Luna Innovations Incorporated

Good day, and thank you for standing by. Welcome to the Q1 2022 Luna Innovations Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Allison Woody, Director of Administration. Please go ahead.

Thank you. Good morning, and thank you for joining us today. This morning, we issued our first quarter 2022 earnings press release. In addition, as usual, 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. These adjusted numbers exclude the effect of certain non-cash 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 risk 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 Grace, our President and Chief Executive Officer, Gene Nestro, our Chief Financial Officer, and Brian Soler, our Chief Operating Officer, will be available to take your questions. And at this time, I'd like to turn the call over to Scott.

Good morning, everyone, and thanks for taking the time to join our call. This first quarter was again full of accomplishments for Luna, operationally and financially. I'm incredibly proud of the team for delivering a solid start to 2022, with first quarter results coming in above our expectations. This recent first quarter includes puts and takes when compared to last year's Q1. Jean and I will review some of these in our remarks, and after we do, I hope you'll see that Luna's underlying operational performance is very strong. For Q1 2022, we reported total revenues up 7%, and above the first quarter guidance range we provided on our Q4 call. Gross margin expanded to 64% compared to 58% in Q1 2021. Gene will talk more about this in a moment. Adjusted EBITDA increased by 400,000, and adjusted EPS came in at 5 cents, a full 2 cents higher than Q1 of last year. So let me provide a little color on the puts and takes I just mentioned and what gives me confidence about Luna's future. Then I'll provide an update on the business lines. First, recall that in December 2020, we closed on the acquisition of OptiSense with only two weeks left in that year. At the time of the closing and as we said on our earnings calls, OptiSense exited 2020 with a large backlog because the revenue recognition from this business depends on delivery and installation of product. With the virus raging in December 2020 and availability of vaccinations only beginning, OptiSense had been unable to deliver and install before year end. As vaccines became available and the world opened up, OptiSense made significant progress in clearing out the backlog and getting deliveries made to customers during Q1 2021 before Delta challenged deliveries again. In addition, the OptiSense business was historically on a different fiscal year than Luna, where Luna's Q1 was OptiSense's Q4 and strongest quarter. These combined factors created an unusually high Q1 for OptiSense in 2021. When the team and I sat down to review operations and budget for this year, we planned for this, knowing that the comparison of our Q1 22 to last year's Q1 would be challenging. That is why I'm so pleased that the team drove solid top and bottom line growth this quarter. A few additional reminders as context for Q1 22 and comparisons against last year's corresponding quarter. First, the difficult comparison involving OptiSense that I just highlighted. Second, the impact of the investments that we've made and continue to make in order to be best positioned for future growth. More about this in a minute. And third, the fact that Leos, our most recent acquisition, only contributed two weeks to the quarter based on the timing of the acquisition close. To underscore, overall the performance of the business in Q1 and start to 2022 was very solid. I want to speak for a moment to the investments we've been making, as they are critical to our long-term success and how we think about and measure that progress. You heard me say on our Q4 call that 2021 was a year of blocking and tackling. we put into place many of the processes and systems that will allow us to scale well into the future. I told you that we made these investments because as we look to the future, we see significant opportunities for strong and rapid growth. And so these investments help to ensure that we are well positioned to capitalize on that growth and can scale appropriately. On the Q4 call, I also mentioned that you should expect to see us continue to invest in our business as we progress through this year and into 2022. And we have done just that. So when I look at the performance at the end of 2021 and in the beginning of 2022, we're extremely pleased and excited about the technologies, products, and talent that we've acquired. We're also pleased with the payoff we've seen from the organic internal investments about which you've heard us talk. As a result of this, I'm not using operating leverage as a metric to measure our M&A, because at this point, we're still investing in our future. Instead, I'm looking at operating efficiency. How well is the organization performing overall? And have the acquisitions integrated well into Luna's culture? Do we have the right people in place? And do they have the right tools required to perform at the highest levels? Is the sales force right sized? What is our backlog? Do we understand our customers' challenges? And are we addressing customers' needs while servicing them with excellence? As CEO, those are the questions that I want to make sure that we address. Because if we get the operating efficiency right, then the operating leverage and increasing profitability will quickly follow. We have focused on this and are seeing the results. For example, divesting Luna Labs frees us up to grow and take on larger contracts and orders. Simply put, we are no longer constrained as a small business since the limiters imposed on us as a government SBIR contractor are gone. So while the divestiture creates a bit of short-term top and bottom line gap, the freedom created has just begun to result in some larger orders and larger contracts. In coming quarters, you'll see us build on the traction that we've already begun. In addition, with respect to our pipeline and backlog across nearly all businesses, it was what our COO, Brian Soler, characterized as a knockout quarter. As an example, for our Terahertz products, our order backlog is no longer the typical 14-week lead time, but instead we are booked through year-end 2022 due to the rapid increase in demand for these products. This impressive accomplishment is a result of tremendous focus and execution by the team. As we move forward, in addition to continuing the effort on selling Luna's terahertz capabilities, the team is also working on a significant expansion of manufacturing capacity, which is expected to increase fourfold within the next year. There are similar significant pipelines for several of our other product lines. As you know, we've now acquired two organizations, Leos and OptiSense. and have been working to fully integrate them. I've been out meeting with the engineering and sales teams, and Salvin Farooqui, our Senior Vice President and Head of Sales, has been working nonstop to ensure that our sales forces are appropriately integrated, incentivized, and highly motivated. So that now, beginning in 2022, we've been able to incorporate the technologies and products from what were previously three distinct companies into one compelling Luna offering. Let me illustrate what I mean. The DAS, or Distributed Acoustic Sensing System, an expertise that we acquired with OptiSense, combined with Leos' leading temperature and strain sensing technology and Luna's own product and technology improvements, creates an offering to the customer that is more compelling than ever before. Luna is no longer only a test and measurement business that generates revenue by shipping boxes off the dock, relying mostly on turns in any given quarter with lower levels of backlog. We're now also selling systems and solutions which are delivered over longer periods of time and are often repeat in nature and come in much larger dollar amounts. For example, when a customer comes to us, Luna can now provide them with the hardware install the software, and run the data analytics. And we're now the biggest player in the distributed fiber sensing market. The work that we've done in M&A has filled out the breadth of Luna's capabilities and allowed us to bundle solutions. This now allows us to do more strategic selling which in turn supports stronger growth. It broadens our playing field relative to test and measurement, greatly expands the market for our products, and results in strategic sales and customer stickiness. Especially with the combination of Leos and OptiSense, the hardware software and data analytics that we provide creates long-term customer relationships. One example of how we're seeing this evolve just over the past 12 months is by looking at both percentage of repeat customers as well as the size of our larger orders. When we look at the size of our larger orders in dollars, that has doubled over the past 12 months. So we are continuously focused on building out capacity, thus my comments about investing for our future. In sum, with all three of these leading entities now integrated, we're working with customers to do the installations as quickly as possible while continuously innovating our product offerings and fulfilling larger blanket orders. The powerful combination capabilities from Luna plus OptiSense plus Leos truly positions us as a world-class leader in fiber optic sensing. Now I'd like to briefly cover some highlights for the first quarter. For the first quarter of 2022, total revenues were up 7% to $22.5 million compared to the prior year's quarter. In sensing, revenues overall were flat year over year, but given the dynamic in the first quarter comparison and opposites that I described earlier, if we exclude that business, revenues grew in the solid double digits. In communications testing, revenues grew double digits compared to Q1-21, driven by record sales for Luna's high-speed communications test instruments, the OVA and OVR. Overall, commercial demand continues to be strong in both sensing and comms test segments, and we are looking at a record backlog overall as we exited Q1, driven by another quarter of book-to-bill of 1.2%. and we delivered adjusted EBITDA of $1.7 million in Q1 2022, a $400,000 increase compared to the prior year quarter. Adjusted EPS increased by $0.02 to $0.05 in Q1 2022 compared to last year's Q1. Gene will provide more financial details on the quarter, but before I turn it over to him, I want to highlight some exciting accomplishments and opportunities in our two business units, sensing and communications test. As you've heard me mention before, we have a good number of significant customers in the aerospace, automotive EV, infrastructure, and industrial process control industries. For our sensing business, Odyssey, Hyperion, Terahertz, OptiSense, and now Leos products We made significant progress this quarter in a number of areas with customer orders and expanding existing accounts. I'll highlight a few of these. First, we quickly got our newest team members at Leos working globally with our legacy sales teams to identify opportunities to bring a combined solution to customers. And I'm happy to say this early work on identifying top line synergies is going very well for applications like power cable and pipeline monitoring. I am more confident than ever in our ability to take one plus one and make three with the addition of Leos to our portfolio. Second, you may remember us speaking about a very large customer order for our Phoenix lasers that we received in 2019. That order was on a four-year delivery schedule, and I'm pleased to say that we have not only met that schedule but are likely to complete these deliveries by the end of this calendar year, about a year ahead of that original schedule. Stay tuned for some more news on this front in the coming weeks. Third, you'll recall our multi-year partnership with Megit in regards to work with Airbus. We're making good progress with that partnership and hope to be sharing an update with you sometime this summer. And fourth, our terahertz products continue to rapidly penetrate industrial process control applications like the production of EV batteries. In Q1, we continue to successfully penetrate this and several other fast-growing industrial applications. Switching to communications testing, You may have seen the release earlier this month announcing that we secured an incremental multi-unit purchase order for OBR6200, the portable backscatter reflectometer, through a continued strong relationship with Lockheed Martin. You'll recall that Lockheed is using the OBR6200 for sustainment of the F-35 airplanes. This demonstrates Luna's strong partnership with with customers and the traction we've had these leading products. Shipments on this order will start in the second half of this quarter. Our comms test segment includes both instruments and control modules and OEM lasers. Sales of modules and lasers account for slightly more than half of all communications test business. And during Q1 22, we saw growth with several larger strategic wins. Notable wins include our orders fulfilled for LUNOS tunable filters with RIO laser products for customers in medical, fiber sensing, aerospace, and industrial markets, and for fast-growing applications such as LIDAR in the case of the RIO laser. And there are further growth opportunities for modules to be sold to customers in green energy, medical imaging, fiber optic gyros, as well as the space and satellite communication industries, to name a few. There's one comment I want to make relating to supply chain. We're still managing pandemic-caused delays in both our supply chain and that of our customers, particularly in availability of printed circuit assemblies. Delays are specifically caused by semiconductor part availability combined with increasing lead times and prices. The Luna team is doing its best to manage through this, including, where possible, design changes to replace unavailable components and and pre-ordering in larger quantities than we would have in the past. So while there is significant demand from our customers for LUNA products, we have felt and expect to continue to feel the effects from sourcing of semiconductor parts in order to complete customer orders. The industry consensus is that these shortages will continue through 2022. We believe we have sufficient supply to fulfill customer orders for the near term and are focused on managing this impact. On a related note, Luna's new composition as a pure play in fiber sensing and measurement combined with our relatively larger size as a result of recent M&A now allows us to evaluate and optimize our sourcing in a more strategic manner. The team is working on aligning products in categories and evaluating vendors in order to best maximize our ability to source efficiently and cost effectively. We will also expect that this will create a more scalable structure and help to identify and eliminate any bottleneck in our supply chain. There is no question that the strategic moves we've made over the past 18 months already have had a positive impact on Luna. One of our key priorities will always be the prudent and thoughtful deployment of capital. That hasn't changed. But right now, and for the near term, we're very focused on the execution to grow our existing businesses. Before I turn the call over to Gene, I just want to reiterate that based on the solid start to 2022, we are again reaffirming the 2022 outlook that we provided on our Q4 call. As a reminder, that guidance for 2022 is total revenue of $109 to $115 million and adjusted EBITDA of $10 to $12 million. In addition, to help you, our shareholders, with understanding the new quarterly cadence for Luna, given the recent mix of acquisitions and divestitures, we are once again providing quarterly top-line guidance. For Q2 2022, we anticipate revenues in the range of $25 to $27 million. In summary, the year for Luna is off to a great start, and we remain optimistic about 2022 and beyond. As always, I am grateful to the Luna team for their focus and hard work, and I continue to be confident that Luna has the right strategy and will continue to make significant progress against it as we progress through this year. We continue to be sharply focused on our purpose to enable the future with fiber, and we will continue to make the changes necessary to capture the opportunities in front of us. I'll now hand the call over to Gene for more of the financial details on the quarter. Gene?