Luna Innovations Incorporated

Good morning. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2023 Luna Innovations 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 that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the call over to Allison Woody, Senior Director of Administration. Allison, you may begin your conference.

Good morning, and thank you for joining us today. This morning, we issued our Q3 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, George Gomez-Quintero, 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 morning, everyone, and thank you for joining us today. I'm pleased to be here today to discuss our third quarter results. As Allison mentioned, in addition to Brian Soler, our new CFO, George Gomez-Quintero, has joined me for the call today. George joined our team nearly a month ago, replacing Gene Nestro. I want to start by thanking Gene for his contributions to LUNA. Under his leadership, we established a scalable foundation by making the necessary investments to improve infrastructure, processes, and systems. These moves have put us in a strong position to be able to continue to drive both organic and acquisitive growth. I'm thrilled to welcome George to the team. He brings to Luna a deep operational focus and significant experience in FP&A, investor relations, treasury, procurement, and credit and collections. He has had a wide range of experience in public companies, and he has built and developed strong finance teams of all sizes. These experiences will be critical as we continue our pursuit of opportunities that will enable us to further expand our global footprint and elevate our international presence. You've heard me say before that our leadership talent is the linchpin in driving our strategy and capturing the abundance of opportunity with which Luna is presented, and we are well on our way. In addition to George, You'll remember that we hired Eva Hartman, our Senior Vice President of HR, almost a year ago, and more recently, Thomas Oldermeier, our Senior Vice President and Managing Director of EMEA. These have been strategic moves to bolster our senior leadership team with seasoned professionals who have demonstrated success in international operations and growth across technical environments. As you know, we've made incredible strides in expanding our global footprint via acquisitions in the last several years. I've mentioned before that we now have more than a third of our employees outside the United States, and more than half of our revenue was generated outside the U.S. In a timeframe where we've been very purposeful about driving growth, improving infrastructure, and streamlining operations, We've also been incredibly intentional about putting the right people in the right roles to support that work. We continue to be strategic about the team who will achieve the targets we've outlined. With that reflection on our leadership, let's turn our attention now to Luna's third quarter performance. Q3 was a solid quarter for us in spite of macro headwinds that are affecting businesses across geographies and industries. The headwinds were a continuation of some of the dynamics we saw in Q2, and they impacted us similarly to many other businesses you've already heard report for the quarter. We had a tough comp this quarter, but continued to build momentum. While some challenges hung over from last quarter, we bounced back where we said we would. I will provide some more color in a moment, but overall, our sensing business was pressured, particularly in contract research and terahertz. I would characterize most of the pressure as timing and slower sales cycles, even though we saw some significant wins in this business. Our communications test business had a strong quarter, driven in part by a few recoveries from last quarter. So let's turn to some of the specifics of Q3. For the third quarter of 2023, we recorded total revenue of $30.7 million, an increase of 5% compared to the prior year period. Our gross margin was 57%. Adjusted EBITDA was $4.2 million compared to $4.5 million in the comparable quarter last year. Our adjusted earnings per share for the quarter was 7 cents. As I mentioned, are sensing vertical experience pressure this quarter and as a result, revenue was down 6% year-over-year. This was largely driven by tough terahertz comparisons. After several consecutive quarters of double and triple digit growth, we saw a Q3 decline in revenue on a year-over-year basis due to timing of deliveries related to several large orders on backlog. Our outlook for terahertz is incredibly strong Bookings and backlog are robust, and the future of the product line is bright. Product revenue was essentially flat year-over-year, with mixed performance between product lines and markets. Notably, sales of our Odyssey high-resolution sensing product reached record levels this quarter. The 72% year-over-year growth in this product line was driven by strong demand and a contract for a large infrastructure project requiring multiple systems. I continue to feel optimistic about the breadth of applications for our fiber sensing solutions as evidenced by multiple significant wins this quarter. We were awarded a multi-year fiber optic monitoring service contract on a transcontinental natural gas pipeline where our solution will help ensure gas supply from a former Soviet republic to the EU. Luna's distributed fiber optic monitoring system provides early warning and highly accurate localization on issues such as intrusions on the pipeline right-of-way, gas leaks, and other potential threats, such as dragging anchors from passing boats. As another part of the project, Luna's distributed fiber optic monitoring system will provide perimeter security for the pipeline's above-ground facilities, such as compressor stations and other in-line facilities that can be vulnerable. We also secured multiple sales of earthquake monitoring DAS instruments to seismic labs on the West Coast and to the U.S. government. We now have more than a million and a half in new orders for DAS and DTS systems for pipeline monitoring from the largest energy company in the UAE. We renewed a global supply partnership agreement with one of the world's largest multinational conglomerates for critical infrastructure monitoring. The agreement covers supply of linear heat detection, perimeter security, pipeline monitoring, and mining product lines to infrastructure operators around the world. More to come on this. as our details get finalized. We also recently deployed the successful application of fiber optic sensing-based traffic monitoring for the state of Utah Department of Transportation, where LUNA is providing accurate and timely information regarding the average traffic speed, detecting slow or stopped traffic, and estimating journey times between set locations. We won this project jointly with our partner, Duraline, a leading conduit manufacturer. We also amassed multiple additional awards totaling over a million dollars for power cable monitoring systems throughout the world. This application continues to be a significant driver of growth. Quarterly performance in our communications test business was solid. We realized 26% year-over-year growth in the segment. As I mentioned earlier in the call, we saw some recovery from the headwinds we experienced in this segment in Q2. Revenue for our laser module business remains strong. Performance in this business line is primarily driven by OEM sales of our RIO lasers into LIDAR and sensing systems. We continued deliveries of our Phoenix laser system to Intuitive Surgical against the $14 million order placed late last year. We also continue to realize strong sales of our polarization control modules to emerging photonics applications. We're pleased to share that we've secured significant wins with new OEM customers in defense systems, quantum computing, and medical applications. Finally, I hope you saw our announcement last week about the large contract secured in support of a major technology provider's hyperscale data center. Our technology will help the provider more accurately assess the performance of transceivers in their data centers as they work to reduce power consumption and data interruptions in those centers. Let me now turn to our outlook. As we keep hearing from others, Luna 2 continues to see a less predictable and more challenging macro environment. That said, We know that Luna's solutions are a superior way for many industries to address critical issues. While I continue to be very optimistic about our future, you undoubtedly saw the downward revision to our revenue range. Obviously, I'm disappointed this is the direction we went, and although the change is not indicative of any degradation in the demand for our solutions, it does represent a change to what we see closing, getting delivered, and installed before year-end. About a month ago, as we were preparing to announce George's hire, I spent a good deal of time with our operations and sales leaders. Based on what customers were telling us, we were comfortable reiterating our guidance. But in the last couple of weeks, we've had certain customers tap the brakes on some of their projects. We're still moving forward, we're just doing it more slowly. As a result of these dynamics, we're revising our top line guidance to total revenue of $120 to $125 million, but we are maintaining our adjusted EBITDA range at the same level at which has been all year, and that is adjusted EBITDA of $14 to $18 million. I want to make an additional comment about the size of the revenue range, given that we're in the last quarter of our fiscal year. By now, you are likely aware that some of our sales include large project-based orders. We have many of these transactions included in our backlog, and the timing of delivery and 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 into next year and is why we are keeping a broad revenue range. With that overview, let me turn the call over to George for his remarks on the quarter's financials.