Luna Innovations Incorporated

Good day. My name is Jordan and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q2 2023 LUNA Innovations Incorporated Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, Simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star key followed by the number one. Thank you. Allison Woody, Senior Director of Administration, you may begin your conference.

Good afternoon, and thank you for joining us today. This afternoon, after market closed, we issued our Q2 2023 earnings press release. As always, you can find the release and supplemental presentation posted to the Investor Relations section of our website. 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 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 Technology Officer, 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 thank you for joining us today. It's great to be back together after seeing so many of you at our May Investor Day in New York. I look forward to sharing with you some of the progress we've made since then and some of the dynamics we're seeing in the market. Importantly, my team and I continue to see an abundance of opportunities for our technology. And as the largest player in fiber optic sensing, we believe we're well positioned to capture those prospects. As you know, if you attended our investor day, we entered this year as a pure play fiber optics company after five years of execution against our strategy to focus on our core capabilities. And as we began the second quarter of 2023, we lapped the sale of Luna Labs and the acquisition of Leos. Therefore, any growth we talk about going forward is organic growth. We made good progress this quarter on many fronts. And if I had to highlight one in particular, it would be that we got much closer to and made major progress in several of our top strategic accounts. We had some incredibly productive discussions with customers, both existing and new. And some of those discussions led to agreements that have been quarters, if not years, in the making. Our sensing business, of which a large component is those project-based solutions, grew incredibly well. I will highlight some of our achievements in this business in just a moment. In comms test, we saw pressure consistent with what we are seeing in some macro trends. As a reminder, this business is more product-based and more subject to slowdowns in discretionary spend. Inflation has slowed purchasing, and some of the projects that we expected to move into procurement phase this quarter are moving more slowly than we anticipated. We are hearing consistently that many of our peers, as well as technology companies more broadly, are experiencing similar dynamics. Despite some of the current market forces, we continue to have confidence, which is supported by a strong sales pipeline and order intake as we entered the third quarter. You may have seen in last week's press release that we continue to secure large, multi-unit follow-on orders. We are laser focused on the service and expansion of our strategic accounts across geographies, and we continue to leverage our lead position in our primary markets. As many of you know, our last two acquisitions, both of which are significant businesses, are located in Europe. As we've continued to refine our integration of these assets to ensure efficiency and to expand our growth opportunities, we recently named a managing director for our Europe, Middle East, and Africa region. With an expanded European footprint, significant international presence, and more than a third of our employees outside the U.S., it was clear that we needed to put in place a leader who could help us fully integrate our European locations and drive efficiencies leading to profitable growth in our European business. Thomas Oldermeyer is an industry veteran coming to us with more than 30 years of experience. Prior to our acquisition of Leos, he spent nearly 12 years as their CEO engaged in the development, production, and global sales of fiber optic distributed temperature sensors. Having someone with deep history and broad experience in technical environments joining the team will be an incredible asset to our EMEA operations and the company as a whole. Thomas's appointment in EMEA is an example of the types of investments that Luna will continue to make in order to support our growth. We've spoken frequently about our need to invest in scalable platforms, processes, and people in order to capture the opportunities we see. For those of you who have followed Luna for some time, you will remember that we've periodically had pressure on margins and earnings due to investments in areas like engineering and sales. Our highest priority is to continue to build value for the long term. And we know that we will need to tolerate some lumpiness as we make the necessary investments. We have a very clear long-term vision and are focused on investments that will drive long-term growth and profitability. As you look at our balance sheet, you probably see some of that lumpiness reflected in our inventory numbers for the quarter. The higher inventory levels resulted from our making strategic purchases to ensure that we are able to service new accounts as soon as they come through the door, while also provisioning for next-gen platforms for several of our product lines. In addition, in some areas, we continue to deal with the supply chain lag that began with the onset of COVID. Let's turn now to some of the specifics of Q2 2023, including financial performance and a few business highlights. After that, I'll turn the call over to Gene. For the second quarter of 2023, we recorded total revenues of $29.2 million, an increase of 11% compared to the prior year period. Our gross margin was 58%. Adjusted EBITDA was 2.7 million for the quarter versus 1.2 million in the prior year quarter. Our adjusted earnings per share was 4 cents for the three months ended June 30th. Now, let me share some specifics about each of our businesses. Our sensing vertical had a very strong quarter, realizing 21% year-over-year growth. The growth was driven primarily by strong performance in our distributed sensing products, which we often refer to as our project-based business. Product lines in those project-based businesses grew in the strong double digits, realizing 43% year over year growth, which was driven by significant commercial progress in a number of different areas, including multiple large wins in our staple markets of pipeline and perimeter monitoring. and significant wins in emerging applications such as power cables, industrial battery storage, and mining. For example, with power cables, we secured a nearly $2 million project for a monitoring system combining our DAS and DTS products, an industry-leading software for the largest power utility in Italy. In the mining market, We won initial contracts in Q2 for the fire detection and conveyor belt monitoring with a partner in South Africa. This is an emerging market that we are investing in to grow. Shifting focus to our terahertz business, I'm pleased to note that in Q2 we experienced triple-digit revenue growth and record bookings. Not surprisingly, the automotive EV market continues to be the largest driver for this business. We were fortunate to secure a large follow-on multi-unit order in the EV battery market from our largest customer for this product line. And Q2 was our first full quarter of production on the redesigned terahertz systems after successful transfer of production to our Atlanta facility. Revenue in our communications test vertical was down 4% year over year. As a reminder, revenue in this segment includes test instruments for telecommunications, control modules for a variety of photonic applications, and laser sources. Some of these areas were stronger than others, and we believe that any slowness was due to macroeconomic factors. On the positive side, revenue for our Rio offerings grew at a healthy 22%. with satellite communications and LIDAR applications continuing to drive growth. Module revenues were down in Q2 compared to the prior year, after growing at a healthy rate in recent quarters. Timing factors, including near-term pressure on discretionary spending and inflated inventories at several large customers, impacted revenue realization for the quarter. We are encouraged by the fact that order intake has been strong. We had multiple key wins in this area, including a seven-figure blanket order for polarization modules from a major data center hyperscaler, and significant OEM wins for new customers in multiple key growth segments, including defense systems, quantum computing, and medical applications. We did experience some spending delays for our higher-end test equipment, especially from several of our larger government and defense customers, resulting in the flattish performance in Q2. We believe this is related to postponements in program spending rather than reductions. We continue to have very positive conversations with customers, but I will share that many of those conversations span a longer period of time. Because we are now selling more comprehensive solutions and driving larger, multiple-unit orders, we have seen longer sales cycles, as we've previously discussed. But once we get the order in the books, there is certainly real stickiness to it. I'm encouraged that sales pipelines are strengthening and the longer-term outlook remains strong as we manage through some of the uncertainties we face that I've discussed. All in all, I want to express my optimism for Luna's future. We are seeing greater than ever potential for uses of our technologies. We are aligned with macro trends in industries with vast market potential, and I firmly believe that the opportunities ahead of us are abundant. As we shared at our investor day, we've set the stage for meaningful expansion. We remain confident in our strategic direction and we remain focused on scalability and capturing market share. For Q3, we anticipate revenues in the range of $29 to $32 million. And for the full year, our guidance remains total revenue of $125 to $130 million and adjusted EBITDA of $14 to $18 million. As you can see, we're reaffirming our annual guidance. However, the back half of the year, and particularly the fourth quarter, are dependent on the timing of revenue recognition from some of those larger project-based sales. That, in combination with some of the overall market uncertainty, makes me more comfortable at the low end of our annual guidance range. While I'm not happy about the impact that recent market uncertainty has had on Luna, I want to express that, on the whole, I'm proud of what we achieved this quarter. We've proven to be a nimble enterprise as we've continued to build and refine the structure we need to drive the efficiency that will allow us to scale. We have identified unique opportunities to collaborate with our customers on grander scales and to strengthen those partnerships. We're generating great momentum on targeted development projects that we believe will lead to long-lasting, high-value relationships. We have a positive outlook for long-term growth, and we're moving purposefully to capture the opportunities that lie ahead of us. With that overview, let me turn the call over to Gene for his commentary on the quarter's financials.