked about our win that we had in Q2 that was a very significant win.
Similar to the types of larger wins.
The strategy, we put in place to go from selling one or two to selling 10 2050, plus a lot of development actually went into that that product had to be completely revamped to get into that that application in line monitoring for the production of these batteries. So this is really our first major step here in Q2, along with getting the production up.
In Atlanta, and that is all driven by the global demand for Evs.
We've got other customers.
That we're developing behind that one major customer we've talked about and I think the outlook is pretty positive.
Okay.
Sounds good thanks for your answers.
Yeah, Thanks, Chris Thanks, Chris.
Your next question comes from the line of Ruben Roy from Stifel. Your line is live.
Thank you Scott Brian Hi.
Hey, guys.
I I joined a little late so I apologize if you talked through this but I wanted to touch on the EV win congrats on a on the order and.
Getting Atlanta up and running.
Just thinking through the guidance for the year reiteration of the guidance and the new order and it sounds like youre going to Youre expecting delivery through the remainder of this year I would imagine that would be incremental to how youre thinking about full year guidance is that correct and if so are there. Some other moving parts elsewhere or are you being conservative on the guide for the full year. If you can just walk me through how you are.
Thinking about that please.
Yeah, I don't see that as incremental.
The way, we step back and look at everything that debt.
Is going to happen and for us in many cases, it's a timing thing.
<unk>.
Just given.
I'm interested to see the write up and listening to what the Avi was saying on the on the comps test side Thats interesting but.
Given given what we've seen.
But we step back and look at a lot of these bigger deals and we've always looked at annual guidance Thats. What we used to just only give the annual guidance and we look at it and say.
You got to be pretty damned certain on the bottom end and then you have opportunities to you know to be.
The higher end of the range and we take it very seriously and go through it in detail. It's a bottoms up look at these things.
It just comes down to timing.
And that's a matter of Av.
The way we look at it. So there is some things that are in house that we have orders in already we're working on and we factored into reaffirming that guidance. There are some things that that that would take that would move you around within that within that range, but that's kind of how we step back I've always looked at guidance as what do I see in front of me now.
To just try to be absolutely straightforward and transparent with what we see today to give you what what's out there and that's how we guide.
That's helpful. I appreciate the detail Scott.
And maybe for Brian .
You're.
Obviously, gaining traction in EV, it's an exciting space.
Obviously, you had a win win for temperature sensing temperature monitoring I guess.
What are the synergies like you know for that type of product along with the terahertz.
Texas thickness sensing.
Moving forward do you expect kind of synergistic sales and kind of additional.
Additional opportunities because of having a broader portfolio of testing products for that market.
Yes, yes for sure the question a little bit probably hard to quantify at this point, but we are seeing we're seeing the activity levels increase organically, but through partnerships between the sales teams that sell cross sell these different products certainly we've seen new opportunities arise because of.
For the temperature sensing because of the EV work, we've done because it's.
It's exciting.
It's pretty high profile within the company now that said there is also internal synergies because the platform strategy that we've developed.
Is driving commonality between all these platforms. So we're not there yet on these two particular products but.
There'll be using a lot of the same components a lot of the same internals the optics, the mechanicals that kind of cuts if you will the products.
Are all highly leverages all across these platforms. So we get we get some internal synergies as well.
Excellent. Thank you.
Thanks, Robert Thanks, Robyn.
Your next question comes from the line of.
Tim <unk> from Northland Capital markets. Your line is live.
Hi, Good afternoon also coming in a bit late but.
So hopefully not repetitive here, but yes.
<unk> been talking a lot about some pretty significant wins in the quarter.
Mostly on the sensing side of the business and I Wonder if you have any commentary kind of at a higher level.
Around.
Bookings.
Or backlog book to Bill either some sounds like some of these are hitting in Q3 as well.
For.
For the June quarter heading in December what sort of trends, we're seeing there. Thanks.
Yes, I think that as I looked at it.
About.
North of one about one two maybe on the product side of the business if.
If you look at some.
Some of the some of the businesses are we are booking more than we're able to get out the door on some of those larger orders.
Just carries into net debt.
That leads into can we get it out some of these are very large orders does it spill into Q3 Q4, even into next year and some of these larger orders.
Okay great.
Thank you cover that was going to ask that.
1112, I assume was Q2, where you expect that to sustain in Q3.
Yes, I mean, yes.
Some of that rollout.
Is.
It could be it could be that or even higher than in Q3 in some of these things that we're looking at you just they just don't move as easily as when you can ship a box out the door on.
On the comps side, you know some of them when they come in and say that they want to place an order for larger numbers and things like that many times.
It requires these upfront investments because they don't want me to say I love, the Ob or that you make today I want to place tenant 10, a month for the next 10 years they come in and go cannot Ob or do something and you have to work on it and invest and invest more R&D to get to.
What we are doing so I see the book to Bill continuing to run pretty hot for us.
Because of those larger orders is that Brian you tell me if that's yes, no that's fair and then we've got.
Several larger blankets, we're looking at for next year deliveries on things that we've talked about in the past lasers in particular that would drive that book to bill even higher.
But again, it's the kind of thing Thats hits this year and delivers next.
But it drives visibility into 24, so lets goods.
Right and I guess from a laser perspective youre looking at Lidar is the end applications I did have a question on.
The.
Commercial side, if you will the commscope business or the silicon photonics.
Good.
Are you seeing any activity.
As a result of what the.
The cloud guys are their suppliers are doing on the.
AI front.
Yes, that's a good question, we've been digging a lot into that that's a very rapidly evolving area.
And one of the large orders we talked about in our narrative was with a cloud player and we're digging into the nature of that we do believe is driven by AI buildout.
As you know it can be a little bit hard to determine what wasn't where these things eventually are ending up in terms of.
Their endpoint, but the level of activity on the commercial comms test side and the test stands that we're building into the one in particular, we talked about was a really nice seven figure win.
And it was one of the product lines that was down year on year for us revenue wise.
It was really strong bookings wise, just because deliveries during the latter part of the year and we do believe that AI is playing a part in that.
Great. Thanks very much.
Thanks, Tim.
Your next question comes from the line of Paul <unk> from William K Woodruff.
<unk> slides.
Thank you for taking our questions.
Most of my questions have been answered.
I do have one I know you mentioned.
The in the sensing area some of the wins you've had these companies together now for a year.
Can you give us a sense for what youre seeing in the funnel that's building that you've been able to put together what areas do you see strength in any sense of when you expect these things to kind of break and everybody starts to two.
To jump in.
Hey, Paul.
So the funnel is robust right and so.
We think we talked at our analyst day about numbers north of $200 million in terms of opportunities that we're chasing.
And those would be for this and next year timeframe energy in particular power cable monitoring where we're combining the solutions from from the two recent acquisitions is a big one.
And we've got visibility in that area into some pretty significant wins.
There's some work to do.
There's work to do on the products has work to do on the customer development side, but that's one area that's really growing rapidly.
A rapidly both domestically and in Europe , we talked about the power cable opportunity in Italy that we've recently won those are coming.
No.
At a higher rate than they have even in previous several quarters and are coming at a higher dollar value.
So.
But we're seeing good activity.
That segment was up north of 40% this quarter and is driven by not only that that infrastructure has been strong pipelines.
Pipelines have been strong.
We mentioned some new applications like mining.
We're working on product developments for the main products in that category.
Three main products that we use to service that category or really for.
That will result in new products between the end of this year and at the beginning of next year that will allow us to really begin to harvest some of that at a faster rate.
As I said, there's work to be done.
But we are aimed in the right direction I believe we've got the right resource behind it.
Okay.
And how about the infrastructure build some of these if you I know you said, you're starting to see a little bit of the funds during the full last quarter as any pickup there sandy design were coming across.
The work there I would categorize that as still pretty early days there have been something like 2800 projects, let from that bill over $100 billion in spending, but what we're learning is that most of that is for you.
Filling the crack so to speak it's really making sure the damaged infrastructure, it's just fixed and working properly, but we do have some work going on with a number of institutions cross country still relatively low from a revenue standpoint.
But we do expect to see a pickup.
Timing wise, we've always said hard to predict right now probably looking at mid late next year to see anything significant.
But lots of activity.
Once they start their five year program. So that once they do get going they should have a nice five year tail to them that will generate.
Business for US you know kind of over that timeframe.
Okay. Thank you.
Do you expect to file another follow on order for the handheld for the F 35 this year.
Yes, so that's.
Certainly we expect continued follow on orders for that we have a frame agreement in place for annual quantities.
<unk>.
The outlook for this year is a little cloudy on that's one of the things that drives the uncertainty we talked about so right now we're looking at getting that into the aperture for this year, but some of that government spending has been a little less.
Predictable than it has in previous years, I think just driven by delays programmatic delays.
Delays in getting equipment in the field.
But.
So whether whether or not we get that in this calendar year or not is still something we're working on but.
A question of when more than his.
Okay and my last question is you.
<unk> manufacturing footprint.
You and your investors as Jackie kind of tuck, but optimizing the east coast.
And the Atlanta, the Atlanta facility in particular.
First question is do you have you seen any impact on gross margin.
Cause of that and can you quantify it and then secondly, I know that the next step is to do the west coast and in Europe , where do you stand there.
And in both cases.
Do you expect to have on gross margin when all of this is done.
While some of that build out.
Be a drag on the margin right and so.
We've seen a little bit of that the majority of what you saw on the gross margin. This quarter. I believe was was more product mix, but it would really be in the coming quarters, where you'd start to see the tailwind on that.
And then going into next year.
Thank you.
I think it's probably worth gene, commenting on that as well and the margins Paul but.
Jackie you remember at the Investor Day talked about these core competencies and I think you have to be careful to make sure. The core competencies grow at a rate that debt revenues growing to make sure that that we don't get out ahead of ourselves on some of those things in and that some times in moving something and Youre, creating redundancies until you get to the point.
Fair.
You can kind of streamline that kit can have short term effects on margin, but I would think.
It would clean out, but Jim you give a little comment on gross margin going forward, Brent Yeah, right, where we said full year, we thought we'd be around 60%, we still think that.
To the point that Brian made as Youre transitioning there is a little bit of a headwind there, but then you get the tailwind later on and so.
For the most part they're through the move from Ann Arbor to Atlanta, that's up and running they are fully staffed and ready to go.
And so we would see that coming up to the 60% I think you would see most of the positive impact though later, maybe in Q4 and then into early part of next year. Yeah. I think it was encouraging for US all units that went off the dock in Q2 terahertz related I'm talking about all came out of Atlanta.
That has been 100% in Atlanta, and don't underestimate what that takes it seems it seems trivial but boy. It is not moving production lines from from Michigan to Georgia. It was it was it was the right thing to do it just it takes twice as long as you think it was in <unk> and a little bit more calm.
And we thought but but we really feel really good about where we are.
Last question.
On the subject.
What type of drag do you expect.
And can you quantify the drag this year and maybe into next year with all these changes, including what might taken particularly in Europe .
Drag on the gross margin yes.
Yes, yes from what Scott had said there'll be some disruptions.
Yes.
We had some of them in Q2 had some migration costs that you can see in our adjusted EBITDA schedule, we have that in there.
Probably the bigger the bigger drag will see as we didn't.
About it but.
We're putting up we're increasing our production capacity in our laser facility in California.
Coming online here.
At the end of Q3 and into Q4, so there's been a slight little drag there, but I think when you look at our sales level, 1% typically a couple of hundred thousand so I would say in that range probably.
Okay.
Very good that's all I had thank you alright.
Alright, Thanks, Paul.
Your next question comes from the line of Alex Henderson from Needham.
Thanks.
It seems to me that you guys ought to be.
Viable for the chips Act.
Particularly given the U S manufacturing.
Can you talk about whether you have any intention of getting any funding from that.
We are looking into that that is something that.
I don't want to get out ahead of that but yes, I think that is something that we agree with you.
And then the second thing is I wanted to understand a little bit more about.
The quote seven figure blanket order polarization.
First of all what is the blanket orders.
I'm not sure I know what that term implies.
And then secondly, it's a little bit of a contrast to.
To what we're hearing out of that segment a lot of people are seeing a lot of consolidation and slowdown in that business.
Is that a function of tying into the AI that does that.
Something that you are getting now going into an environment where conditions are tightening.
Yeah, I'll, let Brian talk a blanket orders the way we use the term blanket order and if someone comes in and says Hey, I need a 100 of these things over the next 18 months or something like that Thats a blanket. We obviously can't get 100 of amount in the current quarter current month, maybe current half of the year. So we look at it as a blanket order they place the order. They are all the same and we will pick off.
That usually work with them on a delivery schedule. So that that's what we're talking about when we say a seven figure blanket order they've command, we've used to before like with intuitive surgical when they've come in and said I want to place a $14 million blanket order to get lasers over a 18 month period or something like that so yes in that order in particular was four.
For datacenter for testing.
With one one of the larger players in that space and.
Yes, we do believe that it's driven by some AI buildout.
So what exactly is the polarization module doing is testing the.
The.
Contrast of data of late.
Going down of fiber fiber testing and then we're looking at.
It is built into a test system that stress test very high channel count stress testing of receivers datacenter receivers polarization.
Polarization sensitivity, which can bring can bring the whole lined down which is near its not catastrophic but it's very expensive.
C D C WDM I assume.
Yes.
Great. Thanks.
Thanks, Rob.
Again, if you'd like to ask a question press Star then the number one on your telephone keypad.
Your next question comes from Chris Sakai from singular research your line is live.
Yes, just to follow up on that blanket order.
Wanted to get a sense of the timing on that will over over what timeframe can we expect that order.
This in next quarter. Yeah. This is Q3 right. Yes, yes. It just came in Q2, we couldnt get it out the door Q3, Q3 Q4, maybe into Q4 okay.
Alright, great. It sounds good that would fall out.
Yes.
No problem thanks, Chris.
There are no further questions at this time, Mr. Scott Graves I'd turn the call back over to you.
Alright, Thanks, Jacob I appreciate it.
Thank you everyone for joining us today as always we appreciate your time and if you have any follow up questions feel free to reach out to any one of us we'd be happy to address them so with that.
We will end today's call I appreciate it.
This conference has now ended you may disconnect.
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