Luna Innovations Inc (LUNA) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Q3 2016 Luna Innovations Incorporated earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Dale Messick, Chief Financial Officer, of Luna Innovations.

Thank you, Heidi. Good afternoon, everyone and thank you for joining us today as we review our operations and results for the third quarter and the first nine months of 2016. A recording of this conference call will subsequently be posted on our website.

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 change at any time. Including but not limited to statements about our expectations regarding future operating results or the ongoing prospects of the Company. 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 latest forms 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 except as required by law. There is more complete information regarding forward-looking statements, risks and uncertainties in the Company's filings with the SEC, available on the SEC website and 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. Thank you all for joining us today. As you have hopefully seen in our earnings release, we had a strong third quarter and continue to show significant improvements in our operating results as we have and continue to be keenly focused on top line growth and profitability.

The third quarter of last year was our first full quarter of combined results of Luna and API. So for the first time, we can easily compare our year-over-year performance without having to reconcile pro forma quarterly numbers. With our quarterly results now on an apples to apples comparative basis, the headline is that revenues continue to grow and our operating loss has been reduced by half.

We have accomplished these results by remaining focused on executing our two key strategic growth initiatives, namely high speed optical receivers for the long haul and metro market build out; and, penetration of the stress and strain measurement market through adoption of our ODiSI product for testing composite materials and structures.

During the third quarter, sales of our ODiSI product increased 43% over the third quarter of 2015. The continued need for improving the fuel economy of cars and airplanes by decreasing their weight will drive ongoing growth in the use of advanced materials such as composites. Our ODiSI solution is the most effective way to test these new vehicles.

In addition to our sales successes in the third quarter, this week we issued a press release regarding the use of our ODiSI technology or embedding a monitoring fiber within a composite structure to routinely or continuously monitor its physical integrity. At the recent Composites and Advanced Materials Expo, a composite smart joint that included our ODiSI technology was demonstrated by the University of Tennessee and was a finalist in the Awards for Composite Excellence category. Further development and deployment of this capability to embed a monitoring fiber is a key step to expanding the market for our products beyond the design labs and into the routine maintenance markets. Q3 was a big step forward for our division supporting the ODiSI platform. We are excited by their recent accomplishments and the growth opportunity this represents.

Within our high speed optical receiver business, the second of our key strategic growth initiatives, we announced last month a new $2.8 million follow on order for our 100 gig coherent receivers. These products will be deployed by a major telecommunications equipment manufacturer in the China market. Year-to-date, our high speed optical receiver sales have increased more than 50% over the first nine months of last year. We continue to expect strong demand in the build out from the long haul and metro market over the coming years, driving continued requirements for our high speed optical receivers. In 2017, look for us to roll out our second generation of the 100 gig coherent receiver as well as ramp up sales activity for our 10 gig avalanche photodiodes for the fiber-to-the-home market.

On these calls, I typically like to focus my comments on our progress within our key growth initiatives. Today I would like to also highlight the accomplishment of our research group in growing our Technology Development revenues. Over the past year or so, this group has done a phenomenal job of increasing our proposal win rates, particularly in the area of successfully converting Phase 1 development contracts into the higher revenue Phase 2 follow on awards. And as a result, the third quarter revenue for this segment of our business has grown more than 30% year-over-year; a tremendous accomplishment. Overall, it is clear to me that our merger with API a year and a half ago has been very successful and was the right decision. The combined company is growing; top line we're up 16% year-over-year, and our bottom line is improving, not only as evidenced in our Q3 numbers, but as you will see in our 10Q that on a pro forma year-to-date basis, it's about a $2 million improvement.

With this, I'll turn the call back over to Dale to cover in more detail our Q3 financial results.

Thank you, My. Revenues for the third quarter of 2016 increased 11% to $14.6 million compared to $13.2 million for the third quarter of 2015. The increase in our total revenues was driven by growth in both segments of our business, with Technology Development revenues growing $1 million compared to the third quarter of last year, and Products and Licensing revenues improving $0.4 million year-over-year.

The increase in our Products and Licensing revenue was primarily driven by sales of our ODiSI systems for fiber optic strain sensing, while the growth in Technology Development revenue can be attributed to increased win rates in Phase 2 contracts within the SBIR program, as My described a minute ago. Gross profit increased to $5.6 million for the third quarter of 2016 compared to $5 million for the third quarter of 2015, with our overall gross margin remaining consistent at 38% of revenues for both periods.

Operating expenses were $6 million, or 41% of revenue, for the third quarter of 2016 compared to operating expenses of $5.7 million, or 43% of revenue, for the third quarter of last year. Amortization of intangible assets associated with purchase accounting for our merger with API, included in operating expenses, was $463,000 for the third quarter of 2016. This represents an increase of $158,000 compared to Q3 of last year and accounted for most of the overall increase in operating expenses year-over-year. Our resulting quarterly net loss improved to $0.4 million compared to $0.8 million for the third quarter of 2015. As I mentioned just a moment ago, our expenses included $463,000 of purchasing accounting amortization for the quarter. So without that amortization cost, our operating cost results would have essentially been break even for the quarter.

We ended the quarter with $13.2 million of cash compared to $13.8 million at the end of Q2. The decrease in our cash balance during the quarter resulted primarily from $458,000 of debt service during the third quarter in addition to $169,000 of share repurchase activity. Our total outstanding bank debt as of September 30 was $4.8 million for net cash minus debt of $8.4 million. Year-to-date through September 30, 2016, we've recognized $43.3 million of revenue compared to $28.6 million for the first nine months of 2015. Our reported revenue for the first nine months of 2015 only includes the revenues of API, subsequent to our merger in May of 2015. If we compare our nine months of 2016 revenues to the combined nine months of both Luna and API for 2015, total revenues increased 16% year-over-year.

Gross profit increased to $15.6 million for the first nine months of 2016 compared to $11.5 million for the first nine months of 2015, representing overall margins of 36% for the year-to-date 2016 compared to 40% for the first nine months of 2015. The change in our gross margin percentage is a function of our revenue mix with the results of operations from API being included for only the partial period in 2015. Operating expenses were $18 million for the first nine months of 2016 compared to $17.9 million for the first nine months of 2015. Operating expenses in 2015 included $3.5 million of non-recurring merger-related expenses. Operating expenses for the first nine months of 2016 included $1.5 million of amortization expense related to the purchase accounting, compared to $0.6 million for the first nine months of last year. Our resulting net loss improved by $2.9 million to a loss of $2.7 million for the nine months ended September 30, 2016 compared to a net loss of $5.6 million for the nine months ended September 30, 2015.

As we mentioned on our last call, we've been successful in maintaining a backlog that leaves us well positioned to grow our revenue through the remainder of 2016 and into 2017. We ended the third quarter of 2016 with $10.1 million of backlog for our Products and Licensing segment and an additional $22.8 million of backlog for the Technology Development segment.

Now I'll hand the call back over to My.

Thank you, Dale. And at this time I would be happy, both Dale and I, to take any questions that you might have.

(Operator Instructions) Gregg Hillman with First Wilshire.

On the ODiSI, you said it was plus-42%. Are you saying publicly what the actual revenue is for that division?

No. We really haven't broken it out by that detail at this point, Gregg.

What's your overall feeling for ODiSI, whether you think it would be material to the company in 2017, material in terms of operating income?

We believe it is. We're gaining a tremendous amount of traction today in the market. We've been endorsed by major aerospace manufacturers and we have a lot of activity going on in the automotive space today.

(Operator's instructions) Gregg Hillman with First Wilshire.

To follow up on it -- it's kind of a different division. The other fiber to the home, what's happening with that, that whole initiative? What do you see happening there and what has to happen before that really gets up to where HSOR is?

Right now we have samples out for evaluation with quite a number of players in the China market. We anticipate that those evaluations will be completed within the quarter, all right? At which point, we will start delivering volumes some time in early part of Q1.

That's for the 10 gig.

Right, for the 10 gig APDs.

Would you do a press announcement when you finally start to ship or something like that to let people know what's going on?

Yes. That is our preference whenever we could. If we can't name the customer, we'll do it in as a third party.

To be clear, we do have a 10 gig APDs that we are shipping currently. But we'll announce when it comes around when we get a commitment for a single, large purchase from a customer.

Just for the telecom companies in general, they seem to go through cycles up and down purchasing capital purchases. Where's your take in terms of the macro factors that's driving the telco's right now that drives your purchases of your products, which are further down the food chain. Are the macros favorable or improving or what's your take on that for HSOR and also for fiber-to-home?

The HSOR, the way that we characterize HSOR is both on the 100 gig receiver side as well as on the 10 gig APD as well as what we've got remaining on the 2.5 gig. The majority of the opportunities that we are chasing today, which coincides with our competitors, is really the build out what's going on in China. And that's all funded by the government dollars. Best guess today is good for at least another three or so plus years. That's where they're spending the money, and I think, again, if you look at our competitors, they're benefiting from that as well.

Do you think you'll be able to diversify your customer-base in that area and get some other, you know wins with Americans or Europeans telcos?

Absolutely. We're right now clearly looking to grow the revenue. Once that's moving in a fairly stable fashion the next big opportunity for us, which is more global than it is China, is the expansion that's going to go on in the data center market. And so you'll start to see the HSOR revenue diversify from that, and I think that's the same with our competitors.

And what's the timing for the data center market for that to get traction do you think?

Data center is happening today. But the volumes are at a lower volume because the data center is not necessarily a China market event; it's more of a Europe and North American. So the revenues that people are getting from that space today is smaller. That's why from a prioritization on our side, we've put that secondary versus the build out on the metro and long haul market. But naturally if you've tracked what's happening with the Amazons of the world, Facebook and Googles, they will command a lot of the data communications.

I'm not sure if it's earlier in the call -- did you talk about Terahertz as a segment earlier in the call?

No, we left that out. It's not on purpose per se; that part of our business is actually doing very well. They're getting very good traction, there was an article in fact recently talking about Terahertz technology -

Wright-Patterson?

Wright-Patterson Air Force base that just happens to be our technology. So, we're gaining good traction in it. That team is working very well and we're making progress. But it's not as high of a revenue stream as we are achieving today on the high speed optical side.

Is that division break even, the Terahertz division?

Not yet. Getting close, but not quite there yet.

I am showing no further questions at this time. I would now like to turn the conference back to My Chung.

Thank you everyone for joining us today. I would like to close the call with a reiteration that we are making significant progress, both operationally and financially, and I look forward to updating you again at the end of the next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, you may all disconnect.