Luna Innovations Inc (LUNA) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2011 LUNA Innovations Inc. Conference Call. My name is Lucinda and I'll be your coordinator for today. At this time, all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today's conference.

(Operator Instructions)

I will now turn the presentation over to your host for today's conference, Mr. Dale Messick, Chief Financial Officer of LUNA Innovations. Please proceed, sir.

Good afternoon, everyone, and thank you for joining us today as we review our operating results for the second quarter of 2011. Before we proceed further let me remind each of you that statements made in this conference call and our pubic filings, releases, and websites are not historical facts, may be forward-looking statements that involve risks and uncertainties, and are subject to change at any time.

We caution investors that any forward-looking statements made by us are management's beliefs based on currently available information and should not be taken as a guarantee of future results or performance which may differ materially as a result of a variety of factors discussed in our earnings release and our latest filings with the Securities and Exchange Commission.

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. There's more complete information regarding forward-looking statements, risks and uncertainties in the Company's filings with the SEC available on our website. At this time, I'd like to turn the call over to My Chung, President and CEO of LUNA Innovations.

Thank you Dale, and thank you, everyone, for joining us on the call today. Overall, we had a solid quarter of top line and bottom line growth. This will also be our fourth consecutive quarter of positive cash flow. Revenues grew by 7% over the second quarter of last year, led by a 39% increase in sales of our test and measurement products, and 29% growth in our product development revenue.

While revenues in this segment grew significantly for the quarter, we have, however, seen the sluggish economy negatively impact our Text and Measurement Bookings activity. Based on this we will be (technical difficulty) our full year projects and guidance as we will share with you later.

Our Product Development relationship with Intuitive Surgical and Hansen Medical continue to proceed on schedule, with critical milestones being met. We have continued to raise the visibility of these programs internally as we believe them to of strategic importance.

Within our Technology Development segment revenues from our government research contracts declined 8% for the quarter, relative to the same period last year, principally due to the timing of one [dark book] project finishing and another one getting released.

With our overall revenue growth in and continued control over operating expenses, we improved our quarterly net loss by 59%, compared to a year ago, and as previously mentioned, continue to generate positive cash flow.

Last week we introduced our newest fiber optic sensing instrument. This new product utilizes a single fiber as a distributed sensor providing thousands of measurement points for strain or temperature. We expect this new product to effectively compete in applications where today numerous, discrete strain gauges are required. Our value proposition is centered around overall cost savings, the number of locations to be tested simultaneously, and the ability to post-process these thousands of data points.

Our initial target market will be in testing of large composite structures such s those in the aircraft and automotive industries. Given the overall value proposition, we expect this to be an important component of our growth over the next couple of years. With that, I'll turn the call over to Dale for more detail on our financial results.

For the second quarter of 2011, we expect to report a net loss to common of $289,000 or two cents per share, compared to a net loss to common of $711,000 or five cents per share in the second quarter of last year. Improvement year-over-year was driven by growth in revenues of 7% and, more specifically, a 38% growth in our product and license revenue which typically pulls through a higher gross margin.

Revenues from sales and rentals of our products grew by approximately $840,000 or 41%, including a 39% growth in revenue from our test and measurement equipment. Revenues from sales and rental of test and measurement equipment increased by approximately $800,000 to $2.8 million with the highest growth coming from our optical backscatter reflectometer line. Product development revenues, which are also a component of our product and license revenue, increased approximately $250,000, or 29%, compared to the second quarter of last year.

Revenues in our technology development segment declined by approximately $468,000, or 8%, due, as My indicated, to a period of transition between major projects within our secure computing group as well as a reduction in other direct contract costs which flow through directly to revenue, related to that expiring contract.

The anticipated [follow-on] project was awarded in early August, so we should expect to see a decline in this group for the third quarter as well, and then revenue picking back up again in the fourth quarter. Gross margins expanded to 38% in the second quarter compared to 37% in Q-2 of last year, reflecting the revenue growth coming from our Product and License segment, which generally carries a higher margin than does the Technology and Development segment.

Operating expenses were essentially flat at $3.9 million, increasing less than $100,000 compared to the second quarter of 2010. Within operating expenses, our SG&A costs declined by nearly $100,000, offset by growth in Research and Development costs reflecting additional head count and other related expenses in our fiber optic engineering group.

Year-to-date the results are consistent with our comments on the second quarter. Revenues increased by $1.7 million, or 10% compared to the first half of 2010, with a preponderance of the growth coming from sales of fiber optic test and measurement, which increased 57% for the first six months compared to the first half of 2010.

Product Development revenues also grew by 23% for the first half of the year compared to 2010. Within the Technology Development segment, the year-over-year decline is attributable to the lower revenues in our Secure Computing group. Other areas within the Technology Development segment grew an aggregate 7% versus the first half of last year.

With the growth in product revenue, margins expanded to 38% for the first half of the year compared with 36% for the first half of 2010. Operating expenses for the six-month period grew approximately $400,000, or 5%, for the first half of the year, with the growth in R&D expenses noted in the second quarter as well as the incremental costs incurred in Q-1 this year related to the potential proxy contest. Our net loss to common shareholders of $1.4 million for the first half of the year is a 32% improvement over the results for the first half of 2010.

Turning to the balance sheet, you'll see that our cash position continued to improve during the second quarter marking now our fourth consecutive quarter of positive cash flow. In the second quarter we completed our new debt facility with Silicone Valley Bank, replacing our prior $5 million revolving facility with a new $7 million facility, including $6 million of term debt plus a $1 million revolver. We used the proceeds from that new credit facility to repay the prior note to Hansen Medical. And that debt has now been completely extinguished.

We ended the quarter with approximately $8.1 million of cash compared to $7.5 million at the end of the first quarter. The execution of the new credit facility offset by repayment of the Hansen note contributed approximately $400,000 to the net increase in cash, or approximately $550,000. Over the past four quarters, the Company's cash balance has improved by $1.9 million.

Looking ahead now, as My indicated in his remarks, activity levels for new orders and test and measurement equipment have decreased recently. And with the current economic climate it is difficult to predict when they might recover. Accordingly, we expect revenues to soften in the third quarter and, potentially, into the fourth quarter. We currently expect revenues for the third quarter to be in the $8.5 million to $9 million range, with a net loss of a $0.5 million to $0.7 million. For the year, we're currently expecting revenues to be in the range of $35 million to $37 million, versus our prior estimate of $37 million to $39 million, with a corresponding net loss of $2.5 million to $3 million. And with that, I'd like to now turn the call back to My.

In summary, we are pleased with our quarterly results, but cautious about our outlook. So, at this point what we'd like to do is open the call up for any questions.

Your first question comes from the line of [Mark Balsam] from (inaudible - microphone inaccessible). Please proceed.

Overall, would you guys term your quarter a relative success and/or are you pleased with the direction the Company is headed now?

I would say we're relatively pleased. We've gotten things, I'd say, focused in the right direction. Our [SPI] or our wins have gone up relative to previous years. And the activity that we're having, as I mentioned with Hansen and Intuitive, are highly focused and are, indeed, meeting the commitments that we set earlier in the year.

With your revenue shortfall or, I guess, reduced earnings that you've commented on today, will there be any potential reduction in head count?

At this point in time we're trying to manage through the quarter with really controlling our discretionary spending. We believe we should be able to do that. And so at this point, we are not looking at any additional head count reductions.

Very good. And the last comment - and this is more of a general one - if you're relative pleased with the direction the Company is going - and this doesn't just go for the CEO - this would be for Directors and officers of the Company. As a long-time shareholder - and I voice this from quite a few other smaller shareholders - we sure would like to see some insider buying from you guys. And not just in the stock option sort.

We'd like to see some of you folks there actually doing some buying with your own money. The stock is closed today at about $1.30 or $1.40 a share and that's about as cheap as it could get. And some insider buying would look great for a company that's very, very sparsely followed. And just urge you to sort of put your money where your prognostications are. And it would really look good for the company and I think it would get more following and increase some investor appetite for it as well.

That's all I have to say. Thanks for taking my call.

Thank you very much, Mark.

The next question comes from the line of John Moses. Please proceed.

I echo the sentiments of the previous participant. I think it is so critical that you all step up to the plate as directors and officers and buy some stock. The stock is back to levels now where we saw when we went to the Kent Murphy episodes and also through the Hansen Medical episodes. $1.40 a share certainly represents value to me. I'd like to ask My Chung a question. Would you sell the Company for $4, sir?

Would I sell the Company for $4?

Yes.

Are you looking to buy?

I'm asking you the question, sir. I don't need a Socratic method here. Would you sell it for $4?

At this point, no.

No. Well, let me ask you this question, if I may? Why won't you buy it for $1.40?

I think I've answered that question previously for you.

I don't think so, sir.

Right now we're on an insider trading.

That will lift in a few days. And if your lawyers increasingly tell you it hasn't, I would suggest that you get new lawyers. They haven't done the Company much benefit in the past. I'm not trying to be a pain in the ass here. But the lawyers of this company have led them down a bad path for any number of years recently. And so, if they're telling you not to buy the stock here, I'd fire them and get some new lawyers because you're not painting a very rosy picture here and I don't see anything that would preclude you, sir, from buying the stock. So, if you won't sell it at $4 a share, you certainly should buy it at $1.40.

Enough on that subject. Do you have anything in your banking loan agreements that precludes the Company from buying the stocks? Would there be anything that precludes the Company from making an offer to buy half a million shares at $2 a share? Hello?

I'm trying to call the exact covenants. And I don't recall a stock buy-back program is not something that we've been considering. So, off the top of my head, I don't recall it.

Well, you've got plenty of cash there and the cash flow is good. And it's time to give some recognition that maybe the stock is pretty damn cheap down here at these levels. I know, Mr. Messick, that you bought some stock at $1.85, if I recall.

That's correct.

And Mr. [Graff] bought some stock at $1.85. Is that correct?

That's correct, John.

What?

You're correct.

Yes. But the only other guy who stepped up to the plate to buy any stock was Mr. Wise. And I commend him for that. But other directors such as Mr. Cool have not put a penny up other than what they put into pre-options. Now, if Mr. Cool doesn't want to buy any stock, I suggest him take a walk and go to another company to be a director because I don't see where he's helping us a bit. Enough on that subject.

How many of these new machines that you advertised recently - which I think is a wonderful machine - the US Navy, and the Air Force, and every county government ought to own one of them. How many of these machines have you sold?

The Odyssey project that we just launched? We haven't ...

I'm sorry?

Are you referring to the one we launched last week, John?

Yes. The one that you announced last week. How many have you sold?

We've not shipped any of those yet. We just released it last week and we haven't shipped them yet.

Now, wait a second. That's not the answer I'm looking for. When I say how many have you sold. I'm not asking you how many you've shipped. Have you sold any?

Not yet.

Not yet. What is the selling price of this machine?

About $80,000.

That seems very reasonable for a machine that does as much as this. And if you got a marketing sales force that can't sell this machine, which seems to be a very valuable piece of equipment, I'd get a new marketing force. I could sell this thing to Eskimos to measure igloos, quite frankly. I mean, it's a wonderful machine and you just don't have the right people marketing it, if that's the case.

All right. I'm going to let you go now. But I emphasize to you as strongly as I can, along with the preceding caller, get out there and put a bid on this stock. And if your lawyer says no, get a new law firm.

Thank you, sir, with putting up with my comments.

Thanks a lot, John.

I will now turn the call over to My Chung.

With that, we'd just like to say again, thank you for joining us today on the call. We appreciate your support. And at this point, we'll call it to an end. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.