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spk06: Good afternoon and welcome to the Q3 2022 LUNA Innovations Incorporated Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Allison Woody, Director of Administration. Please go ahead.
spk00: Good afternoon, and thank you for joining us today. After the stock market closed today, we issued our third quarter 2022 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. 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, President and Chief Executive Officer, along with Chief Financial Officer Gene Nestro and Chief Technology Officer Brian Soler, will be available to take your questions. And at this time, I'd like to turn the call over to Scott.
spk04: Good afternoon, everyone, and thanks for taking the time to join our call. I'm excited to be with you today announcing quarterly results demonstrating strong top and bottom line growth and progress against our operational goals. This quarter's strong performance underscores that we have the right long-term strategy and that we are continuing to capitalize on the opportunities in front of us. On calls during the first half of this year, I outlined how the investments we've made and continue to make are critically important to setting us up for future growth. These include investments in both infrastructure and systems, as well as adding capabilities through our recent acquisitions. You will see some of the benefit of those investments and acquisitions start to come to fruition in this quarter's results. To support future growth, I've made some internal changes, adding Eva Hartman as head of human resources, naming Brian Soller as chief technology officer and EVP of corporate development, and moving Jackie Klein, head of operations, and Salvin Faruqi, head of sales, to report directly to me, in addition to Gene and Allison. We have a strong executive team now in place to help us grow Luna into the future. On earnings calls earlier this year, you may remember that I mentioned we still have some work to do in our project-based business, OptiSense and Leos. which in prior quarters had experienced delays in several large customers taking delivery of products. I'm happy to say that most of the delayed projects are back on track, meaning we are able to complete the install and book the revenue in the corresponding quarter. In addition to creating customer stickiness, these larger project-based sales give us good clarity into future shipments. Our book to bill for Q3 helps us feel confident about reaffirming our 2022 outlook. More on that in a moment. Gene, Brian, and I each visited our overseas operations recently. And, in fact, I just returned from a visit to both our German and UK offices. The team is excited about the growth opportunities and leveraging Luna's assets to create that customer stickiness. And it is clear that there is a great deal of value to be unlocked in the combination of assets and IP from Leos and OptiSense and the existing assets at Luna. We remain very optimistic about the increasing potential in these assets and excited about the future. With that, I'd like now to move on to discuss highlights of the third quarter financials and then provide an update on operational accomplishments. For the third quarter of 2022, total revenues were up 43% to $29.2 million compared to the prior year's quarter. On a constant currency basis, revenues were $30.1 million or up 48%. On a purely organic basis, our total revenues grew 25% in Q3 2022 versus the prior year period. For the first nine months, revenues were up 23% versus the same period in 2021. On a constant currency basis, total revenues increased 25%. We continue to experience strong demand for our Luna products. In fact, we realized robust bookings growth in the third quarter 2022 versus last year. Our gross margin was 58% versus 62% in the prior year third quarter. While gross profit increased in Q3 2022 versus last year, the decline in the margin rate was largely due to product mix based on the project-based sales I mentioned earlier. We do, however, expect that the blended margin rate for the full year 2022 will normalize somewhere around 60%. We reported adjusted operating income of $4.2 million for Q3 22 versus $1.7 million for Q3 21. Adjusted EBITDA was $4.5 million in Q3 2022, more than double compared to last year's adjusted EBITDA of $2.1 million. And finally, adjusted EPS was $0.09 per share, tripling the $0.03 we reported in Q3 2021. Before I move to talk about the businesses in more detail, I want to emphasize the great work and the challenges that the team has worked to mitigate, if not overcome completely, so far this year. Our mission remains the same, to build our capability as a company with blue chip customers and to solidify Luna as a clear leader, fully focused on enabling the future with fiber. We will continue to invest capital in our businesses through this year and beyond, because as I've said in the past, the opportunities are virtually limitless. And as always, we will continue to be prudent managers of our expense structure. But it's all about investing in the right areas at the right time and capitalizing on opportunities for rapid, sustainable growth. Now, let me discuss the businesses in more detail. As a reminder, Luna reports as one segment, but our capabilities fall into two categories, fiber optic sensing and communications testing. For the third quarter 2022, our revenue growth was driven by a full quarter of LEO's contribution and solid sales in the legacy businesses of sensing and comms test. As I mentioned, our bookings growth once again exceeded our revenue growth in Q3 2020. 2022. So, let's first discuss sensing, where we use the fiber as the physical sensor to create smart materials and structures. This includes Odyssey for short-range, high-resolution applications, Hyperion for long-range, discrete applications, DAS acquired through OptiSense for long-range, continuous acoustic monitoring, DTS acquired through Leos for long-range continuous temperature and strain monitoring, and terahertz, a technique that leverages fiber technology to produce terahertz wave used to measure layer thickness and density of opaque materials. We achieved very strong double-digit growth in revenue versus Q3 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 strong double-digit sales growth. Our progress relative to strategic growth areas within sensing continues to yield results. We achieved several key strategic wins in Q3 in infrastructure, security, and energy markets. And bookings for terahertz more than doubled in Q3 2022 versus the same quarter last year and is up strong double digits for the first nine months of 2022 compared to the prior year period. While terahertz revenues remain a smaller fraction of our total sensing revenues, the growth we are experiencing in these applications is a strong indicator that our strategy to get out of the lab and focus on growth and higher volume production and monitoring applications is starting to have a positive impact. Our distributed fiber sensing solutions contributed strong double-digit revenue growth in Q3. As we mentioned on our last call, we experienced project delays that pushed approximately 2.8 million in this segment to the second half of the year, some of which we recognized in Q3. We continue to streamline the LEOS and OptiSense's project-based sales approach as the assets continue to become fully integrated into LUNA. Our Q3 results are proof positive that we are making strong progress And these acquisitions continue to be a key strategic part of Luna's overall offerings and growth. I wanted to highlight a few key wins in sensing as we continue to experience market acceptance and adoption of our fiber sensing technology into monitoring applications for critical infrastructure. We want a project for a large offshore wind farm that combines both our DAS and DTS solutions to monitor the high voltage cables for safety and operability, adding significant value to the overall operation. We want an international airport perimeter security project in Eastern Europe, adding to our list of major infrastructure security wins. We are monitoring significant size perimeter with a single redundant system that provides early warning of intruders to cameras in real time. We were awarded a contract to monitor a water storage tank farm in the Middle East where water is a precious commodity and these sites are critical to a nation's water operation. We continue to provide security systems for oil and gas operators in high-risk operating locations, with new awards in the Middle East at well pad sites for perimeter security. We won a leak detection contract for a water pipeline in the western U.S. Oil and gas operations produce significantly more water than oil from the ground, and this often toxic byproduct needs to be piped away and disposed of correctly. After some recent high-profile leaks that were costly and controversial, the industry is seeking to better monitor these lines with leak detection. Fiber optics, and specifically Luna's unique products, are one of the few technologies that can handle the highly transient nature of these pipelines. And finally, the continued successful penetration of industrial process monitoring markets with our terahertz product, as I mentioned earlier. Moving to comms test, revenues grew as expected in Q3 2022. We made strong progress from an operational standpoint. As a reminder, this area includes our high-end line of communications test products, such as the OVA and OBR, as well as our polarization measurement and control suite and the RIO laser business that we acquired through OptiSense. With the addition of recent acquisitions, this business is now approximately 50% test and measurement and 50% optical components and laser modules, the latter of which are used for a variety of photonic applications such as medical devices, sensing systems, and LIDAR. On our last call, we discussed a major win for our fiber test equipment, securing a large multi-unit OBR6200 order with Lockheed Martin in continued support of the F-35 aircraft. Deliveries of these units began in Q3 and will continue through year end. We are expecting significant further follow-on orders for this application soon and will keep you updated on our progress. as this is an important element of Luna's growth within the comms test area. Another very important highlight for this segment includes our announcement last month that we signed a $14.2 million multi-year contract with our long-standing partner, Intuitive Surgical. This new agreement provides for the supply of critical photonic subsystems manufactured by Luna and spec'd in as part of the FDA approval process for Intuitive's next generation robotic surgical system. This is a great example of how many of our products are becoming critical components in large and growing market applications such as surgical robotics, and it speaks directly to our growth potential. We are excited to expand our relationship with Intuitive Surgical and support its visionary leadership in improving human health, and surgical outcomes. Luna is honored to help advance this leadership by supplying critical technologies over the years to come. And finally, within ComsTest, we also had solid double-digit sales growth in Q3 2022 for Luna's polarization modules. Driven by strong sales associated with the intuitive surgical contract that I just mentioned, as well as strong sales of our gyroscope coils for military navigation applications. I want to provide an update on the ongoing effects of the supply chain challenges. We are still experiencing pandemic-caused delays in supply chain, and particularly in printed circuit assemblies. Delays are specifically caused by semiconductor part availability combined with increasing lead times and prices. The Luna team continues to manage this as best as possible, including design changes to replace unavailable components and pre-ordering in larger quantities than we would have in the past. So, while there is significant demand for customers for Luna's 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 into 2023. We believe we have sufficient supply to fulfill customer orders for the near term and are working hard on managing this impact as much as possible. While we aren't prepared to provide 2023 guidance until our Q4 call, with only two months left to go in the year, I did want to highlight three areas of focus for us next year. First, we are actively exploring new markets to add growth long-term. More on that in 2023. And as I've said many times in the past, the options for our technologies are virtually limitless. It is up to us to prioritize and capitalize on those opportunities appropriately. Second, we continue to make progress on integrating systems from the various acquisitions. We are driving hard to complete what we call One Luna. And third, we are starting to see our strategy pay off as we consistently win larger orders as we've discussed over the past several years and expect this to continue into next year. A few recent examples of large customers that will move the needle for Luna in 2023 include Lockheed Martin, Northrop Grumman, Airbus, and Intuitive Surgical. We remain committed to serving these partners and all of our customers with excellence, and our sales teams will continue to be trained and incentivized to sell a Luna suite of solutions as opposed to simply individual products. In summary, this quarter underscores that customer demand for Luna's products remains strong, despite ongoing global challenges with supply chain and sourcing. And while I am very pleased with the third quarter results and proud of the Luna team, I also know that we can't rest on these results. As I mentioned on last quarter's call, we still have some work to do to grow profitability, particularly of the acquisitions, at a pace that is acceptable to both me and my executive team. This quarter's results are a good start to getting there. You should know me well enough by now to know that I'm never satisfied, and the team and I will keep pushing the organization to execute against our long-term objectives, to capitalize on opportunities, and to perform to excellence while delivering strong growth to our shareholders. Bottom line, we continue to focus on blocking and tackling and accomplishing our goals. So with only two months of the year left and three quarters behind us, we feel comfortable reaffirming our outlook of total revenues of $109 to $115 million and adjusted EBITDA of $10 to $12 million. I do want to make one observation about the size of the revenue range. As you are aware, our recent acquisitions primarily include large project-based orders. While the majority of these transactions are already included in the backlog, the timing of the installation is largely controlled by our customers. Therefore, the revenue recognition can swing from one period to the next. This means that even with just six weeks left to go in the year, revenue could shift to 2023 and is why we are keeping a broad revenue range. I'll now hand the call to Gene for more of the financial details. Gene?
spk03: Thank you, Scott. As a CFO, it's always a great quarter when you don't have a lot to explain, and I'm very pleased that this quarter is just that, a straightforward quarter with excellent results. Q3 represents what we've been working so hard to accomplish during the past 18 months, and gives you a glimpse of what kind of growth and results LUNA is able to accomplish now and in the future on a more normalized basis. In fact, it was one year ago in Q3 2021 that we moved and classified LUNA Labs as discontinued operations. So when I provide comparison figures against last year, I'm referring to the reported numbers that exclude LUNA Labs revenue, gross margin, and operating expenses. With that, let's dive right into the financials. As Scott mentioned, our revenues for Q3 2022 were $29.2 million compared to revenues of $20.3 million for Q3 2021, representing a 43% year-over-year increase. A full quarter of Leos and solid legacy Luna product performance in Q3 2022 contributed nicely to top-line growth. Our reported revenues were impacted by the dollar to euro and dollar to pound exchange rates. On a constant currency basis, our revenue in Q3 2022 was 30.1 million, or a 48% year-over-year increase. For the nine months ended September 30, 2022, our revenue was negatively impacted, 1.6 million by exchange rates. On a constant currency basis, our nine-month year-to-date revenue for 2022 is $79.4 million, or a 25% year-over-year increase. Within sensing, year-over-year revenue growth of 80% was driven by our project-based businesses, OptiSense and Leos, and strong performance from Luna Legacy products. Within comms tests, Q3 2022 revenue grew 6% compared to the prior year quarter. Gross profit was $16.9 million for Q3 2022, compared to $12.6 million for the same quarter last year, representing a gross margin of 58% in Q3 2022, compared to 62% in Q3 2021. As Scott mentioned, while profit dollars grew, the gross margin rate was impacted by mix, as our project-based businesses were a higher percentage of total revenue. As we mentioned last quarter, we still expect to finish 2022 with a blended gross margin rate of somewhere around 60%. Operating expenses were 15.4 million in Q3 2022 versus 12.6 million in Q3 2021. 2.3 million of this increase was driven by the OPEX of LEOs and its associated amortization. Over half of our year-to-date increase in operating expenses is related to LEOs, including its amortization. I indicated on last quarter's call that Q2 2022 was a high-water mark for our OPEX because it was our first full quarter with LEOs and didn't reflect the impact of cost synergies we began implementing. The reduction in OPEX this quarter versus last year was largely due to the result of swift and preemptive measures taken proactively to reduce expenses. We continue to focus on identifying areas of opportunity for increased expense efficiency without sacrificing infrastructure, product quality, or customer support, and we are working to create a nimbler and more efficient Luna. Moving on, we recognized operating income of $1.5 million in Q3 2022 compared to an operating loss of $10,000 in Q3 of last year. Net income for Q3 2022 was $1.2 million or $0.04 per share compared to net income of $355,000 or $0.01 per share for Q3 2021. And finally, adjusted EBITDA was $4.5 million for Q3 2022 versus $2.1 million for Q3 2021. And adjusted EPS was $0.09 per share for Q3 2022 versus $0.03 for the prior year quarter. Let me move now to the balance sheet. We ended the quarter with approximately $7.9 million of cash and cash equivalents compared to $17.1 million at the end of 2021. The decrease was largely due to the purchase of Leos, a proactive buildup in short-term inventory to minimize supply chain disruption, and the planned expansion and consolidation of production for Terahertz products. I'm proud to highlight here that the team has never missed a customer shipment date, even through the pandemic. They've done an extraordinary job managing supply chain challenges. Our working capital was $46.7 million on September 30, 2022, compared to $49.8 million on December 31, 2021. At the end of the third quarter 2022, we had total debt outstanding of $21.7 million. Of that amount, $19.5 million is in term debt, and $2.2 million was drawn on our revolver. Investments over the past five years have all been funded by using our balance sheet through cash and bank debt, and we have access to approximately $14 million in a revolving credit facility should we need it. Given the points made by Scott about revenue recognition and project-based order shifting, I am comfortable reaffirming the guidance discussed earlier. We continue to focus on blocking and tackling to drive long-term growth while being prudent about expense management, particularly in light of the current economy. However, we will continue to invest where we believe it will generate growth opportunities for Luna long-term. With that, I turn the call back over to Scott.
spk04: Thank you, Gene. At this time, Brian, Gene, and I are available for questions. So, Chad, please open the call for Q&A.
spk06: Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our rosters. And the first question will be from Alex Henderson from Needham & Company. Please go ahead.
spk07: Oh, okay. Great. So congratulations, guys. Nice print. Certainly is a lot better than some of the other prints I've seen over the course of the quarterly printing period. I wanted to ask you specifically about the ComTest piece. To what extent you might have seen any differences change in demand there, particularly after watching the Viavi print where they held an analyst day on the 14th of September and then promptly missed the quarter after saying they were on track for the quarter and guided down sharply as a result of pull-in on telecom contest investments. So I was curious if you've seen any change in the trajectory of that business.
spk04: You know, Alex, thanks for the comments. And in regards to this, we see strong demand. You know, we stay very in touch with out in front of customers, with our sales folks, with our vendors and things like that. And we see strong support. You know, I mentioned... you know, that, uh, Northrop Grumman and Lockheed Martin are still driving very fast. We've had some other companies in here. Um, you know, it's really, it's, it's really driving forward, you know, with, with, with, with what we're seeing, um, you know, that, that we had, you know, backlog, uh, you know, two and a half million dollars that we, that we brought in, um, and, uh, you know, continue to, to, to see strong demand. I, I listened to that call, um, and, uh, I was a little perplexed, you know, with what they said mid-September and then how they finished the end of the quarter. So they must have been counting on some things that maybe slipped, but it was unusual.
spk07: That's an OPEX spend. Is yours out of OPEX, or is it more out of CapEx?
spk04: I'm sorry, Alex. You broke up there. Can you say it again?
spk07: Yeah. So with respect to Viati and Javi, most of their – come in from the OpEx side of the enterprises that they're working with. Is your sales coming out of OpEx or is it coming out of the CapEx budgets for your clients?
spk02: Yeah. Hey, Alex. This is Brian. We're definitely on the CapEx side. So the test equipment cycle flows through our customers' CapEx budgets. So that's part of the reason why The other thing we're seeing in that business is, don't forget, as Scott mentioned in his remarks, that the business is 50% communications test equipment and 50% modules and lasers for a variety of different industries. And we had booked a bill in that quarter of over two. So the growth was a little light based on some timing things, but the bookings were strong.
spk04: Yeah, keep in mind, Alex, that two and a half booked a bill factors in some of that large intuitive order. I think it was... what was it normalized without that? It was still 1.2 or so, somewhere in that range. So 1.2, which we're proud of at 1.2, 2.5, I would have to qualify that 2.5 with that larger order. But, yeah, you love to see, you know, love to see $14 million that's going to, you know, come in over the next 18 months or so.
spk07: Totally impressed. Thank you so much. Thanks, Alex. Appreciate it.
spk06: Thank you. And the next question will be from Chris Sakai with Singular Research. Please go ahead.
spk05: Hi, Scott, Gene, and Brian. Hey, Chris. I think I might know the answer to this question or what you're going to say, but of the revenue growth this quarter, can you give any color as to how much was from OptiSense and how much was from Leos?
spk04: Yeah, we really don't manage the business that way. Those two are so synergistic together. We really look at that European project-based revenue kind of together with the DAS systems and the DTS. I talked about an opportunity with Dominion Energy here in Virginia where we're doing the offshore wind farms project. and the cabling of that. And that included both DTS and DAS, and we just ran it through one of – for example, we just ran that through one of the organizations. So it's hard to answer that, Brian. I don't know if you have a clear answer. I don't look at it that way. The way it comes up to me is a blended.
spk02: Yeah, so we had – hey, Chris, this is Brian. We had about 80% growth in that fencing segment, but half of that came from the additional LEOs revenues. So the other half was organic-driven, actually pretty strongly by OptiSense. They had a good quarter.
spk05: Okay, thanks. That's good to know. Can you discuss or share any color about how the contract with Intuitive Surgical, how long-term is that that you mentioned? Do you see any more similar partnerships like that in the future?
spk04: Yeah. Intuitive is a long relationship that we've had for, gosh, over 15 years, and we divested that technology out. I guess probably 2014 or so. And so they've continued. They have to buy kind of the laser module back through us that goes into their system. So like I talked about, we are specced into their robot that's out there. Their robot, this next generation robot, they call it Ion, that is only right now being sold in North America. So when you look at You know, the $14 million, which is probably over about an 18-month period, you know, that's just for North America. But being specced into an FDA-approved product, you know, gives us comfort that we're doing something right, you know, really working with them and getting that over to them. We do have several. I've talked about it on other calls, certainly, that, you know, we talk about having about a half a dozen of those type of relationships that are in the red zone. Now, how long it takes to get from the red zone into the end zone, that varies. But we do have a handful of those and have talked about the hopes of 15%, 20%, 25% in the future in the next two, three, four years going into a year and having that bigger percentage. of our revenue in these blanket deliverable type of orders. So we certainly see more of them. I mentioned Lockheed Martin, Northrop Grumman, we talked about in the future, Airbus providing the solutions on the A320, and certainly Intuitive plays a large role in that as well. So there's several of these that are hanging out there that we're driving to get them closed. So that really was an initiative of ours to get kind of I talk about being out of the lab, doing the onesie-twosie sales to really doing the dozen or 50 or 100 of these unit sales. That's the key to the growth. That really is the key to the growth when you get spec'd in with these larger opportunities, and then you get those recurring every year.
spk05: Okay, thanks for that. And then what drove operating expenses lower in the quarter as compared to a year ago?
spk03: They weren't then a year ago. It was quarter on quarter.
spk05: Oh, I mean, sorry, as a percent of revenue, I believe.
spk03: Oh, yeah, as a percent of revenue. You're going to see those as a percent of revenue, Chris, you're going to see those gradually start to decline because there's a portion of those that are fixed, particularly like the amortization and some of those other things. Variability really is commission. So when you see our revenue go higher, you're going to see a certain portion of OPEX go up because of commissions. And again, while we will go forward and add people as we grow, in the last few quarters, as I mentioned, we did put in a profitability type of plan where we were managing our headcount to levels that are appropriate based on the fact that we had three companies coming together. So there was, there was, you know, initiatives put in place to lower it as well.
spk04: Yeah. I mean, you know, you know, Chris, when I look at, You know, the proactiveness that we took in Q2 after consummating the acquisition of Leos and the divestiture of Luna Labs in March of this year, we talked about it on the last call of us being proactive in the reduction of half. We probably have peeled back maybe 7%, 8% of our workforce back then. back in the end of Q2, primarily due to some of the acquisitions and redundancy of positions. But we really were trying to be proactive, and like Gene said, managing that profitability. I mean, everyone wants, and we talk about this 15% to 20% top-line growth, but we believe that it's very important for that growth to be profitable growth. And we felt like, and Gene went out there and said, Q2's OPEX was definitely a high watermark there. for us, and that's why you saw that reduction from Q2 to Q3, and you see modest growth from Q3 of last year to Q3 of this year. We talked about last year, you know, if you take out the LEOS OPEX out of that, we talked about, we felt like we had, you know, the OPEX level that could sustain additional growth, that we didn't need, you know, the OPEX was a and I think you see that come to fruition here in Q3.
spk03: Yeah, and Chris, what we target when we do our budget is we target to grow our OPEX at half the growth rate of revenue. So if revenue is targeted to grow 20%, we would target to grow OPEX at 10%. And just the math of doing that falls more through the bottom line. Now, what you will see quarter to quarter is, you will see slight movements here and there as certain projects that we're doing or certain things like that. So quarter to quarter, it's not an exact percentage, but certainly when you look at a full year, we expect that to be coming down as a percentage of revenue.
spk04: Yeah, you know, not the first time you heard from me, Chris, and we've done it on one-off calls and on these earnings calls, You know, if you walked around our office, you see the 20-60-20 numbers sitting around, and that really is the 20% growth, the 60% growth margin, and ultimately the 20% pull through to that operating income. You know, we have to adjust it due to some of the things that Gene talked about in relation to the acquisitions. But, you know, we're not, you know, we are, you know, as you see from this quarter, you know, we can see, you know, we talk about the organic growth being at 25%, you know, the other growth being close to 50%. You know, we do see that organic growth, you know, that can be in that 15% to 20% range. We know the 60% gross margin. We have some work to do to get to the 20% on the adjusted operating income margin. But you can see sitting at wherever it is this quarter, somewhere in that 15% range, that we really are seeing the benefit of some of the things that we've done here in the past.
spk05: Okay. Yeah, thanks for the answers, and I'll look forward to next quarter. Yep, great. Thanks, Chris.
spk06: And again, if you have a question, please press star then 1. The next question is from Dave Kang from B. Reilly FBR. Please go ahead.
spk08: Thank you. Good afternoon. First question is regarding some of the verticals that you serve. Can you tell us which verticals are strong, which ones are not, you know, giving you some headache?
spk04: The verticals that we talk about from the sensing and the communications test?
spk08: Yeah.
spk04: Yeah. Well, as you saw from this quarter, both of them were strong this quarter. Both the communications tests from a lot of the everyday business that has grown organically to some of the larger deals with the Intuitive Surgical, the Lockheed Martins, the Northrop Grumman's. You know, we see a lot of strength on that communications test side, and this quarter we saw a lot of some of the slippage that happened throughout the year that came to fruition on the sensing side business as well. So, you know, we've seen – we really see strong growth. This quarter we saw strong growth in both of those verticals. You know, Brian, do you want to add any more to that statement?
spk02: Yeah, sure. I mean, you saw the growth numbers for the two, so the sensing side of the equation definitely came on strong here in Q3 with that level of growth. And as I said, half of it was organic. So we've talked on previous calls about that. Project businesses taking a little bit of time to normalize to our way of doing business at Luna, and we're starting to see that now, and Q3 was good. a good example of that. And then in the communications test vertical, where we had lower revenue growth in the quarter still grew, we're seeing a lot of strength there, especially in the order books. So timing-wise, it didn't quite flow through in Q3, but the intuitive surgical order falls into that category, and that's a big one. But we had other large orders in the quarter as well. And as we said in the remarks, we're expecting another follow-on order for our test equipment for the F-35 aircraft. So we're seeing good indications of continued strength there as well. So, yeah, as Scott said, it's pretty strong in both.
spk04: Yeah, I mean, you know, and I talked about it on last quarter's call, Dave, about the IDIQ that we will enter into. and are in the final stages, almost at the signature stage, of signing that IDIQ with Northrop Grumman and Lockheed Martin regarding the F-35. So, you know, that kind of locks us in. You know, we like where we've been able to hold our margins on that at much, much larger quantities, and I think that contract will span over a three- to five-year period. So very excited about that.
spk08: Got it. And then just a couple of questions regarding terahertz. Are we still getting just like a 1D to 2Ds, or are we finally getting some meaningful volume orders?
spk04: Yeah, we are seeing larger orders in that. I mean, as we I've talked about it in the past. It always starts out with one or two, then it turns into five or six. And when it gets specced in and it continues to deliver, a lot of the opportunities we're working with now, larger orders that require kind of hot spares. And these are on manufacturing lines that are out there. There's a reason why we are moving production to our Atlanta office. It's all set up. It's in the process. It will be fully integrated into by the end of the year into Atlanta. And that was going from, and I've talked about this in the past, you know, one a week, we're now at two a week and striving to, to, to shortly within the next quarter to be at four a week. Um, you know, and so that is a tremendous growth and it's because we have the backlog already in place. You know, we're quoting Q3, Q4, uh, 2023 on any orders that we're taking. So the backlog on terahertz is all there.
spk08: And can you remind me what kind of margins they have? Is it above or below corporate average?
spk04: They're right around the average, maybe, you know, kind of mid-50s, right, Brian, somewhere in there?
spk02: Yeah, actually, the team has done a fantastic job getting some of the touch-time labor out of assembly. So that's trending north of the corporate average. Yeah.
spk04: And as you can imagine, you know, all the – The big buzz names out there that you can imagine we're working with really try to drive your price down when they say they're going to place an order for a larger quantity. But once you know and you start getting specced into there, we really do try to have some leverage at least with holding tight with those margins. So if we were selling a one-off, one-off is clearly in line with the corporate average. It's when you get into larger quantities you know, can you hold the line on that margin? And I think we've done a great job of doing that.
spk08: Got it. And then earlier you said, you know, moving into our manufacturing lines. Have you moved into that battery, you know, for EV? I mean, are we in the manufacturing or still kind of to the side at this point?
spk02: We are in manufacturing currently. And that's the biggest growth driver for that product line this year. There are others coming behind it in other industries. But, yeah, no, we're in production, and we're developing and delivering systems for that application today.
spk08: Got it. And my last question is, I think earlier, or last quarter, I think you said that you were planning four times the capacity expansion. Is that still the case, or maybe up to something higher, or what's the plan on that?
spk02: I didn't hear the question. We are still planning on implementing four times the capacity, yes.
spk04: Oh, yeah, yeah, yeah, I'm sorry. Yeah, Dave, we're at two. So we've doubled capacity. We were one a week earlier this year for the first nine months. We're now at two a week. And once the move is consummated and it gets up and running, you know, kind of mid next year, we will be at four a week. So we will quadruple capacity over a one-year period. Is that right, Gene?
spk03: Yep. And, Dave, to answer your follow-on question, that's basically two lines, one shift. So to your point, if we need to, you know, increase it more, it's just adding another shift and training the folks up.
spk08: Got it. Thank you. All right, thanks, Dave.
spk06: The next question will be from Charles Knowles, a private investor. Please go ahead.
spk01: Hey, great quarter. I guess the joke of the day is I'm sure you all don't pay attention to this, but stocks trading up 83 cents at $6 a share. That was a joke. Okay, how are all the meetings you went to around the world the last couple of months going?
spk04: Yeah, no, they were great. You know, I think I mentioned I just got back and I got back Sunday night. So I was there all last week. Brian was there probably 30 days ago. I was there maybe a couple weeks. Yeah, a couple weeks after that. We do divide and conquer rather than all three of us rolling in there at the same time. Brian will go for a week to 10 days. Gene will go for a week to 10 days. To meet with different people, let folks ask different questions and things like that. Really trying to rally the team together. We talk about this one Luna. I don't believe that Feeling like you're part of one company when you're around the world happens by accident. I think you have to work hard at that. So we spend a lot of time. I know I spend a lot of time out in front of in the Atlanta office, in the L.A. office or Chino and in San Francisco, you know, out at the offices really trying to roll out what the company culture is. you know, really making sure people feel comfortable in asking the questions and they're excited about what the vision is. People want to know what the strategy is and where they fit. You know, it doesn't matter where you fit. You may say I'm a small cog in the wheel, but people want to know what's the strategy and what does it mean to me? How can I help? So I think that only happens by being face-to-face and you know, going into an office and leaving the door open and welcoming in for questions and then getting everyone together. So I think, at least for my trip, I sensed everyone was very excited to be part of this one Luna. Gene, do you have anything to add?
spk03: Yeah, I would say, you know, one thing that amazed me from both places I went, and I visited Leos and OptiSense, When you start talking to the people in production or the people, you know, in engineering or customer service, all of them were very interested about Luna. All of them had great ideas for improvement. And so it's just a testament to the employees that we acquired, you know, their interest in the company and their interest in, you know, all of us being successful. That is the one thing that really stuck out to me.
spk01: Yeah. Yeah, that's great. I was sort of meaning the different places in the world besides the companies, like the Dubai thing last week, how those events went. And it would be great if it appears on your news, on your events, but Business Wire or whoever doesn't pick those things up, it would be nice if on Yahoo, when you went and looked at Luna at SAW, today or this week they're here doing this and instead of having to hunt for it so much yeah and the other thing the other thing i sure wish y'all would get this on zoom that'd be a lot of fun to see your faces when you're talking about these accomplishments that tells a lot yeah no uh
spk04: You know, we certainly would do that. Brian, you've gotten out a little bit and seen what the reaction brought. You know, Brian has expanded out to the sales force out in the field and things like that, so do you want to comment?
spk02: Yeah, and that's good feedback, Chuck. Thanks for that. We have been very active, as you've been following us globally with trade shows in the last few months, South America, Dubai, all over North America, and it's been fantastic. And, in fact, we're really hitting our stride as it relates to the combined solution set that we have with, you know, what we call kind of Luna's legacy products, the OptiSense DAS products, and the Leos temperature and strain products. So being able to talk to customer base about all of those things in one solution is really getting some great traction. We announced, you know, that we've landed a pretty sizable offshore wind job that will start installation, you know, early next year. And that's a combination of those products. And so it's been great to see that. So it's going very well.
spk04: So, you know, hey, Chuck, as my wife always says, careful what you ask for. So if you really wanted to see our face, I mean, you may not like what you get.
spk01: No, I was saying your interview. You did good.
spk03: Hey, Charles. This is Gene. I don't know if you have – it's a shame you can't get that on Yahoo, but if you have access to LinkedIn or Twitter, our folks do post a lot of the trade show information and things like that. And what you would want to do is follow Luna, follow Leos, and follow OptiSense. There's separate Twitter and LinkedIn for those.
spk01: Okay. Sounds great. Well, looking forward to next quarter. Yeah, thank you. Me too.
spk06: Thank you. And ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Scott Grafe for any closing remarks.
spk04: All right. Thank you, everyone, for joining us today. You know, certainly feel free to reach out to Gene, Alice, and Brian or myself with any questions that you have that come out of this that you just didn't have a chance to ask here or have arisen out of this call. And I certainly look forward to seeing maybe some of you. We have several upcoming investor conferences. And, again, I thank you for your time and interest in Loon Innovation. So, Chad, I'll turn it back to you, and really that concludes the earnings call from my perspective.
spk06: Yes, and thank you, sir. The conference has now concluded. Thank you all for attending today's presentation, and you may now disconnect. Take care.
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