Luna Innovations Inc (LUNA) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Luna Innovations Earnings Conference Call. My name is Philip and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Dale Messick, Chief Financial Officer. Please proceed.

Thank you, Philip. Good afternoon, everyone, and thank you for joining us today as we review Luna's results for the second quarter of 2013.

Before we proceed with the 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 change 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 is more complete information regarding forward looking statements, risk, 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. Today I would like to provide you with an update on our strategic growth initiatives, and on our overall business performance. Dale will then review our quarterly financial results, and we will then open up the call to take any questions that you might have.

To transform Luna into a high-growth products company, we have focused on two key strategic growth initiatives, the first of which is the unique and exciting development of fiber optic shape-sensing for minimally invasive surgical applications. At the end of June, we announced that we had entered into an amended agreement with Intuitive Surgical to define development milestone expectations for the next several years. This is significant as we have historically only executed annual amendments.

With the technical accomplishments we have made in the development of our shape-sensing product over the past several years, both Intuitive and us concluded that it is in our mutual best interests to commit to a multi-year plan, one that will move this technology closer towards product commercialization. We are delighted to now have this agreement in place.

At the same time, we continue our development efforts with Philips Medical for the use of this technology in non-robotic medical applications. This program is on-track, and we continue to be excited about the [productization] opportunity in working with Philips.

Our second strategic growth initiative centers around our ODiSI distributed optical sensing platform, which enables easier, more effective, and higher resolution measurements of strain and temperature using optical fiber rather than individual strain gages or Thermocouples.

We continue to focus our marketing of the ODiSI products toward automotive, aerospace and energy opportunities and applications, especially those related to composite materials, complex shapes or environments where conventional electrical strain gauges or thermal couples cannot operate.

We're making good progress with this initiative, as our sales of ODiSI products in the second quarter were double the sales of ODiSI products in the second quarter of last year. In terms of our overall product sales, I am pleased to report that sales increased 7% over the second quarter of last year, and approximately 38% over the first quarter of this year.

The increase in ODiSI revenues continues to offset the softness we and other vendors are experiencing in the telecom testing and measurement market.

Turning to the technology development segment of our business, last quarter I mentioned that within this segment, one of our research groups, our optical systems group, experienced a significant decline in their funded backlog at the end of last year, which would naturally have an adverse impact on our revenue opportunities for this year.

Because of that, earlier this year we did some restructuring and realignment within that group. This restructuring helped offset the expenses associated with the approximately $1 million decline in their Q2 2013 revenue.

The other groups within the technology development segment were essentially flat compared to Q2 of 2012. The good news is that we continue to win new contracts, and our backlog for future work improved 10% from year end 2012.

At this time, I would like to turn the call back over to Dale to review the overall financial results.

Thank you, My. For the second quarter of 2013, we recognized revenue of $6 million, compared to revenue of $6.7 million in the second quarter of 2012. Products and licensing revenue increased 11% to $3.2 million, compared to $2.8 million in the second quarter of last year.

Our higher revenues from the products and licensing segment during the quarter were driven by increased sales of our ODiSI products which, as My mentioned, were double the Q2 2012 revenues, as well as higher revenue in our fiber optics shape-sensing development contracts with Intuitive Surgical and Philips Medical.

Products and licensing revenues in the second quarter overall increased 69% versus the first quarter of this year, including a 38% growth in product sales from Q1 to Q2.

Our technology development revenues were $2.8 million in the second quarter of 2013, compared to $3.9 million in the same quarter last year. As My mentioned, the decrease represents primarily a decline in contact research projects for our optical systems group, which completed some large awarded contracts toward the end of last year, and did not have the remaining backlog necessary to sustain that level going into this year.

However, with recent improved contract win rates within our overall technology development groups, revenues of $2.8 million in the second quarter represents an increase of 7%, compared to the first quarter of this year, and our backlog for future work at June 30th improved $1 million compared to the backlog at March 31st.

Our overall gross margins remain steady at approximately 40% for Q2 of 2013 and 2012. Operating expenses increased slightly to $3.3 million for the most recent quarter, compared to $3.1 million in the second quarter of last year. This increase includes the recognition of $125,000 in a provision for [doubtful] accounts related to one of our international distributors.

Excluding that unusual charge, operating expenses would have increased only 2% compared to the same period last year.

Our resulting loss from the continuing operations was approximately $951,000 in the second quarter of 2013, compared to a loss from continuing operations of $442,000 in the same period last year.

We recognized an income tax benefit of $161,000 in the most recent quarter, which represents the utilization of available NOLs to offset the tax impact of the gain we recognized on the sale of our secure computing group in the first quarter of this year. You'll see that this income tax benefit to continuing operations is offset by the impact of tax on the sale of secure computing group, recognized in the discontinued operations section of our income statement for the quarter.

After the recognition of discontinued operations, our net loss (inaudible) to common shareholders for the quarter was $978,000, or seven cents per share, compared to a net loss to common shareholders of $269,000, or two cents per share, for the second quarter of last year.

Year-to-date, we've recognized revenues of $10.5 million, compared to $13.4 million for the first six months of last year. The decrease in revenues year-to-date is primarily driven by a $2.4 million decline in technology development revenues, with the most significant factor being the decline in our optical systems group, as I mentioned a moment ago.

Operating expenses increased 3% compared to the first six months of last year, with the increase reflecting predominantly a higher level of internally funded product R&D activity in the first quarter of this year.

After recognizing the gain we realized on the sale of the Secure Computing group in the first quarter of the year, we have recognized a net income for the first six months of 2013 of $1.8 million, or 11 cents per diluted share, compared to a net loss of $638,000, or five cents per diluted share, for the first half of 2012.

We ended the second quarter with $8.7 million of cash on hand, compared to $6.3 million at the end of last year, and $10.3 million at the end of the first quarter of this year. Our cash flow for the quarter was adversely impacted by the timing of our revenue recognition in the second quarter, being very heavily weighted toward the last month of the quarter and therefore not yet collected by the end of the quarter.

Our accounts receivable balance, accordingly, increased $1.1 million at June 30th, compared to March 31st which, again, had a negative impact on our cash flow for the second quarter.

Offsetting the balance of our outstanding term loan, our net cash was $5.7 million at June 30th, compared to $2.7 million at the end of 2012.

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

And now, we'll open up the call for any questions that you might have.

(Operator Instructions). Your first question comes from the line of Mark Dalton. Please proceed.

Good afternoon. Thanks for the report. Could you speak -- fractionally speaking, how big a part of your overall business, Luna's overall business, is from the telecom sector? And I'd like a follow-up on that, also. Hello?

Sir, I -- yes, the telecom sector is part of the Product and Licensing revenues. And it's about 60% of it.

Okay, and thank you, Dale, for that. And the reason I ask is, we listen to these calls quarter after quarter, and of course, you folks can't change the economy. I wish you could, but you can't. But we hear you say continually that, you know, part of the problem there at Luna, if you will, is due to softness in the telecom sector, and you just -- you have to wonder how long you continue down that road?

I mean, euphemistically, it used -- euphemistically saying, it's not good. And when do you -- when do you begin to say this, that's a part of our business that's probably never going to evolve or grow that much, based on, you know, the current environment and what it's going to continue to be down the road?

And also, on that same note, has the head count changed for the folks that are involved in that sector at all?

Okay, so just a little bit about the history. The -- just before Luna Innovations decided to take the company back, or take the company public -- this was back in 2006, they reincorporated into Luna Innovations a spinout that they had called Luna Technologies.

Luna Technologies was founded to go after the telecom test market and join that telecom boom era of 2000. So the basis of the product side, when the company went public, was for the most part all 100% telecom.

I came on board in 2011. By then the company had decided that it needed to diversify away from the telecom market, at which point it has gone into the sensing space. And they introduced their first sensing product in July of 2011.

So since then, we've been transitioning our product revenue from 100% telecom to now, still a majority telecom, but it's, as Dale said, roughly now about 60%, rather than 100%. And the increasing the growth coming from ODiSI which has a bigger market size for us than the telecom space.

So to answer your question directly, the telecom will continue to be a part of Luna, but it will become less and less of a part, by us executing on our strategic growth initiative, by -- and it'll kind of stable out, in our opinion, as the telecom market does recover.

And the players that are in that space to track, to see how that industry's doing, or people like JDSU, or Agilent, which are very large players in the telecom space. And there's one third player in there, called ExFo. And you'll see that all three players have been hit just as hard as we have in this space. Did that answer your question?

It -- it did. And the second part is, has your head count remained relatively the same?

It's roughly the same, the head count in that division really consists not only of development engineers for the telecom products, but it's been shifted over to ODiSI, as well as those development engineers also work on the development agreements that we have with Intuitive as well as with Philips.

Very good. Could you expand just a little on your multi-year deal with Intuitive? Is it relatively the same financial deal going forward? Is there anything you could expand upon or tell us, other than the fact that it's a multi-year deal instead of just an annual?

It is a little bit more expanded than in previous years, all right. The rate that we charge them are the same. The specifications that they've outlined for us to achieve in this multi-year plan is a little bit tighter, all right, at which point the development dollars that we're looking at for this period is slightly higher than we traditionally have had.

All right. Very good. And, I guess, lastly, are you satisfied with the direction you're headed? I realize you've only been there two years, but where we are now, obviously, is (inaudible) not where you want to be in the future. But are you satisfied in the general direction the company's headed?

I am. I believe that we are headed in the right direction. I think the challenges that we've had, clearly, has been things somewhat out of our control. The telecom market going soft in 2011 didn't help things. And also what's been happening in the US government with the sequestration and all the tightening back on the government spending has clearly impacted our research side.

So the combination of those two kind of discount some of the growth that we're seeing on ODiSI. But the restructuring that we've done, the sale -- the cyber-security thing put cash on our balance sheet.

So I'd say right now I think we're headed in the right path. We've got enough headroom. Our multi-year agreement with Intuitive gives us the comfort that we're both committed to this space, and that we're excited about where we're at today, and where it's going to take us.

So it's taken longer than I had anticipated, by all means, but I think that we've made the right moves and that we are well-positioned at this point in time.

Very good. Thank you very much.

Well, thank you, Mark.

Your next question comes from the line of Greg Greenberg from Wells Fargo Advisors. Please proceed.

Hi. Good afternoon. Again, congratulations on the multi-year agreement with Intuitive Surgical. You know, obviously very little detail on the press release, and nothing filed until the next quarterly report, but I know that (inaudible) close basically talk about achievement and various development milestones through 2015.

So should we expect any product revenue from that collaboration before 2016? Or am I misunderstanding that (inaudible)?

Well, you know, there -- I don't know how much detail I want to get into. You know, I guess as the -- certainly as the development progresses, we do provide prototype kind of units, evaluation kind of units for them to work with. And as we get closer to the end-date, they'll, of course, need units for trials and what not.

So, you know, we should see some product revenue coming in, but, you know, the growth from a product standpoint is going to ramp much more significantly once a product is launched commercially with them.

Okay. And then, you recently announced five different trade shows that you're going to be attending to the end of October. Are any of these new trade shows, or are these things that Luna's being represented at in the past?

I think they're pretty consistent with the ones that we've done in the past.

Okay. And as far as exploring partnership opportunities for some of the other projects that have -- are either coming out of your technology development division now or in the past, or just maybe the water-repellent coatings. You guys had an interesting blog post about coatings in F-16 airplanes (inaudible). What's the status or challenge to you (inaudible) to partner some of those technologies out?

We continue to be in discussions with a number of players interested in different technologies that we have. None of them are quite yet at a point that we're ready to divulge. But I'd say there's a good mix of companies that have approached us about exploring either partnerships or -- or even possibly acquiring the technology.

Okay. Back to ODiSI, again you guys had an interesting blog post talking about some new ways you've gotten better, and I think inside of that it talked about that there's new options available for purchase. Can you give any color as far as, you know, what% that adds to the selling price? Is that high-margin type products and you're adding on to the ODiSI?

I'd say that all the options that we've introduced would become high-margin options. I -- fundamentally, its additional capabilities, higher speed, acquisition that we've enabled and it's gotten actually a lot of attraction.

You know, the highest speed that we can now sample at is 250 Hz whereas previously it's 100 Hz.

Okay. Was this the highest quarter of sales by units for ODiSI, which I kind of guess is somewhere around 25, was the highest quarter?

I'm not sure if it was the highest quarter, but it was pretty close.

Okay. And then, lastly, you mentioned the Philips Healthcare relationship. Is there any extra color you can give us on that project?

I think that, you know -- and I would just say that our relationship with Philips is continuing. There's work that was done for them here in Q2 that's included in the results here. We're happy with the partnership, and look forward to continuing to work with them.

Well, great news as far as seeing a product and revenue increase. Obviously, we'd love to see the other side as well, not decline, but -- I'm excited about ODiSI and certainly the Intuitive Surgical and Philips opportunities for a few years out. And that's good work. Thanks.

Thank you, Greg

Thanks, Greg.

Once again, ladies and gentlemen, if you wish to ask a question, please press star, one. And your next question comes from the line of Chris Basta -- a private investor. Please proceed.

Hey, guys.

Hey, Chris. How are you today?

Doing well. You have my congrats on the sequential growth here.

I was just wondering if you could shed some color on where you're seeing the strength with the ODiSI product. The last call you gave a little bit more -- talking about being active in the aerospace market and winning some opportunities in the automotive market. Is it more of the same there, or can you talk about any actual design wins in the aerospace market as of yet? Or is it -- most of it coming from auto, still.

Most of it is coming from auto because auto -- the auto industry is different in the way that they design new vehicles every year, whereas aerospace is a long design cycle, and so you have to get in at the right stage.

Aerospace continues to be one that we advance in, but the ones that we're booking today are predominantly in the automotive space.

Is that with domestic players, or international as well.

International.

So, if you had to put a [TAM] on each of those markets, which is the better opportunity for the company? I mean, long term, is it aerospace, or is automotive bigger?

I think they're both equal. (Inaudible) you have a lot more players in the automotive industry, but you have budgets every year. On aerospace you have the big players, right, Boeing, Airbus, AVIC, Comac in China. Relatively few, but when they do test, boy, they buy a lot of equipment.

So with respect to these wins in the auto space, I mean, it would be great to see, given you've got a new technology trying to replace and older technology. And you're really one of a kind, here. Is there any -- what's the pushback on trying to get some announcements out there from some of these customers?

I think it's similar to what we've seen previously. A lot of people don't want to publicize what they're doing, and they're fairly large structures whereby the approval process to get a press release out on this sort of technology is like pulling teeth.

Well, let's get to the dentist sometime soon, please. On the medical side of the business, with the (inaudible), you talked about, obviously, the length of the contract. Can you kind of give us some parameters around when you think this will actually be a commercial product that they're using?

And then, second to that, if you could, on the Philips, just that I hate to ask another question on this, but was that deal that you signed in May of last year, was that a multi-year deal? Was that an annual deal? Are you looking to extend that with a new, if it is just a, you know, a one-year deal that was signed?

The May announcement on Intuitive? Is that what you're asking for, a year ago? Or Philips?

No, it's on Philips. On the Philips, is that a one-year deal, or was it a multi-year deal when it was originally signed, or are you working hard to get some kind of extension if it was not a multi-year deal?

Yes, the agreement that we have with Philips has been pretty much development project related. Certain milestones that they look for, and they'll price it out that way. All right?

And to answer your first question, in terms of visibility as to when the product will become commercial for either Intuitive or Philips, (inaudible) it's somewhat out of our hands, remember. Because it goes into their end product and we're not really engaged in terms of how long that development cycle is.

So this could be -- so you're not -- it could be 2015, potentially? It could be 2014? I mean, do you feel -- is there any kind of guidance they've given you as to when they want to -- I mean, given the benefits this does bring to robotic surgeries, is there a push for this? Or -- I mean, I'm very thankful to (inaudible) the extension of the deal, but can you kind of give us some kind of -- you know, what's your goal?

Obviously, a lot depends on what you guys do internally and, yes, a lot depends on them. Do you think it's ready today with what you have? Or how long will it take you to get to where you think Intuitive needs you to be, for them to put this into their product line?

I guess that, based upon the multi-year agreement that we just signed, that's kind of the time frame that you're looking at. For us to get to the spec points that they're looking for, to feel comfortable that it achieves the overall systems spec that they're looking at from their perspective.

Okay. All right. And lastly, with respect to the water repellent clothing initiative you guys have, if that's the right way to term it, I thought that there was a test store, or a follow-up test that was going to be done maybe in the July time frame? Did that occur or is that still to happen with the Army? And if it did occur, can you give an update on how you did?

Yes, I don't think that has occurred yet. I think it's slipped a little bit, so there have been no actual tests that I know of, that we -- we've done, so.

All right. Great. Well, congrats again on the quarter, and it's good to see some growth at the ODiSI and good luck moving forward.

Thanks, Chris.

Thanks, Chris.

Ladies and gentlemen, this will conclude the question and answer portion of today's conference. I would now like to turn the call over to My Chung for closing remarks.

All right, well, thank you everyone, for joining us today. As you can see, we're excited about our continued progress, and we look forward to speaking with you again at the conclusion of the third quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and you may now disconnect. Have a wonderful day.