Luna Innovations Inc (LUNA) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter Luna Innovations Incorporated earnings conference call. My name is Latrice. I will be your coordinator for today's conference. At this time, all participants will be in a listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

At this time I would like to turn the call over to your host for today's conference, Mr. Dale Messick, Chief Financial Officer. Please proceed, sir.

Thank you, Latrice. Before we proceed with our presentation, I would like to remind each of you that the statements by Luna's executives during this presentation include information that constitutes forward-looking statements made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements about Luna's plans, objectives and strategies and management's expectations and beliefs about business results in the future.

Forward-looking statements are subject to many assumptions, risks and uncertainties that may cause future results to differ materially from those anticipated, including the risks and other factors listed in Luna's filings with the Securities and Exchange Commission. Such filings include Luna's quarterly reports on Form 10-K and its annual report on Form 10 -- or quarterly report on form 10-Q, and it's annual report on Form 10-K. All forward-looking statements are based on information available to Luna as of today's date. Luna undertakes no obligations to update any forward-looking statements as a result of any new information, future events, changed expectations or otherwise.

And now, I would like to turn the call over to Kent Murphy, Chairman and Chief Executive Office of Luna Innovations.

Thank you very much, Dale. Good afternoon, everyone. Thank you for joining us as we review our operating results and other developments during the second quarter of 2009. Before we get into the details of the second quarter, let me update you briefly on the progress of our Chapter 11 filing that we did in mid-July. While the filing has certainly had some impact on our vendor relationship, and raised concerns among some of our customers, I want to assure you that we are continuing to run the business in our normal fashion, and deliver exceptional products and services to our customers.

We are continuing to develop new innovative products for our markets, and provide unique applied research capabilities in our technology development segment. With respect to the legal process, to-date, the court has provided us the necessary approvals to keep us operationally moving forward.

One of those necessary approvals related to the retention of outside professionals, including our independent accounting firm, Grant Thornton, because of Chapter 11 filing required Grant Thornton to go through an extensive internal process to determine if they wish to continue to be Luna's independent accountants. I am happy to report that they did decide to maintain their relationship with us. And then, subsequently, their engagement had to be approved by the Bankruptcy Court.

We had to delay the required review of our quarterly results and filing of our 10-Q beyond the normal timeline. The court heard our motion to retain Grant Thornton and has approved their continued relationship as our independent accounting firm and, accordingly, we filed our 10-Q today.

In the coming days, the court will hear our motion requesting an estimation hearing related to the Hansen litigation claims, as well as Hansen's motion requesting that the automatic stay provided by bankruptcy be lifted and the litigation allowed to continue in California. We believe that the estimation process provided within the US Bankruptcy Code allows for the most effective means of resolution of the Hansen claim and allowing us to emerge from Chapter 11.

With that, let me turn to our business results for the second quarter. Overall, our revenues were lower than the second quarter of last year. On the product side of our business, the economic slowdown that began for us in the fourth quarter of last year continued to impact the sales of our optical, test, and measurement equipment on year-over-year comparison.

Our products continue to be industry leaders, and I believe that the enhancements we are currently making will allow us to penetrate new markets as the economy improves and demand for our test and measurement equipment returns. With our technology development business unit, revenues declined about 7% compared to the second quarter of last year.

The end of the first quarter of this year we closed our facility at Hampton Roads, Virginia due to its underutilization compared to our other locations. Some of the work that was being done in that location, and that we anticipated moving to other groups and other locations was not maintained, as some key personnel that we had anticipated relocating to other Luna facilities decided to pursue other opportunities and our revenues declined as a result.

Our operating expenses improved 4% compared to the second quarter of last year, as stated on these calls for several months, our focus on improving efficiency in our operations, reducing costs and driving towards profitability. You can see the results of these efforts in our lower operating costs even though our legal expenses in the second quarter of 2009 were much higher than in the second quarter of 2008, as Dale will touch on in our financial overview.

Excluding our outside legal fees from both periods, we would have shown an improvement in operating expenses greater than 20%. Some of these savings come from efficiency and operations, some results from necessarily reducing our internal R&D costs in order to fund our legal work.

Now, I will turn the call over to Dale for more details on the financial results.

Thank you, Kent. As Kent mentioned previously, revenues for the second quarter came in slightly below the low end of the range that we gave in our outlook back in May. Total revenues of $8.7 million represent a decline of $1.2 million, or 12% compared to the second quarter of 2008.

Product and license revenues, while down $0.7 million, or 24% compared to last year, were consistent with our expectations for the quarter based on the impact that the overall economic recession was having on that segment of our business. The adverse variance that we experienced was a factor of volumes in our telecom products, as well as fewer current contracted product development projects compared to the second quarter of last year. We have not seen a decline in the average selling price of our products.

Within the technology development business segment, the closing of our Hampton Roads facility resulted in a revenue decrease of approximately $400,000 compared to the second quarter of last year. That shortfall resulted primarily from employees choosing to seek employment elsewhere rather than relocate to another Luna facility. Overall, the Hampton facility was underutilized compared to our other locations, and the closure was made as part of our overall progress toward improving our operating efficiency and results.

While we did have slightly lower revenue in a couple of other groups within the technology development division, those reductions were offset by continued growth in projects within our secure computing area. Gross profit for the quarter was $3.3 million, compared to $4.1 million in the same period last year.

That decline was principally due to the lower overall revenues in addition to the revenue mix with a lesser proportion of our revenues coming from product sales in the most recent quarter. With this change in mix, our overall gross margin percentage declined slightly from 41% to 39%. Operating expenses for the second quarter this year were $5.6 million, compared with $5.8 million for the second quarter of last year. Within operating expenses, it is significant to note the impact of outside legal fees on our operating results.

During the second quarter of 2009, we recorded charges of approximately $1.6 million in professional fees related to our litigation and other legal fees. During the second quarter of last year comparable charges were approximately $0.8 million or $800,000 less than this year. If we ignore those costs from the comparison, normalized operating expenses would have been approximately $3.9 million in the second quarter of 2009, compared to approximately $5 million in the second quarter of last year, as Kent mentioned, an improvement of 20%.

The reductions in operating expenses have been realized principally through headcount reductions in our SG&A areas, and in reduced investment in internally funded research and development activities. Other expense grew by $0.1 million in the most recent quarter, compared to last year, due to the interest expense associated with our term loan.

We entered into the debt facility during the second quarter of last year, and so we have a full quarter's interest here compared to a partial quarter last year. With those factors, our net loss for the quarter was $2.4 million, or $0.21 per share, compared to $1.8 million, or $0.16 per share, in the second quarter of last year.

We had an adjusted EBITDA loss of less than $1 million in the second quarter of this year, compared with an adjusted EBITDA loss of $0.3 million in the second quarter of 2008. Absent the impact of the $1.6 million in outside legal fees during the quarter, our 2Q '09 adjusted EBITDA would have been a positive $0.7 million.

On a year-to-date basis, revenues were $1.7 million below 2008, again, with the global economic slowdown impacting our product sales and gross profit. Within expenses, the charges recorded during the first quarter related to the Hansen litigation were $36.3 million in litigation reserve, $1.3 million in impairment of intangible assets, and the additional $0.6 million deferred tax valuation allowance were the dominant drivers in our year-over-year performance.

From a balance sheet perspective, we ended the quarter with $12.1 million of cash compared to $15.5 million last yearend, and $13.2 million at the end of the first quarter of this year. Overall, current assets were $22.4 million at the end of June, compared with $26.1 million at the end of 2008, with the decline principally coming from the reduction in cash on hand.

In our long term assets, the declines and values primarily reflect the intangible asset impairment charts that we record in the first quarter of this year, as well as the additional reserve recorded against our deferred tax assets in the first quarter.

On the liability side of the balance sheet, the increase in current liabilities reflects the reclassification of the entire balance of our bank term loan, and the current liabilities due to our default status under the credit agreement and reserve recorded in the first quarter for the jury verdict amount in the Hansen litigation.

From a cash flow perspective, we used a net $1.1 million during the second quarter, and $3.4 million year-to-date. We had an adjusted EBITDA loss of $2 million year-to-date, and paid down $0.7 million of principal on our term loan for the second quarter. Subsequently, in July we repaid the remaining $4.3 billion balance of the term loan.

And with that, I will turn the call back over to Kent.

Thank you very much, Dale. Latrice, please let us know if any listeners have any questions.

Sure.

(Operator Instructions)

And there are no questions in queue at this time.

Great. Thank you, Latrice, and thank you all for your interest. We look forward to talking with you on our next call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and everyone have a wonderful day.