Luna Innovations Incorporated

Good day, and thank you for standing by. Welcome to the Q2 2022 LUNA Innovations Incorporated Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would like to turn the conference over to your speaker for today, Allison Woody, Director of Administration. Please go ahead.

Thank you. Good morning, and thank you for joining us today. Earlier this morning, we issued our second quarter 2022 earnings press release. In addition, we posted to the investor relations section of our website a presentation with supplemental information for this 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. Linda 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 change at any time, including but not limited to statements of 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 file, 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, President and Chief Executive Officer, along with Chief Financial Officer Gene Nestero and Chief Operating Officer Brian Soler, 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. I'm excited to be with you today announcing another quarter of solid top-line performance and progress against our operational objectives. We continue to be confident that our long-term strategy is the right one and remain bullish about the opportunities in front of us. On last quarter's call, I told you that we're making investments now to set us up well to capitalize on significant opportunities for strong and rapid growth over the mid and long term. Part of this is an investment in operational infrastructure. And the other part is capital used to acquire new technologies and capabilities to bolster Luna's own strong platforms. We continue to be excited about the technology, products, and talent we've acquired and what we've nurtured and grown internally. And I'm encouraged by the continuing and increasing customer demand for our products and capabilities. For our second quarter of 2022, a majority of Luna over-delivered on the top line. That's an incredible accomplishment, and we see this momentum continuing, even as the world is talking about recession. It is a testament to both the need for Luna's products and capabilities and the work and commitment of every Luna employee. My many thanks to the whole Luna team. With that said, we still have some work to do in our project-based businesses that include OptiSense and Leos, which came in below our expectations, primarily due to delays in several large customers taking delivery of our products. You may remember that the nature of a project-based sale and associated recognition of revenue is slightly different than the rest of our portfolio, which is largely comprised of product-based sales. The project-based businesses often involve traveling to customer locations to install or perform services. So, although we may have technically sold and shipped the product and incurred associated expenses, we may still experience delays in recording the associated revenue until the customer actually takes possession of the product according to the revenue recognition rules. One of the benefits for us in 2022 of these project-based businesses is that we have good clarity into the shipments that will be made through the remainder of the year. In fact, in Q2, the book to bill in OptiSense and Leos were very strong, with nearly $6 million more booked than billed. This puts us on solid ground as we look at the remainder of the year. As with all acquisitions, you learn a lot as you work through the integration process. And in many cases, changes and refinements need to be made. One of the changes we're looking to make would harmonize the process by which our project-related products are sold and delivered in order to be consistent with the rest of the LUNA portfolio. We are doing this to better match revenues with the related expenses. I want to be clear. We still feel very good about our recent acquisitions. We acquired these important and growing assets at a very good price. There is no question that they filled an important gap in the existing Luna capabilities, that of distributed acoustic and temperature sensing. We look forward to being in person with these new teams more regularly. Now that the COVID restrictions on international travel have mostly been lifted, and it was great to spend a week recently with some of our newer colleagues. Brian Soller, our COO, and I just got back from the Farnborough Air Show, where we met with several of our larger customers in the aerospace segment. We also took the opportunity to spend several days in the office with our team at OfficeSense. On this trip, we also visited Leosensing, our most recent acquisition, at their Cologne, Germany office. And we are excited about the potential to have these two groups coordinate activities more closely to drive both top and bottom line growth. There are a lot of synergies to be shared. There's a great deal of value to be unlocked in the combination of asset and IP from Leos and those of OfficeSense and the existing assets at Luna. And we want to make sure that we are deliberate in getting this right. And we will get it right. We are incredibly optimistic about the increasing potential in these assets and excited about the future. With that, I'd like to move on to discuss highlights of the second quarter financials and then provide an update on operational accomplishments during the second quarter. For the second quarter of 2022, total revenues were up 19% to $26.2 million compared to the prior year's quarter. For the first half, revenues were up 13% versus the first half of 2021. Total company revenues were in line with our internal expectations. We continue to experience strong demand for our Luda products. In fact, we realized double-digit bookings growth in the second quarter 2022 versus last year. Our gross margin increased to 61% versus 57% in the prior year second quarter. We reported an operating loss of $2.5 million for Q2 2022 versus a loss of $2 million in Q2 2021. The largest driver of the operating loss was the addition of Leos in Q2 2022, as the revenues in that business are strongly weighted towards the latter half of the year. In addition, I want to emphasize that had several large project-based customers taken delivery of our products, we would have added several million dollars to our bottom line in the quarter. The fact that the plots are built and in many cases shipped with just a slippage of revenue to the next quarter gives me comfort in reiterating our 2022 outlook. Adjusted EBITDA was $1.2 million in Q2 2022, an increase from last year's EBITDA of $1 million. Related to bottom line performance, there are essentially two buckets. that affected year-over-year increase in the net loss line. These are, first, a tough comp against last year's second quarter as the result of roughly $1.8 million of benefit from both tax and discontinued operations that did not repeat in Q2 2022. The second bucket is several million dollars of expense reductions we've implemented as part of our Synergy Savings Initiative undertaking to right-size the organization, but that have not yet been realized in the P&L. Before I move to talk about the businesses in more detail, I want to touch on our investments. Our mission hasn't changed to build on a capability as a company with a blue chip customers to solidify Luna as a clear leader, fully focused on enabling the future with fiber. To accomplish this, We will continue to invest capital in our businesses through this year and beyond because we've seen abundance of opportunities for strong and rapid growth. In addition, we will continue to be prudent managers of our expense structure while ensuring that we are in the best position to capitalize on growth opportunities. Now, let me discuss the businesses in more detail. As a reminder, LUNA focuses on two business areas, fiber optic sensing and communications testing. For the second quarter of 2022, the revenue growth I just mentioned was driven by a full core of LEO's contribution and solid commercial sales in the legacy sensing and comms test business. In fact, our bookings growth once again exceeded our revenue growth in Q2 2022. Let's dig a little deeper into sensing, which you may recall is where we use the fiber as the physical sensor to create smart materials and structures. Revenues grew double-digit versus Q2 last year, driven both by a full quarter of LEOS as well as strong demand for legacy Luna products. In fact, Luna legacy Odyssey, Hyperion, and Terahertz product lines each contributed double-digit sales growth. We also made important progress on several strategic growth areas within Sensing. Hyperion achieved a key customer win to use those products in oil and gas monitoring to monitor in real time the riser pipe that takes oil from the sea floor to the surface, greatly enhancing the safety of offshore oil extraction. And bookings for terahertz increased more than 100% in the first half of 2022 versus the same period last year, driven by the continued successful adoption of these products in the automotive Relating to OptiSense, and as I mentioned earlier, the timing of customers' receipt of large DAS orders resulted in a slight decline in revenues for that business. But from an operational standpoint, OptiSense realized key DAS product wins for critical infrastructure, and as I mentioned earlier, had a strong quarter from a focus perspective. Now switching to communications tests, comms test revenues were flat in Q2 2022 against a particularly tough comp in Q2 2021. If you recall that in last year's second quarter, we mentioned it was a record quarter for comms tests with nearly 80% year-on-year growth in that quarter. Given that comparison, comms tests performed well this year. We secured a large follow-on multi-unit OVR 6200 order from Lockheed Martin. Stay tuned for some more to come with Lockheed Martin. We also secured multiple strategic wins with Blue Chip customers in the high-speed telecommunications and data communications markets. Brian and I just attended an important three-day sales conference in our Blacksburg facility. This was the first time since the pandemic began that the worldwide sales teams were able to all gather together in person. The enthusiasm and vast opportunity as reviewed by the sales teams were extremely exciting. They left the week completely pumped. In fact, the overwhelming nature of the opportunities in front of us will cause us to be focused. in order to ensure that we are capitalizing on the best year-term projects while leveraging LUIS capabilities to the max. The team continues to be inspired by the impact our products have on our customers and society, whether it's making bridges and dams safer, or 5G networks more reliable, or securing key government and private industry assets. luna's products help make the world a better and safer place as i've said previously we sit in rarefied air with the applications of our fiber technology nearly limitless from a pandemic and supply chain perspective we are still seeing impact while effects timing of sales cycles as well as certain parts of our supply chain in particular Persistent pandemic-related supply chain delays in semiconductor availability has affected pricing and lead times. As we've mentioned previously, we've largely been able to mitigate supply chain risk for electronic parts by building in more safety stock and working closely with our supply chain partners to ensure delivery. However, we want to call this out because it is an ongoing challenge. In summary, customer demand for Luna products remains strong. Sourcing component remains challenging, and we still have some work to do to grow profitability at a pace that is acceptable to both me and my executive team. While Luna legacy products continue to grow according to our expectation, we need to improve profitability of our recent acquisitions. Strategically, these acquisitions were the right move, and in the long term, Luna will certainly reap significant benefits. The team is hard at work now and will be over the next couple of course in executing the initiatives we've already implemented in order to drive profitability. In sum, we will continue to focus on fundamental blocking and tackling as well as building for the long term. With all these accomplishments, with six months of reporting behind us, and looking at the rest of 2022, from a bottoms-up perspective, we feel very comfortable delivering on our guidance of total revenues of $109 to $115 million and adjusted EBITDA of $10 to $12 million. I'm incredibly grateful to the Lunar team for their continued focus and work. And now I'll hand the call to Jeanne. For more on the financial details, Gene?