Luna Innovations Inc (LUNA) 2012 Q3 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Quarter Three 2012 Luna Innovations Incorporated Earnings conference call. My name is Ian, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder, the call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Dale Messick, the Chief Financial Officer. Please, go ahead, sir.

Thank you, Ian. Good afternoon, everyone and thank you for joining us today as we review Luna's results for third quarter as well as the first nine months of 2012.

Before we proceed with our presentation today, let me remind each of you that statements made in this conference call as well as in our public filings, releases and websites which are not historical facts may be forward looking statements that involve risk and uncertainties and are subject to changes at any time, including but not limited to statements about future financial and operating performance.

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. Actual results may differ materially as a result of a variety of factors discussed in our earnings release and our latest Forms 10-K and 10-Q filed 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 would like to turn the call over to My Chung, President and CEO of Luna Innovations.

Thank you, Dale. As I've done in the past, I will begin today's presentation by providing an update on our key business developments, particularly as they relate to the strategic growth initiatives we previously laid out. Following my comments, I will turn the call back over to Dale for a discussion of our operating results and then we will be happy to take any questions you might have.

We remain focused on three key growth initiatives. The first of these is to become the leading supplier of fiber optic shape sensing and localization systems and components for minimally invasive surgical systems. Our second key growth initiative is to be a leading provider of distributed fiber optic strain and temperature sensing systems targeting in particular the composites industry. And third, is to be a leading supplier of cyber-security services to companies with critical electronic systems, utilizing field-programmable gate arrays.

Beginning with our initiatives surrounding shape sensing for minimally invasive medical systems, we continue to work closely with our development partners, Intuitive Surgical, Hansen Medical and Philips Medical to productize this exciting technology. We are continuing to advance this technology with regards to resolution, robustness and accuracy.

Our relationship with our development partners remain strong and our efforts towards productization of the shape sensing technology with medical applications remain focused and on track towards integration with their target systems and onto FDA approval.

The second key growth initiative of ours is to become the leading provider of sensing systems for testing composite materials. Our recently launched ODiSI products enable developers and manufacturers to better understand what is happening inside their composite structures and see potential damage even when it's not visible.

We are improving the way composite materials are tested and validated for peak performance and safety by providing thousands of sensing points, spaced 5 millimeters apart on a piece of optical fiber that's easier, cheaper and faster to install than individual strain gages.

During the third quarter, we experienced a healthy uptick in orders for our ODiSI products, accounting for more than 15% of our products and license revenues. We remain optimistic that we can continue to increase the adoption of our sensing platform as the composite industry continues to grow, especially in aerospace, wind turbine and automotive applications.

Our third growth strategy is to continue to advance our industry-leading cyber security solutions. Our security computer group has unique capabilities in reverse engineering of field-programmable gate arrays to improve design integrity and further enhance cyber-security. This unprecedented capability makes it possible to perform high reliability verification of FPGA designs at the bitstream level to detect any malicious functionality. That is we answer the question, does it do what I designed it to do, and nothing more.

With this unique capability, we intend to pursue new growth opportunities in areas such as trust and design of FPGAs for our technology is like a virus scan. High reliability validation for FPGA system components and anti-obsolescence as the designs are transferred from old FPGAs to newer devices.

Additionally, I'm pleased to report that we have recently received [full] accreditation from the US Department of Defense as a trusted integrated circuit supplier. Beyond the progress we're making on our key growth strategies, we continue to expand our offerings in our traditional fiber optic testing market. During the third quarter, we introduced a faster, easier-to-use, lower cost precision reflectometer, our OBR 5T-50.

This new product addresses the optical system manufacturing testing needs by introducing an instrument that is 200 times faster, with better resolution over a longer distance than the competition, all at a significantly lower price. It's the latest example of Luna developing technology to meet the specific needs of our customers.

With that, I would now turn the call over to Dale to review the financial highlights.

Thank you, My. For the third quarter of 2012, we recognized total revenues of $8 million, compared to revenues of $8.8 million in the third quarter of 2011. Our product and licensing revenue increased 18% from $2.7 million in the third quarter of 2011 to $3.2 million in the most recent quarter of 2012, with the increase being driven substantially by sales our new ODiSI line of sensing products which, as My mentioned, accounted for approximately 15% of product and license revenue for the quarter.

Revenues in this segment of our business were also up 11% compared to the second quarter of this year. Technology development revenue decreased to $4.9 million in the third quarter of this year, compared to $6.2 million in the third quarter of 2011. The largest component of this year over year decrease related to our Secure Computing and Communications Group, where in the third quarter of last year, we were awarded and completed 4 short term projects with an aggregate value of $800,000 that provided a spike in the group's quarterly revenue.

We did not have a recurrence of similar projects in the third quarter of this year, although we do expect the group to win more of these service contracts in the future.

Margins remained consistent at 39.2% for the third quarter of 2012 compared to 39.5% in the third quarter of last year. The slight year over year decline is attributed to the impact of the Secure Computing programs from last year that I just mentioned which carried a higher margin.

Offsetting much of that impact, overall margins in the third quarter of this year benefited from a higher proportion of our revenues being generated through the product and licensing segment, which typically carries a higher gross margin than does our Technology Development segment. Our operating expenses increased 4% to $3.3 million in the third quarter of this year, from $3.2 million in the same period last year due principally to higher commissions associated with our increase in product sales.

We realized a net loss attributable to common stockholders of $254,000 or $0.02 per diluted share for the third quarter this year, compared to a net income to [common] of $222,000 or $0.01 per diluted share for the same period last year. From a cash flow perspective, during the third quarter of 2012, we generated $0.6 million of positive cash flow from operations compared to a cash usage in operations of $0.7 million in the third quarter of last year.

We also realized $0.1 million of overall positive cash flow from all sources and uses in the most recent quarter, compared to a $1.2 million overall cash usage in the same period last year. Year to date, we've recognized revenues of $24.6 million compared to $27.5 million for the first 9 months of last year. Technology development revenues have decreased $1.5 million compared to the first 3 quarters of last year with much of that decrease being driven by the Secure Computing Group as we've already discussed.

Product and license revenues of $8.7 million for the first 9 months represents a 13% decrease from the first nine months of last year, driven by the very strong first and second quarters of 2011 for product sales in our telecom. As I mentioned last quarter, since the second quarter of last year, product and license revenues have been running in the range of $2.7 million to $3.1 million per quarter and we saw the top end of that range here in the most recent quarter.

Operating expenses have declined to $1.1 million or 10% for the first 9 months compared to last year, with the decreases primarily being recognized in share based compensation consulting fees and depreciation.

With those expense improvements, our net loss has also improved with a net loss attributable to common stockholders of $0.9 million or $0.06 per diluted share for the first 3 quarters of 2012, compared to a net loss of common stockholders of $1.1 million of $0.08 per diluted share for the first 9 months of last year.

From an adjusted EBITDA viewpoint, we realized $1.7 million of adjusted EBITDA for the first 3 quarters of 2012 compared to $2.1 million for the first 3 quarters of last year. And we provided for you a reconciliation of adjusted EBITDA and the schedule is included in our press release today.

With that, I'd now like to turn the call back over to My.

Thank you, Dale. We have made great strides in our key growth initiatives in 2012 and we remain optimistic about our future in developing new and innovative solutions for the markets we serve. On our last call, I mentioned that we would be rolling out a new branding campaign for the Company. I hope you noticed our company logo and tagline, one that we believe more clearly defines our vision and strengthens our position within our markets.

We have redesigned our image to more effectively present the Luna brand, and have begun to roll it out throughout all of our communications. More importantly, we have developed a new website that presents our new brand image, providing compelling content, intuitive navigation in effectively communicating what makes Luna special.

As we move forward, we will continue to develop the content and optimize the website's search potential to broaden our awareness and further strengthen our position. For those interested, you will also find our latest investors' pitch on this new site, www.lunainc.com.

At this point, I would be happy to take your questions.

Thank you, sir.

(Operator Instructions)

And we have a question, it's from the line of Greg Greenberg at Wells Fargo Advisors. Please go ahead, Greg.

Hi guys. I have a number of questions. First one, your partner, Hansen Medical had their earning release yesterday and they announced they shipped 4 Magellan Robotic Systems last quarter, can you describe for us kind of the revenue opportunity for each system?

You mean, once they commercialize our technology? Is that what you're asking?

Yes, well, is it currently in the Magellan Robotic System, that they started shipping that was just FDA approved not too long ago?

No, we are still working with them on integrating our technology into their system.

Okay. Okay. Next question, as far as from the Secure Computing Group and this FPGA design integrity, so if this becomes a requirement for -- from the Defense Department, number one, do you envision anybody else being able to do this. Is it patent protected or just something unique, and then would the Department of Defense have any influence on setting the price if it's a mandatory service?

So, the answer to your first question whether it's unique, to our knowledge, there's been no one that's been able to duplicate the capabilities that we have. The initial stage of the DARPA contract, there was another party that attempted to develop that technology. To our knowledge, they were unable to do it.

So, as of the moment, if we look at what's been awarded for the follow-on contract, this contract called IRIS, we were the largest receiver of that grant and the only one for this technology again.

Once it becomes an edict by the US government that system component places need to validate that they're compliant (inaudible), we believe that that will not necessarily be dictated by the government as to who they go to but again, we envision that we're one of the leading vendor to be able to provide that service.

Okay. And what sort of revenue opportunity, let's say on an annualized basis, could that be?

It's hard to say right now exactly. So, there's really no comment on that, at this point.

Yes. Until it's actually rolled out as an edict, it's tough to say how they would roll it out.

Okay. A couple of questions that are investor relations type items. You guys scheduled and presented any conferences for investors, are you trying to get your story out to the investment community in any new ways?

We have -- as you know, Greg, have signed up with an investment banking firm to work with us on that. They continue to build out the schedule for us for the next couple of quarters.

Okay. So no --

Nothing has been confirmed as of yet.

Okay. And you have been happy with the engagement, so far?

I'd say that the business that they have set up for us has been very productive.

Good. Okay. And just kind of a question 00 I guess, My, it's been since May of '11 since you've been CEO. Correct?

Correct.

Has there been much change in headcount as far as either just actual numbers of the type of headcount?

Not much. We've had some adjustments here and there but nothing significant in either direction.

Okay. Okay.

The one strategic hire that we made as you know, is adding marketing to our [area].

Right.

So, bringing Geoff McCarty on board was a strategic one right now.

Okay. And then, last question, if I have any other, is just on the ODiSI product, so did we sell roughly 10 this last quarter, or that's something you can talk about units?

We don't divulge units, but that's a pretty good guess on your part.

Okay. And when you have -- I would imagine the customers that are buying now are sort of buying 1 to sort of test it out. Is this --

They're trying to validate this technology which is what you would expect and our vision is once it's been endorsed that indeed it matches to the measurements that they have traditionally been making the strain gages, that's when you'll see the transition.

Okay. Great. That's it for me, at this point. Thanks, guys.

Thanks.

Thanks, Greg.

Thank you, Greg. There are no further questions at this time.

No further questions in the queue, Ian?

No, there's no further questions in this queue. Sir, would you like me to turn the call over to My Chung for closing remarks?

Okay. Well, again, thank you for everyone for participating with us today, and we look forward to speaking with you again on our next call. Thank you.

Thank you very much. Ladies and gentlemen, that concludes your call. You may now disconnect. Thank you very much for joining us. Do enjoy the rest of your day today.