Q3 2023 Luna Innovations Inc Earnings Call
Good morning, My name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the third quarter 'twenty twenty-three Luna innovations earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again Crestar. One. Thank you I would now like to turn the call over to Allison Woody Director Senior Director of Administration Allison you May begin your conference.
Good morning, and thank you for joining US today. This morning, we issued our Q3 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 materials. Please check our website at Luna Inc. Dot Com. We will also post a replay of this call through our website some of our comments and discussions today are based on non-GAAP measures. These adjusted numbers exclude the effect of certain noncash expenses and other items. The adjusted results are.
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 expectations.
Regarding future operating results or the ongoing prospects of the company.
Actual results may differ materially as a result of a variety of factors more complete information regarding forward looking statements risks and uncertainties is available in the company's SEC filings, which can be found on the SEC website and our website.
We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward looking statements to reflect future events or developments, except as required by law.
After our prepared remarks, Scott Graeff, our president and Chief Executive Officer, George go math, when Tara <unk>, our Chief Financial Officer, and Brian Solar 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.
Good morning, everyone and thank you for joining us today.
I'm pleased to be here today to discuss our third quarter results.
As Allison mentioned in addition to Brian Soller, our new CFO George Gomez Quinn Taro has joined me for the call today.
George joined our team nearly a month ago, replacing gene that is true.
I want to start by thanking Jean for his contributions to Luna under his leadership, we established a scalable foundation by making the necessary investments to improve infrastructure processes and systems. These moves have put us in a strong position to be able to continue to drive both org.
Ganic and acquisitive growth.
I'm thrilled to welcome George to the team.
He brings to Luna, a deep operational focus and significant experience in F. P N a.
Investor Relations Treasury procurement.
In credit and collections.
He has had a wide range of experience in public companies and he has built and developed strong finance teams of all sizes.
These experiences will be critical as we continue our pursuit of opportunities that will enable us to further expand our global footprint and elevate our international presence.
You've heard me say before that our leadership talent is the linchpin in driving our strategy and capturing the abundance of opportunity with which Luna is presented and we are well on our way.
In addition to George you'll remember that we hired ever Hartman, our senior Vice President of HR, almost a year ago and more recently Thomas older Meier, Our senior Vice President and managing director of EMEA.
These have been strategic moves to bolster our senior leadership team and with seasoned professionals, who have demonstrated success in international operations and growth across technical environments.
As you know we've made incredible strides in expanding our global footprint via acquisitions in the last several years I've.
I've mentioned before that we now have more than a third of our employees outside the United States and more than half of our revenue was generated outside the U S.
In a time frame, where we've been very purposeful about driving growth improving infrastructure and streamlining operations. We've also been incredibly intentional about putting the right people in the right roles to support that work.
We continue to be strategic about the team who will achieve the targets we've outlined.
With that reflection on our leadership, let's turn our attention now to Luna third quarter performance.
Q3 was a solid quarter for us in spite of macro headwinds that are affecting businesses across geographies and industries. The headwinds were a continuation of some of the dynamics we saw in Q2.
And they impacted us similarly to many other business you've already heard report for the quarter, we had a tough comp this quarter, but continued to build momentum.
While some challenges hung over from last quarter, we bounce back where we said we would.
I will provide some more color in a moment, but overall, our sensing business was pressured particularly in contract research and terahertz I would characterize most of the pressure as timing and slower sales cycles, even though we saw some significant wins in this business our communications test.
<unk> business had a strong quarter driven in part by a few recoveries from last quarter.
So, let's turn to some of the specifics of Q3 for.
For the third quarter of 2023, we recorded total revenue of $30 7 million, an increase of 5% compared to the prior year period.
Our gross margin was 57%.
Adjusted EBITDA was $4 2 million compared to $4 5 billion in the comparable quarter last year.
Our adjusted earnings per share for the quarter was seven cents.
As I mentioned, our sensing vertical experienced pressure this quarter and as a result revenue was down 6% year over year. This was largely driven by tough terahertz comparisons.
After several consecutive quarters of double and triple digit growth. We saw a Q3 decline in revenue on a year over year basis due to timing of deliveries related to several large orders on backlog.
Our outlook for terahertz is incredibly strong bookings and backlog are robust and the future of the product line is bright.
Product revenue was essentially flat year over year with mixed performance between product lines and markets, notably sales of our Odyssey High resolution sensing product reached record levels. This quarter, the 72% year over year growth in this product line was driven by strong demand.
And a contract for a large infrastructure project requiring multiple systems.
I continue to feel optimistic about the breadth of applications.
For our fiber sensing solutions as evidenced by multiple significant wins this quarter.
We were awarded a multiyear fiber optic monitoring service contract on a transcontinental natural gas pipeline, where our solution will help ensure gas supply from our former Soviet Republic to the EU.
Luna is distributed fiber optic monitoring system provides early warning and highly accurate localization on issues such as intrusions on the pipeline right of way gas leaks and other potential threats such as dragging anchors from passing boats.
As another part of the project Loon is distributed fiber optic monitoring system will provide perimeter security for the pipelines above ground facilities.
Such as compressor stations and other in line facilities that can be vulnerable.
We also secured multiple sales of earthquake monitoring dash instruments to seismic labs on the west coast and to the U S government.
We now have more than a million and a half in new orders for das and Dts systems for pipeline monitoring from the largest energy company in the UAE.
We renewed a global supply partnership agreement with one of the world's largest multinational conglomerates for critical infrastructure monitoring.
The agreement covers supply of linear heat detection perimeter security pipeline monitoring and mining product lines to infrastructure operators around the world more to come on this as our details get finalized.
We also recently deployed the successful application of fiber optics sensing based traffic monitoring for the state of Utah Department of transportation, where lunar is providing accurate and timely information regarding the average traffic speed detecting slow or stop traffic and estimating journey times between <unk>.
Set locations.
We won this project project jointly with our partner Dura line, a leading conduit manufacturer.
We also amassed multiple additional awards totaling over $1 million for power cable monitoring systems throughout the world. This application continues to be a significant driver of growth.
Quarterly performance in our communications test business was solid we realized 26% year over year growth in this segment.
As I mentioned earlier on the call we saw some recovery from the headwinds we experienced in this segment in Q2.
Revenue for our laser module business remains strong performance in this business line is primarily driven by OEM sales of our REO lasers into lidar and sensing systems.
We continued deliveries of our Phoenix laser system to intuitive surgical against the $14 million order placed late last year.
We also continued to realize strong sales of our polarization control modules to emerging photonics applications.
We're pleased to share that we've secured significant wins with new OEM customers in defense systems quantum computing and medical applications.
Finally, I hope you saw our announcement last week about the large contracts secured in support of a major technology providers Hyperscale data center.
Our technology will help the provider more accurately assess the performance of Transceivers in their data centers as they work to reduce power consumption and data interruptions in those centers.
Let me now turn to our outlook as.
As we keep hearing from others lunar two continues to see a less predictable and more challenging macro environment that said, we know that Luna solutions are a superior way for many industries to address critical issues.
While I continue to be very optimistic about our future you undoubtedly saw the downward revision to our revenue range.
Obviously I'm disappointed this was direction, we went and although the changes not indicative of any degradation in the demand for our solutions. It does represent a change to what we see closing getting delivered and installed before year end.
About a month ago as we were preparing to announce Georgia is higher I've spent a good deal of time with our operations and sales leaders based on what customers were telling us we were comfortable reiterating our guidance.
But in the last couple of weeks, we've had certain customers tap the brakes on some of their projects, we're still moving forward.
Just doing it more slowly.
As a result of these dynamics, we're revising our topline guidance to total revenue of 120 to 125 million, but we are maintaining our adjusted EBITDA range at the same level at which has been all year and that is adjusted EBITDA of $14 million to $18 million.
I want to make an additional comment about the size of the revenue range given that we're in the last quarter of our fiscal year <unk>.
By now you are likely aware that some of our sales include large project based orders we have many of these transactions included in our backlog and.
And the timing of delivery and installation is largely controlled by our customers.
Therefore, the revenue recognition can swing from one period to the next.
This means that even with just six weeks left to go in the year revenue could shift into next year and is why we are keeping a broad revenue range.
With that overview, let me turn the call over to George for his remarks on the quarter's financials. Thank you Scott and good morning, everyone.
I am excited to be here today as the newest member of Luna team.
As I got to know Scott and the rest of Luna is leadership at <unk>.
Increasingly impressed with their vision.
Select and commitment to solving complex problems for very demanding customers.
<unk> solutions address the needs of global customers in multiple verticals and the breadth of opportunity represents significant potential for value creation.
I am looking forward to meeting many of you in the months to come and to partnering with Scott and the team to drive <unk> growth and shareholder value creation.
Now let me provide some additional detail on our Q3 results.
Third quarter revenue was $30 7 million, an increase of 5% year over year.
The increase was driven largely by strong performance from our comms test business, specifically, a rebound in sales to our government and defense customers.
As that business continues to recover from the headwinds we mentioned last quarter.
Gross margin of 57% for the three months ended September 30 of 2023 was 62 basis points below prior year.
The decrease in gross margin was driven primarily by product mix.
Operating expenses were $16 $5 million, an increase of 7%.
Sequentially Opex was actually down three 5%, reflecting some of the cost efficiency initiatives management initiated as part of our one lunar strategy.
Operating income was $1 2 million for the three months ended September 30th compared to operating income of $1 5 million for the prior year period.
The company had net income of $461000 compared to net income of $1 2 million in the prior year period, and adjusted EBITDA for the quarter was $4 $2 million compared to $4 5 million for the prior year period.
Turning our attention to the balance sheet.
We ended the quarter was $6 million of cash and cash equivalents compared to $6 million at December 31, 2022.
However, importantly, cash increased nearly $3 million sequentially.
Our working capital was $65 2 million at the end of the quarter.
Compared to $54 2 million at the end of 2022.
The increase was primarily due to increases in accounts receivable and inventory.
I want to make a few additional comments about these changes.
In the third quarter accounts receivable increased $6 million versus year end 2022.
As we had a disproportionately large number of units that shipped at the end of September.
Leaving no time to collect before the quarter cutoff.
Inventory increased $6 7 million versus December 31, 2022.
We're still dealing with supply chain challenges so when certain inputs become available we purchased the number we anticipate meeting.
We've been talking about the higher levels of inventory consistently for the past year.
As we've discussed we are focused on improving inventory turns and are confident we will be able to do so.
In addition, I think it's instructive to look at the sequential change in inventory, which shows roughly a 3% increase.
We are working hard to ensure we are only holding the inventory we absolutely need.
Our total debt outstanding was $31 $9 million compared to December 31, 2022 amount of $23 2 million.
The increase was primarily due to a $12 million drawdown of the revolver offset by a reduction in the term loan.
Overall, we had a solid quarter, despite the tough comparisons, resulting from the significant COVID-19 rebound in the third quarter of fiscal year 2022.
I've now been at Luna for one month and I'm, even more excited about the companys potential than it was during the interview process.
I've already been to the UK and Germany to meet our teams there.
We have some terrific assets and I look forward to continuing to dig in and help Luna achieved the potential I know it has.
With that I will turn the call back over to Scott for his concluding thoughts.
Thank you George before we open the call for your questions I want to take this opportunity to emphasize our belief in being as transparent as possible about the events, we see unfolding and their impact on the business. While we we've seen real pressure from evolving macroeconomic headwinds we want you to know.
That we're making real time changes to ensure that we're able to continue to deliver shareholder value. We remain bullish in our vision and the long term results. We've outlined now Brian, Georgia, and I would be happy to take questions about today's presentation. So Christa. Please open the <unk>.
Call for Q&A.
As a reminder, if he would like to ask a question. Please press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question press the pound key well pause for a moment to compile the Q&A roster.
Your first question comes from the line of.
David Kang from B Riley. Please go ahead.
Hi, Thank you good morning.
First question regarding.
Fourth quarter.
Actually I'm more interested in next.
Next year since we already know fourth quarter is how the how should we think about next year.
Should we expect.
So double digit growth or maybe in the first half maybe starting slowly in.
One of our strongest second half any color on next year outlook.
Yes, I think we continue to feel the way that we always have on 2024, I think what's out there in the end.
And the <unk>.
The comments that we have made on 2024 continue to stay the same we see these things that have pushed.
Pushing into Q4 and 2024, so we don't see anything changing from what we already have out there Dave that we've talked about with everyone in regards to 2024.
Got it and then Comcast.
It's great to see a quick recovery just wondering how sustainable that is.
Yeah.
I'm, sorry, I didn't understand that so can you say again.
Yes, Comcast it sounds like.
It rebounded last quarter is that a sustainable recovery or was it just the couple of.
Orders kind of making it appear to be up.
Quick recovery.
Yes, no Brian you want to.
We've talked about this last time that we saw that some headwinds in that segment would would persist maybe through the middle and part of the year, we saw a nice kick kick back up to.
Normal levels in Q3, and we continue to have good visibility into the next few quarters and we believe that'll be a sustainable.
Our sustainable come back rather than just a kind of a one off.
Got it and my last question is is on Cara Hertz just.
Update on that.
EV battery testing opportunity and update.
Update on the capacity expansion plans.
Yes that continues to remain strong Dave.
What we have is a tough comp in Q3 of last year.
We had a big delivery to a big customer.
And but we continue to work through that a lot of that is already in backlog. It's just a matter of when that gets delivered but that continues to be strong across multiple customers.
And most notably with with a very large customer.
Brian on the if you want to add to any of that yet I mean, the order book is strong the backlog is strong we look to finish the year on a high note and for that product.
And with the capacity build out is on track and.
Looking for another strong year next year.
Can you remind us your capacity.
Actually quantify I remember it was like a four times our capacity expansion is that correct, that's correct yep or capacity.
Yep got it okay. Thank you.
Thanks, Nick.
Your next question comes from the line of Paul <unk> from William Cable address. Please go ahead.
Yes, thanks for taking my question.
I wanted to talk a little bit more about the balance sheet.
You got it correct me, if I'm wrong about $35 million in credit lines and your you are up to $32 million, how much do you expect to be able to.
The squeeze as far out of your working capital in the third or I'm, sorry into the fourth quarter into first quarter next year.
Yeah.
Good question Paul.
We continue to see as we've said first half of the year is a little bit.
More difficult on the us and the second half is really harvesting you saw us harvest about $3 million in Q3, and I think Youll continue to see we don't see opex is going to hold pretty steady and we will be able to leverage off that so with with what we see as much larger revenue in Q4 that that.
That will fall through so we should again see a strong Q4 as it relates to.
Cash generation.
And working capital.
George I know you want to add.
Okay.
Okay. The other question this disorder with the data center win is this something that has legs.
Given everything that's going on with AI is this kind of a quasi AI play and do you see more customers on our larger market out there can you give us some color on that.
Yes sure yes, we do believe it has legs, we've made a lot of progress with one.
Relatively significant customer.
You saw the announcement this week and we look to be able to replicate that.
With other customers in the space It has to do with.
High speed testing of many many.
Data sockets optical sockets.
In parallel which is really the key to being able to enable this large scale deployment whether it be in.
Any type of Hyperscale data center, but certainly that includes AI data centers.
So yes, it's a nice it's a nice solution from our team in Chino, California that that make our polarization management and control modules.
And do you guys out knocking on doors, you have a good sales funnel in that product.
Yes, we do.
Okay.
Question, maybe an update a little bit on the F 35.
How that's going I know there was a terahertz follow on order out there somewhere.
Are you planning on getting it by year end update on that and then very quickly where do we stand with the F 22 and.
Magnet with the Airbus as we still look in 'twenty five.
Airbus business, Yeah, Let me, let me start with the F 35 question.
35, while while they do buy terahertz systems for measuring the thickness of the the coding being on the outside of the plane that really is our <unk> 6200 that we're specced into PA and yes, we do expect.
We do expect that order in Q4, so that is something that.
We are expecting and is factored into.
To what we're guiding so that is a a large order of that.
We have gotten assurance that we will get so as it relates to expanding into other.
Planes within Northrop Grumman or Lockheed Martin.
We're making progress on that Brian do you want to talk a little bit about the F 22, or $2 30, or yes sure. So we have a we are expecting some follow on orders. We got the first orders for the F 22 this year.
We're doing some customization of the interface for that aircraft to the later part of this year and then with unit deliveries next year, So that's going well.
And on the terahertz side related to the.
To the F 35 application those orders have come in as we've discussed for delivery throughout the rest of this year.
Okay.
Thank you that's all I had.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
We have no further questions in our queue at this time I will now turn the call over to Scott Graeff for closing remarks.
Okay. Thank you everyone for joining us today and as always we appreciate your time.
And with that Krista, we can conclude today's call.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
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Okay.
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