Luna Innovations Inc (LUNA) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Luna Innovations Incorporated earnings conference call. My name is Clinton; I am your event manager. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

Thank you, Clinton. Good afternoon, everyone, and thank you for joining us today as we review Luna's results for the first quarter of 2014.

Before we proceed with our presentation today, let me remind each of you that statements made in the conference call as well as an 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 as 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 would like to turn the call over to My Chung, President and CEO of Luna Innovations.

Thank you, Dale. On today's call I will review key elements of our operations as well as provide you with an update on our distributed fiber optic sensing growth initiative. Following my remarks, Dale will go through the financial results for the first quarter, and then we will be happy to take any questions you might have.

The results that we released today reflect our performance post-sale of our medical shape sensing business to Intuitive Surgical. We have discussed this transaction with you on previous calls, so I won't do that again here unless there are questions later.

The one additional piece of information that I would like to share with you at this time is that in mid-April we did receive from Intuitive the second payment of $6 million that was due as part of the initial purchase price.

Turning to our current and ongoing operations, I am very pleased to report today that our Q1 revenues for both our research and products group were up relative to the first quarter of last year. Contributing to this was a rebound to growth in our telecom test and measurement products.

In particular, sales of our Optical Vector Analyzer, which typically have our highest average sales price and are therefore most susceptible to economic swings, grew in the first quarter. Our OVA provides comprehensive component characterization of optical devices. It is the only instrument on the market that is capable of providing this level of detail in a single scan.

Our research group continues to improve in its win rate for government proposals as well as advance certain technologies toward commercialization. The group has followed a disciplined, improved proposal-writing process that has both led to an increased rate of initial Phase 1 awards as well as an improved rate of obtaining follow-on Phase 2 funding.

From an organization standpoint, we have recently hired Brian Soller as Vice President, General Manager of our Lightwave Division. He will be overseeing all of the fiber optic based products, services and R&D activities. Having worked previously at Luna, Brian comes to us with an extensive background in our products and in our target markets.

Most recently, he served as Vice President Marketing for Micron Optics, a leading global supplier of fiber optic sensing equipment. Brian recognizes the compelling opportunity for growth presented by our fiber optic sensing platform, and we are excited to welcome him back in a leadership role at Luna.

With the sale of our medical shape sensing business to Intuitive Surgical, we are now focused on the execution of our fiber optic sensing strategic initiative. An important component of this growth initiative is the buildout of a dedicated direct sensing salesforce.

With the additional sales engineers in Q1, we have already seen a 40% increase in the number of qualified sensing opportunities entered into our sales funnel. Our target markets for our sensing product line are the aerospace, automotive, and energy industries.

Our distributed fiber optic sensing platform offers these customers a faster, cheaper, and higher-resolution product than conventional strain gage or thermocouple data acquisition instruments. Based on customer feedback and requirements, our product development team will continue to build on these capabilities in order to become a market leader in this space.

With that, I turn the call back over to Dale.

Great, thank you, My. Before we dive into the numbers, let me point out that our results for the first quarter of 2013 have been restated to now reflect the revenues and expenses associated with the medical shape sensing operations, to be included within discontinued operations rather than in our operating revenue and cost, as when we reported the results last year. With that reclassification, our 2014 revenues and costs are comparative to the 2013 results as shown.

For the first quarter of 2014, revenues were $4.5 million, representing a 9% increase over the first quarter of 2013. The growth in revenue was driven by higher sales of test and measurement equipment, with overall product and licensing revenue growing 22% compared to Q1 of last year. As My mentioned previously, the increase in product sales was largely related to telecom test and measurement, including our OVA product line.

Revenues from our contract research in our Technology Development segment improved by 2% compared to the first quarter of 2013. Our overall cost of sales were essentially flat, declining less than $100,000 compared to Q1 of last year, with higher costs corresponding to the growth in product sales, being offset by reductions in the cost of our technology development activities.

As a result of higher products component to our revenue mix as well as the improved margins within our Technology Development segment, we realized an improvement of 7 points in our overall gross margin to 35% in the first quarter of 2014, compared to 28% in the first quarter of 2013. Our resulting gross profit increased approximately $400,000 to $1,552,000 for the first quarter of this year versus $1,135,000 for the first quarter of last year.

Operating expenses grew slightly to $3.5 million in the most recent quarter, compared to $3.4 million in the first quarter of last year. The increase of approximately $90,000 in our SG&A expense was primarily due to higher selling cost, including additional time spent in bids and proposal activity within our Technology Development segment and our additional sensing sales engineers.

We recognized an income tax benefit in continuing operations of approximately $900,000 in the first quarter of 2014 and in the first quarter of 2013. These income tax benefits offset the income tax expense recognized on the gains that are reflected in discontinued operations for our sales of medical shape sensing in 2014 and our Secure Computing and Communications group in the first quarter of last year, which I will touch on in a moment.

Our resulting loss from continuing operations improved $340,000 from $1.3 million in the first quarter of 2013 to $963,000 in the first quarter of this year.

Income from discontinued operations was $9.5 million in the first quarter of 2014 compared to $4.1 million for the first quarter of 2013. The 2014 amounts reflects the gain on the sale of the medical shape sensing business of $10.6 million, less estimated taxes of $1.1 million. The gain recognized is based on the $12 million that we have received from Intuitive thus far and does not include amounts that are contingent upon the technology milestone or royalties in the future.

The $4.1 million of income from discontinued operations in 2013 includes a gain on the sale of our Secure Computing group in March of 2013 in the amount of $4.9 million, offset by a $0.9 million estimated tax on that gain. Income from discontinued operations in the first quarter of 2013 also includes approximately $250,000 of net contribution from the medical shape sensing development work in that quarter, less $160,000 of net cost incurred by our Secure Computing group, also in Q1 of 2013, prior to the completion of the sale of that group.

After considering the gains recognized in discontinued operations, our net income attributable to common shareholders improved to $8.5 million or $0.49 per diluted share, compared to first quarter of 2013 income attributable to common shareholders of $2.8 million or $0.17 per diluted share.

Touching on the balance sheet, we ended the first quarter with $10.9 million of cash on hand compared to $7.8 million at the end of 2013. Receivables of $10.5 million at March 31 included the second $6 million installment due from Intuitive on the shape sensing sale, which as My mentioned earlier was collected in April of this year.

Total assets have grown to $27.5 million at the end of the first quarter of 2014 compared to $19.7 million of total assets at the end of 2013. Our bank debt has continued to amortize, and the balance was $1.75 million at the end of the quarter.

With that, I will turn the call back over to My.

Clinton, we would now like to take any questions from participants on today's call.

(Operator Instructions) [Caleb Bivens].

Yes, thank you. I have a couple questions. Number one, it seems that you recorded all the gains and expenses related to the $6 million that you received in April for the second quarter. So is that true?

On the income statement, the gain is reflected, yes. On the balance sheet side, the $6 million is sitting in accounts receivable.

So yes, all of the $12 million that was due from the upfront payments has been reflected in Q1. What we haven't reflected here is anything that we would receive in the future from the achievement of the technology milestone or royalties upon their system sales.

So when you report second-quarter revenue, that $6 million is pure profit?

The $6 million was reflected in Q1, so it won't show up in the income statement in the second quarter. All that will show up in the second quarter would be the conversion of the accounts receivable into cash.

Okay, I got you. Thank you. Just one more question. In reference to your bringing Mr. Soller back to the firm, I just looked through and I see that he spent about 5 years with your firm, then he went to LightPath, and then he went to Micron for a year.

In reference to the cash that you now have on your books, do you plan to do any acquisitions maybe in the next year or so?

What we conveyed at the last earnings call was the appropriate time for us to do acquisitions would be at the point that we have achieved at least breakeven, which we kind of alluded to being around a year to 2 years from now.

Okay, so that cash is just a cushion.

That is correct at this point.

Okay. Thank you.

(Operator Instructions) Thank you. We currently have no more questions at this time. I would now like to hand the call back over to My for closing remarks.

Well, thank you, everyone, for joining us today. I would like to remind everyone that we will be holding our annual shareholders meeting in Roanoke on May 20 at 9:00 AM and I hope to see you all there.

If you received a proxy in the mail and will not be able to attend the meeting in person, please do complete the proxy so that your vote may be counted. With that, we thank you again for joining us today.

Thank you, ladies and gentlemen. That concludes your conference call for today and you may now disconnect. Thank you for joining. Have a very good day.