Luna Innovations Inc (LUNA) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year End 2013 Luna Innovations Incorporated Earnings Conference Call. My name is [Regina] and I'm your conference operator for today.

At this time, all participants are in listen-only mode. Later, we will be conducting a question and answer session. (Operator Instructions). Today's event 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 of Luna. Please go ahead.

Thank you, Regina. Good afternoon, everyone, and thank you for joining us today, as we review Luna results for the fourth quarter, as well as the full year 2013.

Before we proceed with our presentation, let me remind each of you that statements made in the conference call, as well as in our public filings, releases and Web sites, 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, as discussed in our earnings release and our latest forms on 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. More complete information regarding forward-looking statements, risks and uncertainties in the company's filings with the SEC, available on our Web site.

And at this time, I'd like to turn the call over to My Chung, president and CEO of Luna Innovations.

Thank you, Dale.

On today's call, I will begin by reviewing our recent transaction with Intuitive Surgical and updating you on our progress with our key strategic initiative. Following my remarks, Dale will go through the Q4 financial results and then we will be happy to take any questions you might have.

As I am sure most of you know, in mid-January we completed a very significant transaction for Luna. We sold to our longtime development partner, Intuitive Surgical, the assets associated with our technology for shape-sensing and localization of optical fiber in medical devices.

We had been developing this exciting and promising technology, along with Intuitive and others, since 2007. On January 20th of this year, we sold the assets associated with it, as well transferred 10 of our employees to Intuitive, for a total value of up to $30 million.

We received the first $6 million at closing of the transaction in January. We expect to receive the next $6 million next quarter. Following that, there are additional amounts of up to $18 million, in the aggregate, to be received as Intuitive is able to achieve further development milestones and successfully commercialize the systems utilizing this technology. Since those future events are under Intuitive's control rather than ours, I won't speculate on the expected timing for those receipts.

We firmly believe that completing this sale and capturing the value at this time was right for the company and our shareholders. It was also the right opportunity for Intuitive, giving them full control over a dedicated team of very talented engineers to drive this technology and the opportunity it affords forward.

Completing this transaction with Intuitive provided two key benefits for Luna. First, it gave us the opportunity to monetize the transaction at an attractive value on an accelerated pace. With the receipt of $12 million in the first half of the year, we will significantly enhance our liquidity.

Second, but also related, it gives us the opportunity to concentrate our focus and devote the necessary resources to drive the increased adoption of our solutions for fiber optic sensing of temperature and strain throughout our ODiSI product line. We plan to utilize a portion of the proceeds from the Intuitive transaction to further expand our sales force, enhance our marketing efforts, and continue to improve the functionality of the Odyssey platform.

Although we did transfer several people to Intuitive, we maintained a core team of extremely capable engineers to drive technological improvements for the Odyssey platform. We continue our focus on marketing ODiSI in automotive, aerospace, and energy applications. We are currently doing some rebuilding and reorganizing, making sure that we have our resources properly aligned and prioritized. I believe we are now a stronger company with an improved focus.

I have mentioned on previous calls that we would be building out a dedicated sales force for our ODiSI product line. We have now filled the positions for North America and started to build our funnel of opportunities. We will also be looking to add a salesperson in Europe in the near future.

In the fourth quarter, we were successful in continuing to penetrate our key target markets of automotive, aerospace, and energy. Example sales of ODiSI products we shipped in Q4 included an automotive component manufacturer who is using the ODiSI for measuring strain on parts with complex shapes, an aerospace lab, using the product for measuring both strain and temperature in the process for curing composite materials, and a company using the product for measuring temperature in the nuclear energy market.

In Q4, we also received internal certification from an aircraft manufacturer for fatigue testing. Our mix of product sales continues to shift more towards sensing applications, with double-digit growth in products sold for sensing in fiscal year 2013, compared to fiscal year 2012.

Now I will turn the call over to Dale to further discuss the financial results for the quarter and year.

Thank you, My.

For the fourth quarter of 2013, we recognized total revenues of $5.9 million, compared to $6.1 million for the fourth quarter of 2012. Our product and license revenues improved 18% to $3 million, compared to 2.5 million in the fourth quarter of 2012.

Our technology development revenues decreased to $2.9 million in the fourth quarter of 2013, from 3.6 million in the fourth quarter of the prior year, with the bulk of that decline being attributed to lower contract research activity in our optical systems group, as we saw throughout 2013.

Our gross profit for the fourth quarter of $2 million was essentially flat compared to the fourth quarter of 2012. With the change in revenue mix being slightly more weighted toward product and licensing in Q4 of 2013, the gross margin percentage improved a half a point, to 33.7%, compared to 33.2% in the fourth quarter of 2012.

Operating expenses for the fourth quarter of 2013 were significantly impacted by additional costs incurred in connection with the sale of the fiber optic shape sensing technology. The $4.2 million of operating expenses in the fourth quarter of 2013 included approximately 0.8 million of incremental costs that were incurred and recognized because of the transaction.

Additionally, the Q4 operating expenses include $0.3 million of expense for rent on space that we have subleased. You can see an offsetting $0.3 million of other income from that sublease that offsets the rent expense in OpEx. Excluding those transactions and rent costs, our operating expenses would have remained flat, at approximately $3.1 million for the fourth quarter of 2013, compared to also 3.1 million for the fourth quarter of 2012.

Our loss from continuing operations grew by a $0.5 million to $1.6 million, compared to 1.1 million in the fourth quarter of last year. The $0.5 million increase in the loss from continuing operations can be summarized as the impacts of the $0.8 million we recorded in transaction-related expenses, offset by $0.4 million benefit that we recognized in income taxes related to continuing operations.

Below continuing operations, in the fourth quarter of 2012, we also recognized a positive contribution of $0.5 million from the operations of our secure computing and communications group, which we've shown in the discontinued operations section of our income statement. Recall that we sold the secure computing and communications group back in March of 2013.

In the fourth quarter of 2013, we recognized $0.3 million of income tax expense in discontinued operations, offsetting the amount of the tax benefit that I mentioned we recognized in our loss from continuing operations.

Our net loss to common shareholders was $2 million for the fourth quarter of 2013, or 14 cents per share, compared to $0.6 million or 4 cents per share for the fourth quarter of 2012. Again, that increased net loss of $1.4 million can be summarized as a combination of the $0.8 million in transaction-related expenses in Q4 of 2013, plus the half-million dollars in discontinued operations of the secure computing group in 2012.

For the year, we've recognized revenues of $22 million in 2013, compared to $26.4 million in 2012. Product and license revenues in 2013 decreased by $0.6 million, or 5.6%, compared to 2012, due to sales of prototype shape-sensing units in 2012 that did not recur in 2013.

Technology development revenues were $11.4 million in 2013, compared to 15.1 million in 2012. And as we've mentioned on our calls throughout 2013, we had a lower level of contract research in our optical systems group during the year, accounting for approximately $3.2 million of the decline for the year. Our gross profit for the year accordingly decreased to $8 million in 2013, compared to $10.4 million in 2012.

Operating expenses increased to $13.6 million for 2013, compared to 12.8 million in 2012. And as I mentioned earlier, the increase in OpEx is tied to the incremental costs recognized in conjunction with the shape-sensing sale transaction. Our resulting loss from continuing operations was partially offset by the gain that we realized on the sale of the secure computing group in the first quarter of 2013.

So after considering the after tax gain of $3.3 million from discontinued operations, we recognized a net loss to common stockholders of $0.8 million or six cents per share for the full year, compared to a net loss of $1.5 million or 11 cents per share for the full year of 2012.

We also ended 2013 with $7.8 million of cash, compared to 6.3 million at the end of 2012. The change in cash included 5.1 in net proceeds from the sale of the secure computing group, as well as $1.6 million in debt service for our term loan and our capital leases. Our remaining balance on the bank debt at December 31st was $2.1 million.

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

Well thank you, Dale.

Well, hopefully you've seen some positive results from us and we're very well positioned, going into 2014 here. At this time, we'd open up for any questions that you might have.

(Operator Instructions).

Your first question is from the line of Greg Greenberg with Wells Fargo.

Hello; good afternoon, gentlemen.

First, a housekeeping question on the initial $12 million that you get from Intuitive Surgical; I think you previously mentioned that after cost -- after expenses, you'd get about 9.5 million. How much of that have you already put in past quarters to use as [airplane tax] (inaudible) expenses?

So I'm not sure I entirely followed, Gregg. But as I said, we have about $800,000 that we recognized in Q4 of 2013 for transaction related expenses.

Okay. A little capital allocation question; I mean, again, cash balance at the end of the quarter was 7.8 million?

Yes.

Okay. So assuming we get the second payment of $6 million and we have some more expenses, you're going to have 10 million on top of that, so you're going to have $17.8 million and you have a $25 million market cap.

So as far as capital allocation goes, you certainly can't need anywhere near close to that to get to wherever breakeven is and any other investments you need to do, so what kind of things is the board and you guys considering doing as far as that goes?

You know, Gregg, there's not a specific plan that we're ready to roll out at this point on use of those proceeds. I think My has talked about you know we got some initial things that we're going to do, in terms of building out a sales force and some improvements to the -- to the platform itself, to broaden the base that we can -- we can market it to. But beyond that, that's really all that we've got in place at this point.

Okay. Makes sense. Understand you can't really answer further.

As far as what's left of the business, which is what we're focusing on the gross, the quarter looked good as far as sequential and growth year over year. So about -- as far as on the product side, like $3 million in revenue; did I read it correctly?

Yes. Right at 3 million.

Okay. I know you guys don't give guidance. Any color you can give as far as -- and I know obviously the contract R&D has been down and that will change some things, but as far as a breakeven, and obviously we're hoping in the long run for much, much more than breakeven from the core business, but any color you can give us on kind of the business plan on when we see profits and breakeven?

Yes. You -- as you started your conversation, or your question, Gregg, I got -- we haven't -- we haven't been giving guidance and I you know I don't want to start that here.

Obviously you know we've got some revenue outflow from the product development work that we used to do in the shape-sensing and so we're looking for growth in the product side of the business, specifically that ODiSI platform growth to start offsetting the lost revenue from the product development side. But you know I can't really put out there where we see the breakeven point coming.

Okay. And at some point, first of all ...

A little bit more color on that, Gregg ...

Yes.

A little bit more color on that; what we've found is that trying to sell the ODiSI product line through manufacturers' reps really doesn't work for us, because of the displacement we make to current technology. So the growth in the product line revenues will very much be tied to how quickly and how much we continue to grow the direct sales force.

So what you'll see is that as we -- as we expand your -- our sales and marketing costs will grow accordingly.

Okay. As far as -- in your prepared remarks you mentioned (inaudible) about a few customers in different industries. Will there be a time where we'll be able to find out which customers those are by name?

That's really dependent a lot on our customers. We found that in the number of cases that we've asked to do press releases or announcements of that nature is people are fairly protective, keeping in mind that we deal with fairly large-sized organizations and the [group] that we sell to are not necessarily in control of releasing that and will typically run into the brick wall when they go up the chain, looking to get endorsement.

Okay. Last question; any update you can give us on the corrosion testing, I think it was the Navy that was running?

We continue to make progress on that. We're in discussions today with a number of aircraft companies looking to do trials, but nothing significant quite yet for us to put out a press release.

Okay. Thank you very much.

Your next question is from the line of [Galspar Zomaver] and he is a private investor.

Good afternoon.

Hello. Have you received the $12 million that you were supposed to receive?

So the terms of the transaction were for us to receive 6 million at closing and then another 6 million 90 days after closing. So we have received the first 6; we did get that at the closing in mid-January and the other 6, as My mentioned, is due in the second quarter, in April.

So the numbers that we gave you for ending 2013 does not include that 6 million. When we announce Q1 results, it will include the first 6 million of the 12.

Okay. And any plans to pay out a special dividend with that money?

There are currently no plans to do that. We think the best use of funds today is really to help grow the top line revenue.

By acquisitions or ...

Currently by sale of the ODiSI product line; by focusing on the initiative that we set forward. We believe the target market that we're going after is significant and that putting -- what we're putting in place, as far as sales marketing and engineering will allow us to capture a major portion of that.

So this is all [genetic] growth, not acquisitions. Am I correct?

Correct, correct. Now that doesn't preclude us looking at acquisitions, because as Dale mentioned, we are not looking to spend that $12 million in any significant way.

So why not pay it out as a dividend?

Because it leaves us with the ability to do, as you've suggested, look at acquisitions to bulk up. But the right time to look at acquisitions is after we've got our own house in order; right? And then that's where the focus for 2014 is, is to build the revenue side, get it to a point of penetration that we're looking at, and then explore what else can we add to this thing to accelerate our growth.

But you're on the right track. So that's why we've kind of held off. Again, I think the right thing is to reinvest the money and to take this company to the -- to the level that is has the potential to be.

Okay. Now, in the press release, you had mentioned that there's potential for this technology that you sold for $12 million to be sold to other industries. Is this something that you're shopping around now or no?

Not really. We maintained it, so what we got royalty-free license back for all the applications outside of medical. And we've been doing research programs on it. We will continue to do that, but our focus, short-term, is very much on the sensing side.

Okay. But this technology in no way would seep into the 3-D printing bonanza that's going on right now, with all those companies making 3-D printers.

No. No, we really don't fit into that market there.

Okay. All right. Got them all, thank you.

Thank you.

Ladies and gentlemen, this concludes the question and answer portion of today's broadcast. I'd like to turn the call back over to Mr. My Chung for any closing remarks he'd like to make.

Okay, well again, thank you for -- everyone, for joining us today. I think the company is in the best position it's ever been and we look forward to continuing to report to you our quarterly results.

Thank you.

Ladies and gentlemen, thank you so much for your participation today. This does conclude the presentation and you may now disconnect. Have a great day.