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:

https://seekingalpha.com/article/4512207-luna-innovations-incorporated-luna-ceo-scott-graeff-on-q1-2022-results-earnings-call

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. 

OT- LUNA INNOVATIONS-Fiber Optic Sensors from Luna Innovations Help Monitor Structural Integrity of New Composite Bridge

Sensors Provide a Sustainable Solution for Aging Infrastructure

https://lunainc.com/fiber-optic-sensors-luna-innovations-monitor-structural-integrity-composite-bridge/

(ROANOKE, VA, August 5, 2020) – Luna Innovations Incorporated (NASDAQ: LUNA) has partnered with researchers at the University of Tennessee (UT) and the Institute for Advanced Composites Manufacturing Innovation (IACMI) to equip a new fiber-reinforced polymer composite material (FRP) bridge deck with integrated, high-density fiber optic sensors. The sensors will be used to monitor the composite deck system over time to give critical performance and safety data, thus providing a sustainable solution for aging infrastructures such as bridges and tunnels.

The Morgan County demonstration bridge in north central Tennessee will replace a damaged, decades-old concrete bridge. County officials are partnering with private industry and researchers on a bridge that can be installed faster and at a lower cost than traditional methods. Luna’s fiber optic sensors will form the key element of a structural health monitoring framework for the bridge, allowing engineers to ensure that the bridge operates safely and within established performance parameters for many years to come.

“Luna’s sensing solutions deliver data and insight not available with conventional data acquisition and monitoring systems,” said Scott Graeff, President and Chief Executive Officer of Luna. “We strive to enhance the safety of people and structures by leveraging our expertise in fiber optic-based technology and the information it provides. The Morgan County demonstration bridge is a great example of how Luna is enabling the future with fiber by providing advanced sensing solutions that address our nation’s aging infrastructure.”

Due to the use of technologically advanced composites, the bridge deck system has a 100-year lifespan and a low-maintenance design. The system is equipped with Luna’s high-definition and high-speed fiber optic sensors for real-time monitoring of the composite deck system while in service. The sensors are easy to install during the manufacturing process and become part of the structural components, thus creating “smart” infrastructure and enabling the constituent building materials to report their structural health from within. A single 10-meter sensor can provide strain from mechanical loading or thermal/hygroscopic loading from thousands of locations simultaneously with exceptional precision. In addition, wireless technology developed at UT will be utilized for monitoring the response of the bridge system and traffic counts remotely via cloud computing.

FRP materials will be used to create a durable, sustainable, cost-effective lightweight bridge structure. By using composite materials, the bridge replacement project will require less equipment and less time for on-site preparation and on-site installation. Quicker completion can result in significant savings to safely meet transportation needs for this rural community.  

“Lack of durability data is one of the major barriers of the adoption of novel and advance materials including carbon, basalt, or glass fiber reinforced polymeric composites in civil infrastructure,” said Dayakar Penumadu, the Fred N. Peebles Professor in the Tickle College of Engineering and Characterization Fellow for Materials and Processing group for IACMI.

Penumadu added, “this is a major obstacle for integrating new materials and structures quickly and thus require successful demonstration as being done through this IACMI project. Bridge decks are the most damage prone elements and we are integrating smart sensors distributed throughout the composite bridge deck that will provide us valuable performance data with time for years to come.”

High-definition fiber optic sensing is ideally suited to monitor and characterize composite structures. Using Luna’s ODiSI measurement system, a single 10-meter sensor can provide strain from mechanical loading or thermal/hygroscopic loading from thousands of points simultaneously with exceptional precision. In addition, fiber Bragg grating (FBG) sensors combined with Luna’s high-speed HYPERION interrogator can capture dynamic phenomena and additional bridge response data. Together, these systems will deliver the durability and performance data needed to facilitate the integration of new, advanced materials in civil infrastructure.

The installation of the composites bridge deck is expected to be completed late 2020 or in early 2021. Luna Innovations is one of the private industry partners on this project that have committed to designing, fabricating, shipping, installing and monitoring the 16-by-25-foot bridge deck, all at no cost to Morgan County.

OT-Luna Releases Portable High-Resolution Reflectometer

https://apnews.com/Business%20Wire/d8b8c93085874f92a7ba5805a329375c

Luna Innovations Incorporated (NASDAQ: LUNA), a global leader in advanced fiber optic-based technology, today announced that it is releasing the industry’s highest resolution portable reflectometer. The OBR 6200 Series performs advanced inspection and diagnostics of fiber optic assemblies and networks.

Luna’s proven Optical Backscatter Reflectometer (OBR) technology provides advanced design, diagnostic and inspection capabilities to fiber-optic manufacturers, developers and installers by illustrating a map, in ultra-high resolution, of an optical link. OBR 6200 Series instruments are rugged, hand-held reflectometers with ultra-high sensitivity for testing and troubleshooting short fiber optic networks up to 100 meters in length. This breakthrough new product will bring significantly enhanced diagnostic capabilities to the installation and maintenance of commercial and military avionics, data center networks and industrial manufacturing applications.

The OBR 6200 series was initially developed for field support and maintenance of fiber optic links onboard advanced aircraft, such as the F-35 Joint Strike Fighter. Because of this, OBR 6200 was designed with ruggedness and ease of use in mind. Integrating a touch screen interface with “go/no-go” data and qualification to strict military operational and environmental standards, the OBR 6200 greatly simplifies analysis and maintenance of fiber optic links and is deployable in a multitude of environments. The OBR 6200 provides diagnostic capabilities in applications where the industry standard Optical Time Domain Reflectometer “OTDR” doesn’t provide enough resolution or precision. With 100 times more spatial resolution and precision than other “high-resolution” OTDRs, the OBR 6200 enables pinpoint diagnostics not otherwise achievable.

“Luna’s OBR 6200 Series is the industry’s most capable high-resolution tool for maintenance and troubleshooting of fiber optic networks,” said Scott Graeff, President and Chief Executive Officer of Luna. “Our work with the Lockheed Martin team in support of the fiber network on the F-35 has ensured that this product combines the ultimate in accuracy and usability, and we are excited about the many applications of this instrument, including total fiber system quality control to ensure component performance and network uptime.”

The OBR 6200 Series instruments are ideal to use in the field for service and maintenance applications because the units are ruggedized with IP65 (water-resistant and dustproof) and MIL-STD certifications, and their fast acquisition rate reduces susceptibility to vibration. The portable units are touchscreen, have an easily chargeable Li-Ion battery and work with single- and multimode fiber installations.

Luna Innovations Reports Strong Third-Quarter 2019 Results

My note: Luna Innovations had another outstanding quarterly report yesterday. revenues for the quarter ended September 30th of 2019, were $18.4 million, compared to revenues of $10.7 million for the same period of the prior year, representing a 72% year-over-year increase. The increase in revenues year-over-year was composed of 122% increase in Luna's product and licensing segments along with a 22% increase in it's technology development segment.The following are CEO Scott Graeff's comments about Luna's terahertz division Terametrix. 

https://seekingalpha.com/article/4302958-luna-innovations-incorporated-luna-ceo-scott-graeff-q3-2019-results-earnings-call-transcript?part=single

Scott Graeff

Now moving on to Terahertz. Our product line is continuing the strong momentum built in previous quarters, with a robust double-digit increase in revenues for the third quarter compared to the prior year period. New sales and continued growth into the aerospace non-destructive testing, process control and research markets were strong in Q3.

And we continued with our strategy of enhancing market presence by deploying Terahertz sensors in the applications where high precision, high speed measurement or tolerance of harsh environments is required. During the quarter, we were awarded an Air Force contract to develop and install multiple Terahertz process control sensors used in the refurbishment of aircraft at Hill Air Force Base.

As you’ve heard me say in the past, the main drivers for Terahertz adoption haven’t changed. They are effective thickness control, lower manufacturing costs, minimization of waste and the optimization of product quality. We’ve maintained a good balance between ensuring efficiency in our daily operations, while still investing in growth opportunities.

OT-Press Release-Luna’s Fiber Optic Sensing Products Enhance the Safety of Oil and Gas Pipelines

September 12, 2019

(ROANOKE, VA, September 12, 2019) –

Luna Innovations Incorporated (NASDAQ: LUNA), a global leader in advanced fiber optic-based technology, today shared that its fiber optic sensing technology is becoming adopted for safety and integrity monitoring in the oil and gas industry.  

A continuous monitoring system allows early detection and warnings of defects before they reach the magnitude of a major disaster.  While pipelines are designed to withstand many conditions, they are naturally susceptible to operational, ecological and man-made issues, including internal erosion and corrosion, mechanical deformation, leaks and encroachments.  Yet, detecting and localizing these types of complications in pipelines can be very difficult, expensive and imprecise.  Fiber optic sensors installed along pipelines have proven to be successful in mitigating these risks by providing valuable data about accumulating strains.   

“This is a great example of Luna’s expanding applications in the oil and gas industry,” Scott Graeff, President and CEO of Luna Innovations, said.   “Our sensors detect, identify, and localize the conditions that can lead to leaks and breaks in real-time allowing potential emergencies to be addressed immediately, enhancing safety, reducing downtime and lowering maintenance costs.”

A Columbian pipeline transport company that was experiencing mechanical deformations due to local soil and geohazard effects is now using Luna’s sensors to diminish these risks by providing the information necessary to perform preventative maintenance in a more precise way.  Outfitted with more than 1,000 Luna strain sensors, Luna’s Hyperion optical sensing interrogator provides data that allows pipeline operators to gain an understanding of the mechanical behavior of buried pipelines under diverse soil conditions.   This information is critical as a predictive measure for the overall integrity of a pipeline installation, which not only helped the customer establish new maintenance protocols, but also created significant savings in prevented pipeline ruptures and associated environmental remediation costs.

Terametrix Division of Luna Innovations shows strong growth in Terahertz sales in Q2, 2019

My Note: I listened to the Q2 conference call regarding Luna Innovations last week. The company continues to show impressive growth across the board, which marks the seventh consecutive quarter of double-digit year-over-year growth in it's revenues from continuing operations. Luna grew total revenue 80% in the quarter versus the comparable year-ago period, and gross profit margin grew to 49% from 43%. Revenues from it's Product and Licensing segment grew at a robust 155%, while revenues from it's Technology Development segment grew at a very strong 18%. Below are the comments on the Terametrix division relating to Terahertz at Luna.  You can read a full transcript of the conference call here:

https://seekingalpha.com/article/4284322-luna-innovations-incorporated-luna-ceo-scott-graeff-q2-2019-earnings-call-transcript?part=single

Scott Graeff

Now moving on to Terahertz. Our product line is continuing the strong momentum built in previous quarters, with a robust double-digit increase in revenues for the second quarter compared to the prior year period. New sales and continuing growth into the process control and nondestructive testing markets were strong in Q2.

We continued with our strategy of enhancing market presence and sales channel expansion with the addition of a new distribution partner. This addition accelerated our sales and marketing efforts to deliver both a single-point gauge and a line scan gauge product into new market opportunities.

The main drivers for Terahertz adoption continue to be effective thickness control, lower manufacturing costs, minimization of waste and the optimization of product quality. We've maintained a good balance between ensuring efficiency in our daily operations, while still investing in growth opportunities.

...

Barry Sine

Kind of lost in the mix with all the fiber optic news is the T-Ray product line. And I know you putting a lot of marketing resources behind there. I think they've moved offices, and you've been to a lot more trade shows. Could you talk specifically about how that product line is doing the Terahertz sensing?

Scott Graeff

Yes. That continues to fit very nicely within our sensing vertical. So as I talk within the Lightwave Division, you have these two verticals and one being the sensing. And it's the third product that I talk about in that sensing vertical. So you have the OVA - I mean, the ODiSI, the HYPERION and the Terahertz product. And our team Ann Arbor - we have moved - at January 1, we moved them into a separate location. And they are really driving on all cylinders out there with the entire team led by our General Manager out there, Margaret Murdock.

So it is continuing to penetrate into the market. We sign up additional VARs and distributors, and we're seeing that momentum. Brian, you're involved with them, if you have any additional information?

Brian Soller

Yes. The team in Ann Arbor who are working on Terahertz has done a fantastic job in improving the product and in concert with adding new sales channels and distribution, and we hit on that. Scott, hit on it in his discussion of the second quarter. We did add a global reseller in Q2 that led to some new business for the nondestructive test market, which is focused on aerospace, oil and gas and automotive, primarily. Q2 was strong, again, in the aerospace market, in general; also strong, again, in process control, which is the two main areas of focus for the Terahertz team.

So again, as the product improves and as the team brings on and builds more capacity through international sales channels, we expect to continue to see progress there, and Q2 was an example of that.

Scott Graeff

Yes, Barry, I've always been careful with the Terahertz products, specifically. And I certainly just don't want to overpromise. I mean, I think, they are making - they had a lot of progress to make, and they have made that progress with getting cost down and some clean up internally, and that has gone beyond our expectations and the job that they have done out there.

So I just don't want to get out ahead of that. And I want to be cautious because the percentages are huge, but there are percentages on some smaller numbers. So I'll continue to update you guys as that makes progress, but we have very high expectations on where this product can go given the technology and where it sits.

OT-Luna Innovations Announces Another Breakthrough in Measurement Capability for Fiber Optics

http://ir.lunainc.com/news-releases/news-release-details/luna-innovations-announces-another-breakthrough-measurement

The new Luna 6415 will deliver comprehensive, high-speed testing needed for design and manufacturing test of modern optical components

ROANOKE, Va.--(BUSINESS WIRE)--May 22, 2019-- Luna Innovations Incorporated (NASDAQ: LUNA), a global leader in advanced fiber optic-based technology, has launched the 6415 Lightwave Component Analyzer (6415). The 6415 is the first offering in the company’s next generation of high-performance, high-resolution analyzer products.

The 6415 provides an advanced and cost-effect solution to support measurements for the development and manufacturing of modern high-speed optical components and networks. The product enables the next-generation, high-speed networks from the data center to 5G mobile, both of which require an ultrafast, economical optical network.

“Today’s extreme expansion in communications bandwidth and capacity depends on rapid advancements in fiber optic component and network technology. A high-speed, economical and scalable optical network is the backbone of our communications infrastructure and forms the basis for everything from cloud computing to ultra-fast 5G mobile networking,” Scott Graeff, President and CEO of Luna Innovations, said. “The 6415 gives our customers the power to develop, test and manufacture the next generation optical network components that fuel this global demand for bandwidth.”

As component technology moves more aggressively towards higher speeds with higher levels of integration using semiconductor technology like silicon photonics, minimizing the cost of design cycles and increasing manufacturing throughput become critical. The 6415 helps reduce the design cycle and increase manufacturing throughput. With an unprecedented combination of measurement speed, accuracy, functionality and ease of integration, the 6415 was designed with integrated photonic components production in mind.

With an integrated tunable laser, the 6415 provides fast and accurate information at a fraction of the cost of multi-unit test systems. This high-resolution product delivers comprehensive and high-speed results needed for testing modern passive optical components and provides a versatile tool for manufacturing test and quality control. More information on the Luna 6415 can be found here: https://lunainc.com/product/luna-6415/

Phoenix laser order further underscores Luna’s fiber optic-based expertise

Business Wire

ROANOKE, Va. -- April 30, 2019

Luna Innovations Incorporated (NASDAQ: LUNA), a global leader in advanced
fiber optic-based technology, today announced that it will supply an
industry-leading robotics company with a significant number of its Phoenix
tunable lasers. The order, valued at more than $6 million, will be delivered
over four years, with deliveries beginning this summer.

Luna’s Phoenix tunable laser was designed with systems integration in mind and
is well-suited to a wide range of fiber optic sensing instrumentations. The
Phoenix is a miniaturized, tunable external cavity laser offering high
performance in a compact footprint, which provides improved scalability,
ruggedness and speed compared to similar lasers on the market. These features
are ideal for robotics applications because they enable the maximum precision
and repeatability needed to measure and control very fine movement.

Laser-based fiber optic sensing systems are now widely deployed across many
industries due to the benefits of optical fiber over traditional techniques in
terms of precision and scalability. Advanced robotics increasingly relies on
optical-based measurement systems as a core component. The Phoenix laser
delivers the high performance needed to maintain maximum precision and
reliability and is ideal for these applications.

“Luna’s collaboration with an industry-leading robotics company demonstrates
how far our optical sensing technology has advanced,” said Scott Graeff,
President and CEO of Luna Innovations. “The technology has matured to the
point where it is being used in precise applications – requiring the ultimate
in performance, reliability and quality. From a commercialization standpoint,
an order of this magnitude, combined with our existing platform, will allow us
to achieve greater economies of scale on our existing and future products.”

Seeking Alpha Transcript: Comments on the Terahertz Division of Luna Innovations for Fourth Quarter

Scott Graeff, President and CEO of Luna Innovations and Dale Messick, Luna Innovations,  Chief Financial Officer made the following brief comments about the Terahertz division of Luna Innovations on the recent Q4 2018 Results Earnings Conference Call March 4, 2019 8:30 AM ET. 

https://seekingalpha.com/article/4246190-luna-innovations-incorporated-luna-ceo-scott-graeff-q4-2018-results-earnings-call-transcript?part=single

Scott Graeff:

Our Terahertz division is continuing the strong momentum built in the first three quarters. In the fourth quarter, we posted a 72% increase in product sales year-over-year and delivered a robust 68% growth in product sales for the full year.

Importantly, in 2018, we expanded sales channels with the addition of six new distribution partners, and increased market exposure through 10 trade shows. We made robust progress on product sales with a large government defense contractor achieving a formal manufacturing readiness level 7 assessments, and purchasing 5 Terahertz systems for production of the F-35 fighter jet.

And on expense side, we created cost efficiencies for the future by moving to a new facility, which is scaled appropriately to the size of our business and allows for much greater levels of collaboration.

As we move into 2019, we'll be focused on leveraging the efficiencies provided by the new facility and our expanding team. In addition, we will promote new products and capabilities with successful applications, market presence and compelling collateral and web content.

Dale Messick:

Within the Products and Licensing segment, revenues in our Lightwave division grew 75% versus the fourth quarter of last year and Terahertz revenue grew 72%. Our gross profit increased to $6.6 million for the quarter, compared to $4.2 million for the same quarter of last year, representing a gross margin of 49% in Q4, 2018 compared to 42% in Q4 2017.

LUNA INNOVATIONS Q3 Conference call THz highlights

https://seekingalpha.com/article/4220719-luna-innovations-inc-luna-ceo-scott-graeff-q3-2018-results-earnings-call-transcript?part=single

(MY NOTE: I wasn't able to participate in the LUNA INNOVATIONS 3rd Quarter conference call, but there was some interesting information shared about progress in the terahertz division,  and some great questions by an unidentified participant. The Company is "hitting on all cylinders" and gave some really strong guidance for the 4th Quarter which is posted at the bottom of the page. As always perform your own due diligence.  )

Scott Graeff

Our Terahertz division is continuing the strong momentum built in Q1 and Q2 with a 55% increase in products revenue in Q3 year-over-year. We continued with our strategy of enhancing market presence and sales channel expansion with the addition of two new value-added resellers. These additions accelerated our sales and marketing efforts to deliver innovative Terahertz products into new process control market opportunities in Korea and Taiwan. In the third quarter, we successfully deployed the higher performing Terahertz gauge developed in Q2 into new process control and non-destructive testing applications. This new gauge will meet the demand for measurement of thinner and buried layers. These more demanding process control and non-destructive testing applications are driving demand for accurate process control with high repeatability at a continuously growing rate.

Unidentified Analyst

Congratulations on a nice quarter. I just want to -- had two questions. Number one, you mentioned the additional process control business coming out of the Terahertz division. Could you elaborate just a little bit on when you talk about process control, what is it that your customer is actually doing? And then what is that taking the place of, what were they doing before and is there a definitive cost benefit ratio to them?

Scott Graeff

The Terahertz system in getting the new gauge out there, it's measuring thickness several layers deep, that's why I talked about embedded layers or several layers down in measuring. Typically, historically ultrasound or using some kind of radioactive technology and we are replacing that with more efficiency and effectiveness. So but you can imagine anything, whether it be tires or any material that has relevant several layers to it, us being able to measure a layer that is several layers down below the surface is critical for a lot of our customers.

Unidentified Analyst

These are multiple material opportunities?

Scott Graeff

Yes.

Dale Messick

Think about blowing film, plastic packaging kind of applications and how widespread that is and that's a target environment that we're currently pursuing in and getting some success with.

Unidentified Analyst

So the last part of that question was the cost benefit analysis ratio, obviously these people have put it through the paces and determined that they want to deploy it, what is the payback to them? Is there such thing as ROI in this area?

Scott Graeff

Yes, I think I what they look at is, as you can imagine, if you're, whether it be water bottles, shampoo bottles, a lot of those things they don't want it any thicker than it needs to be, but it needs to be thick enough such to not have leaks and things like that. So their benefit is to get a precise measurement to have that bottle or that substance specifically thick enough and not too thick. So there is a major return from a customer.

Unidentified Analyst

And that would be globally, there's nothing specific about Japan or regulators deployed?

Scott Graeff

Yes, remember, this is in real time on a line, so it's embedded into someone's manufacturing line to give real time feedback on that thickness of that specific product.

-------

Scott Graeff
One last item I'll cover, is an outlook for the remainder of the year. As you know, we do not typically give financial guidance. But because of the proximity to year-end and the various transactions we've done this year, we'd like to provide an outlook range. We are not committing to providing guidance in the future, but we will continue to regularly evaluate which disclosures makes the most sense. We expect fourth quarter 2018 revenues to be in the range of $12 million to $12.5 million. We expect full-year 2018 revenues to be in the range of $41.5 million to $42 million. This would give us EPS in a range of breakeven to $0.01 per diluted share for the fourth quarter of fiscal 2018. And for the full fiscal 2018, we would expect EPS in a range of $0.31 to $0.32 per diluted share.

New Luna CEO focuses on culture as stock price climbs

• • 
    
• By Jacob Demmitt 

https://www.roanoke.com/business/news/blacksburg/new-luna-ceo-focuses-on-culture-as-stock-price-climbs/article_e2b85f57-a63a-5484-b29a-7b56c551c7b8.html

The newly minted CEO at Luna Innovations is still enjoying his honeymoon period, as the company’s stock price has more than doubled since Scott Graeff took over about a year ago.

It marks the strongest sustained growth since a lawsuit nearly destroyed the business in 2009, but Luna now has growing revenues and more cash in the bank than ever before and is showing consistent quarterly profits for the first time in years.

Graeff said he has spent his time in the corner office focusing on a side of the business that didn’t receive as much attention under previous leadership: corporate culture

"Everything that I’m doing, in essence, I’m looking at and saying, ‘Let’s turn it upside down and shake it,’ ” Graeff said. “Let’s see what comes out.”

Graef admits most people living around the company’s Roanoke headquarters don’t know that Luna specializes in using fiber-optics to build test and measurement tools. Investors haven’t heard a compelling story that makes them want to buy in, and even internally the mission hasn’t always been understood.

“If we look around the table and the employees don’t have a clear vision of what Luna is doing, how in the world could the local community know and how could the investors know?” Graeff said.

Graeff’s predecessor, former CEO My Chung, took over in 2011 as a seasoned executive hired to make hard decisions and find a solid financial footing for a 21-year-old company that was in turmoil.

He was picking up the pieces after Luna began working with California-based Hansen Medical Inc. in 2006, the same year Luna went public. The deal turned sour when Hansen accused Luna of sharing its trade secrets with a competitor. A jury awarded Hansen a $36.3 million verdict in 2009. Soon after, Luna declared bankruptcy and was in jeopardy of being delisted from the Nasdaq Stock Market.

The company eventually reached a settlement with Hansen, preserved its stock exchange listing and emerged from bankruptcy with a plan for major changes.

Chung tried to create a company focused on fiber-optic technology, instead of a little bit of everything. He abandoned projects, sold divisions and scrapped the old logo. His biggest win was the $16 million acquisition of Michigan-based Advanced Photonix Inc. in 2015, which Luna largely sold off in chunks within three years for more than $50 million.

By the time Chung left, Luna had carved out a niche in the use of fiber-optics as a test and measurement tool in a variety of industries, from checking on the labyrinths of fiber running into Google data centers to finding defects in Boeing aircraft.

Carilion Clinic has been one of Luna’s largest investors since the early 2000s, holding just less than 15 percent of the company’s stock as of April, according to filings with the U.S. Securities and Exchange Commission.

Rob Vaughan, Carilion’s treasurer and senior vice president of finance, said his office took the long view with its investment from the beginning. The bankruptcy wasn’t tied to issues in the underlying business or technology, he said, but rather it was something the company could work through.

“We were always encouraged that they would continue to make progress, and they have,” Vaughan said. “Really, at the heart of it [the turnaround], starting to become profitable is the main grabber. We’re starting to see the results of the strategy they’ve pursued over the past few years pay off.”

Luna’s stock was still trading around $1.50, below 2010 levels, when Chung retired last year, but the company was selling products and generating profits, and the stage was set for the stock rise happening now.

That’s when Graeff was named CEO after more than 15 years with the company, at various times holding the titles of chief financial officer, chief operating officer and chief strategy officer.

He took over with a plan to start focusing on telling the company’s story, improving team morale and communication around the office.

The price briefly hit an eight-year high above $4 per share earlier this month, but has since settled back down closer to $3.50.

“Where it [the stock price] was, I knew was tremendously undervalued. I believed we were not telling the story properly,” Graeff said. “Something wasn’t clicking. I couldn’t put my finger on what it was.”

One of Graeff’s first hires was human resources director Marnie Young. She put out anonymous employee surveys and began making changes to the office dynamic in response.

At one of Young’s first leadership team meetings, she said the group went around the room with everyone describing what kind of company Luna is.

“It was a bit of a mess because everybody had a different description,” Young said. “If you understand how your job impacts the drivers and the results of the company, I think you feel more a sense of ownership and you’re really bought in to that vision and mission.”

Luna is a relatively small publicly traded company with about 200 employees, but Graeff said he always felt it could think bigger when investing in staff. Happy employees are easier to recruit, stay at the office longer, work harder and are less prone to costly turnover.

“When I walked in, it [Luna’s Blacksburg location] kind of felt like manufacturing and not technology — and we definitely are a technology company,” Young said. “So we are working on improving the look and feel of that space.”

Graeff said he makes an effort to be visible in the company’s various offices, including the mostly administrative headquarters in Roanoke. There’s more communication with management and he wants to make employees feel like their concerns are heard.

The company is now looking to install ping-pong tables at the Blacksburg location, which is Luna’s largest facility focused on technology development. They’re getting Starbucks coffee machines and daily fresh fruit giveaways. Young is planning company picnics and holiday parties. She’s launched an internal blog, is working to automate monotonous tasks for workers and is setting up more collaborative meeting spaces.

Luna moved its annual shareholders meeting this year to the Hotel Roanoke and Conference Center, where food was served and Roanoke bigwigs were invited. Instead of three attendees from the public in years past, Graeff said the meeting drew 50.

“I think people are starting to get the clear, concise story we’re trying to tell,” he added.

Luna reported its most recent quarterly results this month, showing a net profit of $1.2 million through the first six months of 2018, compared to a $1.6 million loss at this time last year. Annual revenue in 2017 hit $46.2 million, up from $18.3 million in 2013.

Stocks of smaller companies such as Luna tend to be more volatile, but Carilion’s Vaughan said he thinks the price could stabilize as long as the company keeps showing profits.

“The employees feel like you’re investing in them,” Graeff said. “That cost to me is next to nothing. But what I get in return is tremendous. … You’ll see that in the financials. It just naturally flows through.”

LUNA First Quarter Conference call - my thoughts and comments

Luna Innovations Incorporated (NASDAQ:LUNA) Q1 2018 Earnings Conference Call May 9, 2018 5:00 PM ET

https://seekingalpha.com/article/4172029-luna-innovations-luna-ceo-scott-graeff-q1-2018-results-earnings-call-transcript?part=single

My Note: I listened to and participated in last week's LUNA INNOVATIONS Q1 conference call. My impression is that this company is finally "hitting on all cylinders" and in a variety of cutting edge technologies with real legs to make a run in the market place. 

CEO Scott Graeff noted that, Luna's first quarter revenues increased 21% or $2.1 million year-over-year contributing more than $1 million to Luna's bottom line. Revenues from Luna's products and license segment grew 29%, and sales from Luna's Lightwave division grew 74%. Scott advised that the Lightwave division includes Luna's instruments for testing optical components and networks which target the growing demand for bandwidth fueling the development of silicon photonics and the building of more and more data centers. This division also includes the sales of  Luna's Odyssey instruments used for measuring structural health and integrity. 

Scott also had the following comments about the Terahertz division, in Ann Arbor, Michigan:

Scott Graeff

On the Terahertz side, I discussed last quarter, our new leadership in that group and the traction taking place across the Terahertz organization whether in sales, engineering or manufacturing. The group continues to gain momentum and recognized a 29% increase in revenues in Q1 compared to a year ago. We are increasing our marketing presence for the Terahertz platform with much greater tradeshow presence.

We plan to participate in 10 shows this year with four shows already completed in 2018. For comparison, we only completed four shows in all of 2017. Additionally, we are gaining efficiency in our operations, for instance since January 1, w have reduced our time to build a system by 27% taking 67% of the engineering hours out of the build and lowered overall cost of goods sold by nearly 10%. These important measurements are critical to the growth that we expect and a true testament to the outstanding work being done in our facility.

Here are my questions and comments:

Randy Knudson

Good afternoon. On the last conference call you talked about ODiSi becoming or you're hopeful that it might be recognized as the industry standard for composites or in composite testing and maybe I misunderstood that. So has there been any -- how do you achieve that. I guess is the first question, where are you and where are we in terms of being recognized as the industry standard for testing composite products.

Scott Graeff

Yes. I'm going to let Brian answer that. I know I will say that it is top of our priority list. We believe it is important and we are going down that path and doing everything we can. I will say you're dealing with some bureaucratic organizations and there is a process involved in going through that. I'll let Brian who is very involved in this talk a little bit more.

Brian Soller

Yes, sure. Hi, Randy. I think there are standard bodies that deliver essentially confirmed documentation with regards to what would be considered a standard and test for materials -- all different types of materials. And we've identified two standards bodies that we believe the most relevant to our Odyssey products and using fiber optics to measure composite materials. And we have over the last year engaged with those committees -- at the committee level with those bodies. And we are now members of at the committee level teams that are working on new standards and the partnership between the standards body and other corporate entities in Luna to develop standards over the course of time that would include our technology.

You have to be careful with this, as Scott mentioned that they are fairly bureaucratic organizations, so it can take some time. But over the last year we have gotten engaged with what we believe to be the right folks in the right standard bodies and over the next 18 months or so I think we'll see some real progress.

Randy Knudson

Let me ask a follow up question if I could. In terms of competition without naming competition, is there significant competition in this market, are you the only -- are we the only people that's really doing this kind of testing?

Scott Graeff

That’s a good question. The competition that we have in this market is really other types of measurement technology.

Randy Knudson

Okay.

Brian Soller

So whether these electrical strain gauges or thermocouples or stand offs temperature detection using a flare type instrument. So there's competition -- a lot of competition from other technologies. We bring some very specific benefits to these types of measurements and there's not a lot of direct head-to-head competition with the way we make these measurements using fiber optics.

There certainly are other fiber optics techniques on the market. They'll have different benefits they bring. Ours is pretty unique though in terms of the combination of resolution and accuracy that we can achieve. So I hope that answers the question.

Randy Knudson

No. It did. And one of the technologies that I've seen and in fact I think in Ann Arbor, aren’t they using Terahertz to evaluate airplanes -- various parts of airplane hulls or in various modalities, isn't Terahertz being used?

Brian Soller

Yes. Our Terahertz technologies used to measure layered thickness and quality of coatings for different types of aerospace and many other applications actually. It's not an apples-to-apples to exactly what we're measuring with fiber optics but you can think of them as complimentary.

Scott Graeff

Randy, if you were ever out in the Ann Arbor area, it's a very disruptive technology. I'd welcome you to come in and meet the folks out there and see it firsthand.

Randy Knudson

I appreciate that. And what's the thoughts in terms of when -- how long are they going to stay in the current facility or are the plans to move out?

Scott Graeff

Yes. Our lease -- like I talked before our lease is through the end of this year. It is not ideal space. We're within -- we're kind of where we were mixed in with the Macom facility as well. So we're evaluating that right now looking at where we go from here. But that is a kind of a mid-year decision point as far as where we're going.

Randy Knudson

Yes. Great. In terms of Terahertz, are there any new value added resellers, I was really been impressed with some of the press releases where we can see, I think five significant value added resellers selling in different aspects of using Terahertz in various products whether it's plastic paper, whatever but are there other --are there new value added resellers on the horizon. Are there new markets in that area?

Scott Graeff

Well, we are active in that and the guys out there and the folks out there have done a nice job, Margaret and Irl and John and Steve in signing up some additional VARs and some additional distributors and some reps. So I don't have them the names of them at my fingertips right now. But that is an active approach and you're dead on with when you get into a specific market many times it requires a specific VAR or a specific rep that knows that business it’s not just saying. Let me just broad stroke Terahertz technology out here. It's where we're going after and who has those contacts. So we are active in that and I can follow up with you with the names. I just don't know right now.

Randy Knudson

Well, I appreciate that and overall just really impressed with what you gentlemen have done and so thank you for answering my questions.

Scott Graeff

Thanks Randy.

----

One of the most insightful comments came from an unidentified institutional investor who strongly encouraged management to consider a stock buy back as Luna has approximately 38 million dollars it is holding from the sale of it's HSOR division. I concur whole -heartedly. 

Unidentified Analyst

But, and correct me if I'm wrong on any of that, but what I have learned over the years is that the one business that you know best is, your business and with the amount of cash on the balance sheet returning some cash to shareholders by buying back more stock who would seem to be a very good use for some of the cash because if we want a money market fund we can put money in the money market fund. So, I don't want you to just buy something because you want to put the cash to work. Why not concentrate on buying back some of the shares at these prices because you certainly know your business best.

Finally Scott noted that the  Technology Development segment, which represents funded research under U.S. government contracts, grew 9% year-over-year. Scott touted the diverse team and their ability to win Phase 1 feasibility projects and to extend them into larger development programs at a higher conversion rate with a breadth and depth of the IP portfolio that has been created.  There are solid synergies from having this division as it relates to LUNA's ability to innovate quickly and efficiently. Overall, it was a very positive report which portends good things for the future across the board. This of course is my opinion, and it's not investment advice. Perform your own due diligence.