Tuesday, May 17, 2022

The long-awaited true commercial breakthrough for THZ has just been realized at LUNA Innovations (Congratulations to Steve Williamson and Irl Duling)


I first read about terahertz in a 2005 publication of Popular Science and marveled at the many wonders and technological advances which were promised by the then "virgin" technology. It was sheer coincidence but also my good fortune that a small photonics company I had invested in called Advanced Photonix, (API), shortly thereafter in March of 2005 acquired the Bell-labs, University of Michigan, spin-off called Picometrix which held a large number of the existing patents on terahertz. Picometrix and the patents it held was the brainchild and largely due to the genius & vision of Steve Williamson as well as the technical genius of Irl Duling. 

It seems to me based on what I've learned this week that Luna and terahertz as a viable technology,  has finally moved to the slope of enlightenment on the Gartner technology curve, and appears headed on a long upward slope for some time to come:

Earlier this week, I listened to the Luna Innovations, 1st Quarter Financial Report. Wow! Luna really seems to have finally "hit the home-run", and it's THz division is a big contributor to the companies significant progress (which amazingly) is occurring in the midst of the overall economic turmoil of COVID, supply chain issues, global inflation and war in Ukraine. You can listen to the conference on the Luna investors relations page, or you can read a transcript here:


I'd like to point readers to some of the highlights focusing on the THz discussions (however the wins are really across the entire sensing technology line of products). 

Big congratulations to Scott Graeff and the Luna team. 

Scott Graeff: "In addition, with respect to our pipeline and backlog across nearly all businesses, it was what our COO, Brian Soller 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 the 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....

(O)ur 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."

Brian Soller: "If you remember, when we sold the Picometrix business to MACOM back in 2017, we held on to that terahertz piece of that business out in Ann Arbor and folks like Steve Williamson, who were key and instrumental, we just felt like it was being starved a little bit. And so we invested some money into that because when we would talk to customers who were using the terahertz system, they were overwhelmed. They thought it was the greatest thing ever. And it just took some time to get some processes in place and to engineer out some things or the laser and do some things. And sure enough, those investments are paying off in spades now.

You heard me mention, we now are quoting delivery times, well, into Q1 of 2023 for the terahertz products, and that's not because we can't get parts, we can get all the parts in the world. The problem is capacity. So we have to increase capacity. So we're doing that. We're building out additional facilities in our Atlanta facility to make the terahertz products to make the laser. So – and we were able to make about one of those a week in Q3, we'll make two of those a week.

And in Q4 or into Q1 – early into Q1, we're going to make four of those a week. We have all these processes set up, that our Senior Vice President of Operations, Jackie Kline has been all over setting up these processes, but that's the real expansion in being able to quadruple our output of these terahertz, we are seeing more business than we can handle right now. And we see it continuing to grow once we've been able to get that product really out, get the right sales approach to it, the right marketing approach, put more engineers around it. So we're seeing that grow the really laser again, we're quoting many, many quarters out for the RIO laser. There's a lot of opportunity there that we're expanding our facilities to be able to handle this and it's a good problem to have."

Alex Henderson: "can you quantify the Terahertz, size of that business today just to help scale it for us?

Gene Nestro

Yes. I mean, I think it's a still – it's a smaller portion of our overall revenue. If you look at where we guide it, I would say it's right in that 10% range or so a little bit less maybe, but growing kind of in that, call it, 8% to 10% of our overall business is the Terahertz. But it's coming off of a small number and it – last two years, it's in essence doubled year-over-year.

Alex Henderson

Well, it sounds like if you're getting to four a week from one a week, that that's a pretty big increase in the 2023 revenue stream on a year-over-year basis. If I'm doing my math, right, that alone could give you double-digit increase in revenues."

Gene Nestro: "these are no longer someone's placing an order for one unit. We're now getting orders for eight, 10 units. The Terahertz product sells in the mid-150 range or so. So getting an order for eight, 10 units is a meaningful order.

Alex Henderson

Just going back to the visibility on that, so that's a pretty big increase in capacity, you're sold out through year end. As you get into the first quarter of next year and I didn't realize this is starting to look out beyond a reasonable level of forward thought process. But do you think you will have half a year plus of visibility to that business so that you can be confident that that production will be adequately utilized in 2023, 2024 timeframe?

Brian Soller

Yes. Hey Alex, it's Brian. We do – the nature of the customers that are the big customers that are filling the capacity are such that we have really strong visibility into where these systems are going, what they're being used for, why they're needed and how many that they need. So, yes, we have really nice visibility into that.

Alex Henderson

You talked about increasing your capacity on inventory by ordering more and purchasing commitments. Can you talk about the degree to which that inventory that you're bringing in is safe to stock? Let's hypothetically say we went into a recession globally. Would you have any risk of carrying that inventory having obsolescence occur or is this stuff that is just so fungible that you're not at risk at all on that inventory carry?

Brian Soller

Yes. Our inventory is primarily electronic, boards and other electronic components. And so there's a couple things going on. To answer your question directly, we don't think so because we see – it's not like we're ordering two years worth, we're just ordering out a little further than we normally would. But also Scott alluded to it in his comments, as we see this growth coming over the next couple of years, we're doing a lot on our procurement side of operations. And so we're putting in a more global view and working on combining our buys and working with some other vendors to utilize our buying power. So there's a lot going on in the inventory right now. So I think you'll see – we're up a little bit on inventory right now, but we expect that to hold steady the inventory as our sales are increasing and we start to consolidate some of our commodity codes and things like that.

Alex Henderson

Just going back to EMEA, given the macro conditions there, can you talk about any exposure you think you might have to a meaningful slowdown in that economy?

Brian Soller

Yes. A lot of times remember the products that we're selling are kind of the next thing that people are doing. So it's for safety, it's for efficiency. And so certainly, we would – that could impact us, but a lot of these things, we don't really see having a huge impact. And when you look at our overall sales and May is roughly around 20%, but we're not seeing that right now coming through the sales team, coming through our orders or coming through our backlog."

Those are some of the highlights I wanted to share with readers I encourage you to listen to or read the entire conference transcript. Luna's other product lines are showing similar or even greater promise. 

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