Luna Innovations Inc (LUNA) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year 2019 Luna Innovations Incorporated Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to Ms. Allison Woody, Director of Administration. Thank you. Please go ahead, ma'am.

Thank you. Good afternoon, and thank you for joining us today.

This afternoon, we issued our fourth quarter and full year fiscal 2019 earnings press release. In addition, we posted to the Investor Relations section of our website a presentation with supplemental information for the quarter. If you do not have a copy of the release or the supplemental materials, please check our website at lunainc.com. We will also post a replay of this call to our website.

Some of our comments and discussions today are based on non-GAAP measures, specifically adjusted EBITDA. These adjusted numbers exclude the effect of certain noncash expenses and other items. The adjusted results are a supplement to the GAAP financial statements. Luna believes the presentation and exclusion of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance.

Before we proceed with our presentation today, let us remind you that statements made on 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 risks and uncertainties and are subject to changes at any time, including but not limited to statements about our expectations regarding future operating results or the ongoing prospects of the company. Actual results may differ materially as a result of a variety of factors.

More complete information regarding forward-looking statements, risks and uncertainties is available in the company's SEC filings, which can be found on the SEC website and our website. 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.

After our prepared remarks, Scott Graeff, our President and Chief Executive Officer; Gene Nestro, our Chief Financial Officer; and Brian Soller, Senior Vice President and General Manager of our Lightwave Division, will be available to take your questions

And at this time, I'd like to turn the call over to Scott.

Good afternoon, everyone, and thanks for joining our call.

As Allison mentioned, we issued our fourth quarter and full year 2019 press release at market close. We are joining you today during a period of incredible market volatility, driven by concerns over the unknown. We recognize that this noise in the market is uncomfortable. Nevertheless, we continue to focus on our performance and on our long-term prospects. As you will hear during our review today, Luna has just exited the best quarter and year in its history. Not only am I incredibly excited to share with you the exceptional results of what we accomplished by executing on focused priorities, but I'm extremely proud of the Luna team. I have to start by recognizing and thanking my Luna colleagues who worked so hard to deliver such great results. Congratulations to the entire team.

In my 17 years at Luna and in Luna's 30-year history, 2019 marked the best year from both an operational and a financial performance perspective, and I believe we're just getting warmed up. You will see that we drove very strong financial results for the quarter and the year. I'll start with an overview of the quarterly financials in a moment, but first I'd like to reflect on several important accomplishments during 2019 that helped to set us up for continued success in 2020 and beyond.

I think about our accomplishments in 4 categories: first, financial achievements; second, product and customer advancements; third, employee and community focus; and fourth, enhancing oversight.

Here are a few of our financial achievements throughout 2019. Looking first at revenue and income from continuing operations, we delivered significant growth both quarter-over-quarter and year-over-year. Also you may recall that in Q3, we did some important work on our capital structure, simplifying our balance sheet by converting preferred shares to common, thus also eliminating a dividend on the related preferred shares. During that quarter and because our financial performance was so strong year-to-date, we instituted and completed a $2 million share repurchase program, providing a return to our shareholders and reducing outstanding shares by more than 330,000. Finally, within this category of financial achievements, we also enhanced balance sheet flexibility by putting in place a new $10 million revolving credit facility.

In the second category, product and consumer advancements. We received a large purchase order for tunable lasers from an industry-leading robotics company. We acquired General Photonics, a leader in characterization and control of light for photonics applications. We launched our new Lightwave component analyzer, the model 6415, providing breakthrough measurement capabilities for fiber optics. We signed an exclusive license agreement for the supply of fiber optic technology with Meggitt PLC. We were selected as a NASA partner for Moon and Mars technologies and we delivered the first of our new portable OBR 6200 to Lockheed Martin in support of global sustainment of the F-35.

In the third area of employee and community focus. Our employees are our greatest asset. We've worked hard this year at clarifying and articulating our vision, mission and values and I shared those with you on our second quarter 2019 call. We've also implemented new employee policies, demonstrating Luna's continuous quest to provide the best employee experience possible. Some of these new policies include recognizing and rewarding those with 15 years of service with additional paid time off; implementing a high school intern program to help the children of our employees to gain valuable work experience; updating our parental leave policy as we recognize that bonding time as a family is important; and a robust tuition reimbursement program to support self-improvement and educational efforts. We've also been recognized by the business community with a number of awards, including being named as the 2019 Innovator of the Year by the Roanoke-Blacksburg Technology Council.

And finally, in the area of enhancing oversight. While we believe that Executive Team and Board oversight is excellent, we are constantly looking for ways to improve. During the year, we strengthened our Board with the addition of Mary Beth Vitale, a seasoned executive and cybersecurity expert. We were highly focused on adding diversity, both in experience and gender and Mary Beth has been an outstanding addition to an already terrific Board. We also welcome Gene Nestro, our new CFO. Gene has strong experience working for public companies and has already been working hard on further refining the foundation that our former CFO, Dale Messick, who retired, had created.

We continue to believe that we are on the right path with the right vision and our financial and operational success during 2019 underscores this belief. We also believe that our potential is significant and that we are witnessing a market shift that could accelerate the adoption of the capabilities provided by Luna. Historically, we had to educate the market about our technology and the advantage of its applications. What we're seeing now is a true market pull, where some very significant players have realized the impact of incorporating optical fiber sensors into their products and are coming to us for assistance.

You will recall that we announced last year a partnership with Meggitt PLC. This partnership combines our fiber optic technology with Meggitt's electronics and sensors to enhance passenger safety by developing a more accurate and versatile overheat and fire detection system. On a recent conference call, Meggitt reiterated that the combination of Luna's best-in-class optoelectronics and their market-leading capability gives them an important competitive edge in this market. A major aerospace manufacturer has recently mandated the use of fiber optic solutions on their aircraft. We expect to see more opportunities as fiber is smaller lighter and faster, far surpassing the capabilities of legacy copper wire. Luna is in a great position to take advantage of this kind of market pull.

Another example comes from a recent e-mail that I received from an executive at a very important customer. We partnered with this customer on design of the OBR 6200 for a specific aerospace application. I'm going to paraphrase a little bit but he thanked the Luna team by saying, "On behalf of the company and our program, we want to express our sincerest gratitude to the entire Luna team for successful development and delivery of the OBR 6200. Luna's OBR development team are professionals who met substantial challenges with can-do attitudes and delivered a product that exceeded our expectations. The OBR 6200 will significantly reduce equipment downtime, enabling us to quickly assess the condition of the equipment using fiber networks." I got to tell you, it doesn't get any better than that, especially when you get unsolicited feedback of that nature. It is really important to all of us at Luna to serve as a trusted partner and adviser to our customers, and we remain dedicated to delivering on that value.

Everything I've spoken about provides a strong foundation as we enter our 2020 fiscal year in the strongest position ever and we see the incredible momentum from 2019 continuing. To that end, I'm pleased today to share with you our 2020 outlook. We expect full year 2020 total revenues to be in the range of $81 million to $84 million, and we expect adjusted EBITDA to be in the range of $10 million to $12 million.

Now let me provide some high-level comments on the fourth quarter and some of the details of our operations. Gene will go into greater detail on the quarter and the fiscal year-end. The fourth quarter of 2019 marks the ninth consecutive quarter of double-digit year-over-year growth in our revenues from continuing operations. We grew total revenue 44% in the quarter versus last year and grew gross profit to more than $10 million in the quarter, resulting in gross profit margin of more than 53%. We reported adjusted EBITDA of $3.2 million, an increase of $1.7 million over the fourth quarter of last year. And despite higher SG&A and R&D expenses from integrating 2 acquisitions and making core investments in the organic business, we more than quadrupled our pretax income from continuing operations in Q4 to more than $1.7 million.

Before I cover progress in our operations, I wanted to touch on the acquisitions of Micron Optics and General Photonics. Yesterday marked a full year since the General Photonics acquisition and Micron was completed several months before that, so both have lapped the 1-year mark and are fully integrated into Luna Innovations' Lightwave Division. General Photonics will obviously have 2 incremental months in 2020 on a comparable basis, but beginning in Q2 all comparisons on a year-over-year basis will have both acquisitions fully incorporated into the comparative numbers. You've seen the positive impact of these acquisitions on our top and bottom lines throughout 2019 and we expect them to continue to contribute nicely during 2020 and beyond.

We look forward to gaining even further operational and sales leverage across our now broad portfolio of fiber-optic-based test and measurement products. Therefore, this is the last time you will hear me call out those businesses by name as they are fully integrated into Luna Innovations.

Now let's move on to our businesses, starting with Lightwave. 2019 was a transformational year for Luna and our Lightwave Division. For the fourth quarter, product revenues grew by 65% on a year-over-year basis. For fiscal 2019, Lightwave revenues totaled more than $49 million, increasing by 114% compared to 2018. While significant growth in 2019 came from the acquisitions of Micron Optics and General Photonics, our Luna legacy products, the OVA, the OBR and ODiSI continued their pace of double-digit revenue growth during Q4. Although we don't talk about organic growth rates because we don't manage the business that way, it's important for you to know that these rates are incredibly strong and well into the double digits.

For our group of sensing products, revenue in Q4 2019 versus the prior year period represented a quarter of great double-digit growth. For fiscal 2019, sensing products nearly doubled. As a reminder, our solutions focused on 2 areas: first, the integration of optical fiber sensors in and on advanced materials and structures; and second, the use of Terahertz waves to see through opaque materials to measure thickness for process control applications. Our fiber optic sensing products are ODiSI and HYPERION; and our Terahertz sensing product is our T-Ray 5000.

In Q4, sales of our ODiSI product, the industry's only ultrahigh resolution, distributed fiber sensing system, were up strongly by double digits. During the quarter, we recorded particularly strong sales to international customers and within the automotive market, which demonstrates continued market validation and acceptance of Luna's ODiSI technology. Within sensing, new orders for our HYPERION platform, which is our long-range, high-speed sensing solution were strong, with sales to customers deploying our system in the oil and gas industries. In particular, we received new orders for HYPERION system from several customers for monitoring the health of the flexible risers that bring oil from the seafloor to the surface. These orders will be delivered over the next 12 months.

Continuing on with some of the other products in Lightwave, in Q4, we introduced a new dual-channel Terahertz control unit. The new product allows multiple sensor heads to be attached to a single control unit. This both reduces the per sensor cost of deployment as well as opens up new applications that were previously cost-prohibitive. With the same footprint as the single-channel system, the dual-channel system can control 2 Terahertz sensors. This dual-channel system enables a wide variety of multi-sensor applications within the process control market. This additional new capability helped us nearly double our Terahertz revenue in Q4 on a year-over-year basis.

Moving to our communications test vertical. Remember that this business focuses on the ever-growing need for more bandwidth in communications networks. Optical fiber is a key enabler to high-speed communications. This ability runs the gamut from core telecommunication networks to data-centric networks, to enabling cloud computing and 5G mobile networking. Our products feed the need for speed and include the OVA, or Optical Vector Analyzer; the OBR, or Optical Backscatter Reflectometer; and a suite of polarization instruments and photonics controllers. Revenue growth in this segment for Q4 2019 more than doubled versus the prior year. Revenue for 2019 also more than doubled compared to 2018.

Two major growth drivers continue to enhance this segment. The first is the integration of optical and electronic systems in silicon, generally known as silicon photonics. In silicon photonics, our products are used to test and evaluate new designs to ensure high-speed capability. They are also used on the production side to enhance the throughput and quality of devices that integrate silicon photonic chips. The second main growth driver in this segment is the introduction of a new portable version of our OBR. Luna's OBR technology provides advanced design, diagnostic and inspection capabilities to fiber optic manufacturers, developers and maintainers by illustrating a map in ultrahigh resolution of an optical link, similar to how an x-ray might look.

On our last call, we announced the initial orders of this new product were delivered to Lockheed Martin in support of the F-35 program. Remember that we initially developed this product for field support of the F-35 by making the 6200 portable with an easy-to-use, green-light, red-light touch screen. I am pleased to share that our customer is extremely happy with the performance of the units. In fact, we have recently received follow-on orders for additional units and expect the OBR 6200 to add nicely to our growth trajectory for 2020.

I want to thank our long-term customer, Lockheed Martin, for their incredible collaboration as well as their confidence in us. Their input has been key to successfully developing a user-friendly portable device that will enable them to dependently troubleshoot fiber-optic-based issues on an aircraft.

While the OBR 6200 was developed for testing military aircraft, we are extremely excited about the many applications of this new product, both military and commercial. This is a great example of amazing results that have come from the incredible investments that we've made in engineering staff and sales resources, which has allowed us to accelerate our new product platforms. In fact, as I said before, we're seeing the benefits from all the work that we've done to lay the foundation of growth in fiber optics. We continue to be excited about the momentum that we're seeing. And as always, we'll update you on our accomplishments.

Switching to our technology development group. We demonstrated 16% revenue growth in the quarter and 24% growth for full fiscal 2019 versus the prior year. So a great performance financially from our technology development group. There are 2 notable deployments -- developments, I'm sorry, from the group in fourth quarter.

First, we're part of a team awarded Project of the Year by the Department of Defense's Strategic Environmental Research and Development Program. The team, including Boeing, North Dakota State University, the Air Force Research Laboratory and the Naval Air System Command is developing better tests to predict coating performance in severe conditions that lead to damage and corrosion. And second, we participated in an Air Force Pitch Day Competition, designed by the Air Force and agencies across the DoD, who are looking for ways to accelerate the pace of selection. They are using pitch days instead of conventional proposals as an efficient way of evaluating suppliers. Luna won the competition and was awarded on the spot a contract as a result of the event, making it a very productive day.

As a reminder, when the technologies from these contracts mature, we always look for ways to get them to market as efficiently as possible. In most, if not all instances, we retain the intellectual property rights to these technologies. Overall, I'm very pleased with the continued strong performance from our technology development team. As I mentioned at the onset of this call, I'm very proud of the hard-working and committed Luna team, who delivered exceptional financial and operational accomplishments throughout 2019, including Q4.

We started the year by articulating a strong vision of enabling the future with fiber and we're very clear about our purpose. We feel very good about our trajectory and look forward to continuing delivering against our goals, including our 2020 outlook. We're just getting started to capitalize on the opportunities in front of us and as many of you have heard me say before, there's only one out in the second inning of this ballgame for Luna.

With that, let me hand the call over to Gene for more of the financial details. Gene?

Thank you, Scott.

As this is my first earnings call with Luna, I'd like to start by saying how excited I am to be here and how grateful I am to have the opportunity to join the incredibly talented Luna team. I worked for some great companies and leaders during my career, I learned a lot from them, and I look forward to bringing my knowledge and experience to Luna. I feel lucky to join the business as they are announcing the best quarter and year ever. Rest assured, I feel an immense amount of responsibility to make sure we're well positioned from a financial perspective to be able to capitalize on all of the wonderful assets we have, human, intellectual and otherwise. And I do look forward to meeting and working with all of you as we continue to deliver outstanding shareholder returns.

Now let's get down to business. I'd like to start by covering a number of components of this quarter's results. First, as a reminder on some of my comparative comments, we sold our optoelectronic components business in July 2018 and the operating results of that business for the fourth quarter and full year of 2018 are classified as discontinued operations in our income statement. Also as a reminder, in SG&A, there is approximately $350,000 in noncash intangible amortization expenses related to our 2 recent acquisitions that will be recurring in future quarters.

Our revenues for Q4 2019 were $19.5 million compared to revenues of $13.5 million for Q4 2018, representing a 44% year-over-year increase. The increase in revenues year-over-year was composed of a 63% increase in our products and licensing segment and a 16% increase in our technology development segment, continuing our strong revenue growth cadence throughout the year. Within the products and licensing segment, our year-over-year growth continued to be driven by revenue associated with our acquisitions as well as our strong top line double-digit growth from our legacy businesses.

Our gross profit increased to $10.4 million for the quarter compared to $6.6 million for the same quarter last year, representing a gross margin of more than 53% in Q4 2019 compared to 49% in Q4 2018. The gross margin improvement reflects in part the changing mix of our revenues, with 67% of our revenues coming from the products and licensing segment in Q4 2019 compared to 59% in Q4 2018. This change in mix is driven largely by our acquisitions and is consistent with our long-term strategy.

Operating expenses were $8.7 million or 45% of revenue in Q4 2019 compared to $6.1 million or 45% of revenue in Q4 2018. The increase in SG&A expenses continued to be largely driven by the same 2 items we've previously discussed.

The first driver is the ongoing incremental expense associated with our acquisitions. As we enter Q4, we lapped the incremental amounts for Micron Optics. The incremental expense from General Photonics will continue for another quarter. The second driver of the SG&A increase is higher sales and marketing expenses from our Lightwave Division as we continue to support our increasing revenues.

With the revenue growth and gross margin expansion, our operating profit improved to $1.7 million for Q4 2019 compared to $0.4 million in Q4 of last year. Net income from continuing operations in Q4 2019 was $2.1 million or $0.07 per share compared to a loss of $0.1 million for Q4 2018.

And finally, a key metric reflecting our underlying operations is adjusted EBITDA. As Scott mentioned, adjusted EBITDA was nearly $3.2 million for the quarter versus $1.6 million for the fourth quarter of 2018. This robust performance was driven primarily by strong top line growth from both our legacy businesses and those businesses we acquired, combined with our ongoing expense management.

For the full year 2019, our revenues were $70.5 million compared to revenues of $42.9 million for 2018, representing a 64% year-over-year increase. We drove more of that revenue to gross profit, delivering $35.2 million or 50% of revenues in the period compared to $19.4 million or 45% of revenues in 2018. Further, with continued focus on expenses, we improved operating income to $3.3 million for the full year from $0.9 million last year despite the increased investment in our business, particularly in the sales, marketing and engineering resources, which we've mentioned previously.

Net income from continuing operations was $5.3 million for 2019 compared to $1.2 million for 2018. The decline in net income attributable to common shareholders was due to discontinued operations, which included the gain recognized on the sale of the optoelectronics business in 2018. And finally, we improved net income per diluted share from continuing operations to $0.17 for 2019 from $0.04 per diluted share during 2018.

Let me now move on to the balance sheet. Cash increased over $4 million sequentially and we ended the quarter with $25 million of cash and cash equivalents compared to $42.5 million at the end of 2018 and $21.4 million at the end of September. Our working capital was $41.1 million at December 31 compared to $56.1 million at the end of last year and $39.2 million last quarter. The change for the year reflects the cash paid for General Photonics in Q1 of 2019 and our stock buyback in September.

Scott already discussed our guidance, so I won't repeat it, but I do want to take a moment to talk about the seasonality of our revenue. Our revenue typically increases quarter-on-quarter throughout the year, and historically, we have seen approximately 44% to 46% of our revenue occur in the first half of the year and 54% to 56% occur in the second half. We expect to see this trend continue in 2020.

Before I turn it back over to Scott, I want to mention our thoughts on the impact of the coronavirus. Similar to others, we are evaluating the impacts on a daily basis. At this time, with what we know, we do not expect a material impact on our full year results. With that said, we will continue to evaluate the impact to our business, particularly if the coronavirus becomes a larger global issue. To be cautious, we have suspended all international air travel for our employees.

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

Thank you, Gene. At this time, I'd like to open up the call for questions.

As always, I have Brian Soller, our Senior Vice President and General Manager of our Lightwave Division, is also with Gene and me at this time and is also available to address your questions. So Donna?

(Operator Instructions) Your first question comes from the line of Spartan.

It's Barry Sine with Spartan. Gene, welcome aboard. I wanted to welcome you by putting you on the spot with some financial questions.

All right.

First, on gross margin. On both business segments, if you look at the supplemental data that's on your website, both have had -- both had very high gross margins, and so overall, you had a very high gross margin. Is that sustainable? Was there anything in the quarter that maybe was a little higher than normal because those gross margins are -- for both segments are a bit above prior trends?

There was nothing specific in the quarter in either one of our segments. I would say, consistently, we see our margins where they are year-on-year. We do see quarterly swings here and there due to product mix and other issues, but I think, generally, that's -- we see that going forward.

Yes, I think, Barry, as we've mentioned before, I think when you talk about seasonality, I mean obviously, we have a strong mix in the fourth quarter of products versus our contracts business, and they carry a much higher gross margin. So you'll see that blended, be higher in Q4 than others.

Yes. And we had a favorable mix before as well.

Yes, very favorable mix in Q4. So...

Okay. The other financial item that stood out that I thought was interesting was the R&D expense item. And again, that's broken out in your supplemental. As a percentage of revenue, that number is above where it has been, and I'm just looking at the last -- the prior 7 quarters. So that's trending up. You're spending more and more on R&D. And I know you guys have talked in the call about some new products that you have. It sounds like that new product development is continuing and even accelerating, given the clue I have of a higher R&D spending.

Yes, Barry, this is Brian. What you're seeing there are some nonrecurring expenses related to qualification of some of the new products we've gotten on the market in 2019. So I'll let Gene talk to the basis of that going forward, but from my perspective, looking at our R&D spend, that's driven by the Lightwave Division, and in particular, getting the 6200 product that we mentioned qualified for and ready for full production. And those are the kinds of things that don't necessarily recur. They certainly happen periodically as you get new products ready for the market. That product, in particular, had a fair bit of qualification required for military standards, as we've discussed in the past. So that's what you saw there.

Okay. That makes sense. Gene, you also...

(technical difficulty)

Hello? Donna?

You're still connected, sir.

Okay. We lost Barry. So you may have to go on to the next question, Donna.

Your next question comes from Singular Research.

Nice quarter.

Thank you, Jim.

So at least we have two questions. One is -- the first one will be a financing question, and then for a follow-up question will be one in regards to operations. So starting with the financing question. Just in regards to extinguishing the preferred shares and restructuring your capital structure, do you have a sense of what the weighted average cost of capital is, and how much it decreased from before the restructuring after the restructuring? And kind of the motivation between -- of the -- for the repurchase program. Why deploying the cash towards a repurchase program as opposed to using that cash, say, for acquisitions or other purposes? And I'll ask the operations question.

Yes, Jim, I'll address the -- what our thought was behind the share repurchase program. I think as we continue to -- the stock price increase, we believe that was us getting out and executing on our strategy and being able to properly communicate that strategy as well as deliver on it. So we believe as it climbed up that we wanted to establish that the company believes that we were setting new low watermarks for the stock, and so we wanted to put our money behind that. So we thought an immediate return to shareholders of buying back 330,000 shares was the right use for $2 million worth of our capital.

I think you're right, as you see the balance sheet now, as it sits with $25 million in cash with no debt, I think we will look at other opportunities to put that money to work and be accretive with that cash on our balance sheet. On the weighted average cost of capital, I don't know if, Gene, do you have anything to add to that? We may have to follow-up with you on that.

No. We'll have to follow-up with you on that one.

Okay. But we can imagine a material decrease in the cost of capital with the extinguishing the prefs?

Yes, I think naturally, with paying off the debt in March or May of last year and then the dividend going away from the preferred buyback, I think you will see the cost of capital go down. I think we'll have to follow-up with you -- or Gene will follow-up with you on what that lag is for Luna.

Okay. I'd much appreciate it. And if I could just follow-up with a quick operations question?

Sure.

Just if you could provide a little bit more color on the F-35 program. Can you give us an idea, like is this -- is the product going into like the existing fleet? Or is it on a new build? And can you give us a sense of, well, whether it's the existing fleet or a new build, what percentage is being employed with the Luna product and where it can go from there? And perhaps, just the kind of the pipeline with crossover into the commercial part of the business.

Yes, sure. This is Brian. I'll answer that question. So the 6200, which we began shipments of late last year and have continued now with the follow-on order and will continue into this year is for F-35 aircraft that are already deployed in the field. So there are about 450 to 500 or so in the field right now, with more coming every day, and they all need this type of test equipment for sustainment of the fiber optics links on the aircraft. The good news is that we see this business starting to ramp mid-later part of this year. And Luna is sole-sourced as a provider to the F-35 program for this kind of equipment.

There are 14 F-35s per squadron, and they're looking at 2 or so per squadron. So you can kind of look at it that way. As the number of units in the field grow, we expect our sales to grow as well.

Okay, great. And in terms of the pipeline with crossover into the commercial space, can you give us an idea where it's going with that?

Yes. I'll let Brian give a little bit more color on that, but I -- I'd say, Jim, as you know, commercial kind of will follow military. But when you look at a customer like Lockheed Martin, we talk a lot about the F-35, but there is the F-22 and the C-130. There's a lot of planes, military planes that are being made at Lockheed Martin that our product is obviously relevant to. There's plenty of military applications outside of Lockheed that I made reference to in my presentation here. But we will -- we are currently in the process of rolling this out as well, and will, in the coming months and years on commercial applications as well. Anything more to add to that, Brian?

Yes. Just commercial aircraft are in the process of integrating fiber optics as well. They're -- they tend to be a little bit behind the cutting-edge, high-tech fighter jets. But that process is beginning -- has well begun, and we're in lockstep with those main OEMs. We do do business with them today, and we have with our previous product -- versions of this product. And then we expect from there to grow outside into other applications, including data center connectivity and other types of general fiber optic tests.

We have a follow-up question from -- comes from Spartan.

Sorry about that. Can you guys hear me now?

Yes, got you.

Okay, I think they muted me. So I have a couple more questions, if you don't mind. Gene, you mentioned the coronavirus impact, which obviously is on investors' minds. Scott, your industry, the optics industry recently had a major industry conference out on the West Coast. Wondering if attendance was impacted there. If you see lower attendance, does that mean fewer orders come out of that and -- or fewer M&A deals, is that a place where perhaps you would strike some relationships for M&A deals? Any impact there?

Yes. Barry, that conference you speak of is OFC, and it's next week in San Diego. So we will be at that conference next week. So I can -- I'll have to follow-up and answer that question after the conference occurs. So -- but it is a big industry trade show. And while the attendee list has probably been skinnied down somewhat due to our friends in Asia, I believe, if you -- the website of the conference itself says that it's still on and going strong. So I'll let you -- I'll have to follow-up with that. But it is a great conference to meet a lot of industry leaders as well as other opportunities there.

So if that were canceled, would that impact potentially orders or your ability to do M&A?

No. Barry, I think the way to look at it is, if it were canceled, which I don't think it will be, but it doesn't start until next Tuesday. It would make our jobs to those ends a little bit more difficult. It's much more efficient when everyone is in the same place, as you can imagine. So it certainly drives inefficiency, but there's nothing that we view that we want to get done that we won't be able to get done if for some reason we don't go to the show.

Okay. And then Scott, you also -- you guys gave guidance, which again is a pretty aggressive outlook for 2020. What visibility do you currently have towards that guidance in terms of orders that are already on the books? You talked in your opening remarks about acceleration of adoption of some of your technologies, how much do you know that is driving that guidance right now?

Right. Well, as I've told you before, Barry, we give guidance and I give it based on what I see in front of me at the current time. And what we see right now based on Brian being here 18 years and myself being here 18 years, I think we look at what is in front of us and historically what we have booked. And you know the contract side of the business is much more heavily booked for the year. But what we see from a funnel fill, from an activity perspective, what is currently booked, what's in the pipeline, what we see the momentum going with getting larger orders and the multiple unit orders coming down the pipe with some of the new products that we've come out with, I feel good about the guidance we gave.

I don't -- I try to be as transparent as I can, and I give what I see. And if that changes, I will -- you'll be the first to hear from me. But I feel confident, given what I see and looking at this thing, we take this very seriously, giving guidance. And you've seen that throughout 2019 in what we deliver and we continue that on in 2020. So that's as best I can give you right now.

Okay. And then I want to wrap up with a couple of questions on M&A, if you don't mind. The company is considerably larger than you were a year or 2 ago, both looking at the income statement or the market cap. Does that open up a new range of potential acquisitions or most of what you're looking at smaller on the order of what you've done in the past? So should we think about larger acquisitions now going forward?

Well, I mean certainly, we have a pretty unlevered balance sheet, probably as unlevered as you can get, which is probably a good thing to have. But my attitude towards M&A has always been -- we've done a lot of work to set a strategy and make sure that it's clear and concise.

So when I look at M&A, it has to be a couple of things. Number one, it has to fit with what we are. We're a fiber optic test and measurement company, so it has to fit within our strategy. And I've always said I'm not up for overpaying, and it has to be accretive. So we continue to look at things that, fit those parameters. So I don't know if I put a necessarily deal size on how I look at M&A, but if it fits and it's not overpriced and it's accretive, we're going to probably have a conversation with them. But I don't necessarily look.

Certainly, our position now, when you look at $25 million in cash, no debt, no prefers, no warrants, the balance sheet as clean as it can possibly be, and I've said, I wanted to get these 2 acquisitions that we did under our belt and get fully integrated. We've said now 2 quarters in a row, I've reiterated the point that the integration is complete. So we will have our eyes downrange, back looking at things that might make sense. But they have to fit our criteria.

So just to follow-up on that, is there any -- are there anybody -- any companies you're talking to currently? You have in your sight currently? And my reading of your comments just now, is that a transaction of some type or more than one this year is more likely than not. Is that fair?

Yes. I would just say that we have a lot of conversations. I wouldn't say anything is imminent. I wouldn't say there's anything that you can expect to hear from me in a week. But I would say that we continue to talk to folks and continue to lay out our M&A approach to that, which is what I laid out for you. I wouldn't say anything is imminent. As you know, I wouldn't have thought the last 2 weeks were going to look like the last 2 weeks, but we are where we are, so -- but I wouldn't say anything is imminent, Barry.

Okay. That's my questions, and congratulations on the quarter.

Thank you, Barry. Appreciate it.

(Operator Instructions) The next question comes from the line -- from [Sharmac Capital].

I'm just wondering, Scott, if you can talk a little bit further about the automotive market. You mentioned that you're making some good progress there with the ODiSI product. I was wondering if you can give us some examples and talk about maybe a little more detail about the prospects there, generally, what's going on there?

Sure. Well -- and I'll let Brian jump in here as well. He's out in front of a lot of customers on the floor more so than I am. But what we've done, the ODiSI is relevant because remember, the ODiSI goes out up to 50 meters. It goes 8 channels, so it goes 8 different directions for 50 meters. So it's perfect for structures the size of automotive. And an example, think of the part that holds the seat to the vehicle itself. That part is being made with composites and it's being made on a 3D printer. So we can work on that 3D printer to embed the fiber while that product is being made. And unlike traditional steel, if you back into something, your bumper may get dented, but with composites, you may not actually see a blemish at all. But it may have messed with the structural integrity of, say, that part that is in there, out of composites that's attaching the seat to the vehicle. So there may have been some structural integrity issues that have happened, our fiber can tell you whether there has been some issues there. That's an example that always comes to me. Brian, if you want to...

Yes, sure. So the automotive industry is going through a cycle of lighweighting and electrification. I think most people are pretty familiar with that. But in the end, the design of cars is really moving towards more and more use of lightweight and composite materials, and of course, electric powertrains. So that actually -- that kind of macro driver is what drives the need for new test equipment to verify and qualify new materials. So composite materials that are being used for structural elements of the car anywhere and everywhere, really, that can take weight out of the car need to be fully qualified in the design cycle, and that's where our ODiSI fiber optic sensors come in. So that's been a nice driver for us over the last several years.

Another example is, and particularly in 2019 and in Q4, we had a number of really high-quality sales with some of the larger OEMs for integrating our optical fiber into the composite casing that goes around the battery system for an electric vehicle. There's quite a lot of tests that goes into ensuring the safety of the electric powertrain. And these are very large, typically lithium-ion batteries, which -- it's very important to qualify rigorously for safety. And our ODiSI fiber allows a very high precision, very accurate measurement of things like thermal expansion and thermal strain and stress within those systems. So those are a few examples of what's driving our ODiSI technology and new test equipment in general in automotive.

Okay. I'm sorry, the second example, Brian, that is a case with the batteries you're using the ODiSI product there as well?

Yes. Yes, those were both examples of where we're using the ODiSI product in automotive.

Okay. The composites and the batteries?

Yes.

Okay. That's terrific. And so you're mainly working with the OEMs right now?

Yes, that's correct. Yes, we work with the design and engineering teams within pretty much all -- not all, but most of the major automotive OEMS. And we hope to make that all by the end of this year, and integrating ODiSI technology into their design -- systems for new designs.

That's impressive. When you say all, you mean like the big 3 in the U.S., the big 2 or 3 over in Asia and the German companies as well?

That's correct, yes. No, as -- I'd like to use the phrase that Scott used during the prepared remarks, we're in the early innings with each of those. But yes, we do have -- they are -- the majority of those, in Japan, in North America and in Germany are using ODiSI technology.

Okay. Well, congratulations. It sounds exciting.

Yes. Thank you, Doris.

(Operator Instructions) There are no questions on queue. I'd like to turn the call over to Scott for his final comments.

All right. Thank you, everyone, for joining us today.

As I hope you will take away from our call, I'm incredibly proud of the strong results delivered by our employees across the company. As you know, we worked extremely hard to increase our public profile throughout 2019 and to increase our participation in conferences and other venues so that we can meet with more of you in person. We fully expect to do so again in 2020.

I want to conclude by mentioning that we plan to hold our annual shareholder meeting this year on Monday, May 11, in New York City. We hope to see many of you there. Please watch your e-mail for more details in the next several weeks.

With that, I'd like to thank you for your time and interest in Luna Innovations.

This concludes today's conference call. You may now disconnect.