Luna Innovations Incorporated ( LUNA)

Q3 2010 Earnings Call Transcript

November 9, 2010 5:00 pm ET

Executives

Dale Messick – Interim President and COO

Scott Graeff – Interim CFO

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Luna Innovations Incorporated earnings conference call. My name is Katie and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (Operator instructions)

I would like to now hand the call over to Mr. Dale Messick, President and Chief Operating Officer. Please proceed, sir.

Dale Messick

Thank you very much, Katie. Good afternoon, everyone and thank you for taking the time today to join us as we review our progress and results for the third quarter of 2010.

Before I go further, let me remind each of you that statements made in this conference call and our public filings, releases, and websites, which are not historical facts, maybe forward-looking statements that involve risks and uncertainties, and are subject to changes at anytime.

We caution investors that any forward-looking statements made by us are management’s beliefs based on currently available information and should not be taken as a guarantee of future results or performance, which may differ materially as a result of a variety of factors discussed in our earnings release and our latest Form 10-Q filed with the Securities and Exchange Commission.

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. There is more complete information regarding forward-looking statements, risks, and uncertainties in the company’s filings with the SEC available on our website.

So with that, let me jump into the results for the quarter. With me today on the call are Scott Graeff, our Interim CFO; and Mark Froggatt, our Chief Technical Officer. I'll start with an overview of our business activities since the last call and then Scott will give the detailed review of the financial results for the quarter. And following that, we will be happy to take any questions.

First of all, from a financial standpoint, I am very happy to report that as a result of a $1.5 million improvement in our bottom line and in EBITDA, we did achieve positive cash flow for the quarter of nearly $900,000. That's a very significant milestone for Luna and I am happy to finally not be saying to you on these calls a sentence that starts with, "Except for the legal fee, we would have."

Scott will share the details of our financial performance in a moment. But from an operations perspective, I am optimistic about the growth we have been seeing in our product and license segment in particular. After seeing demand decline during the recession in 2009, orders have been growing steadily this year, with third quarter product and license revenues increasing nearly 50% compared to the third quarter of last year. Within that growth, revenues from the sale of our OVA and OBR products nearly doubled compared to the third quarter of 2009, including the first sale of our new portable OBR in third quarter.

We also introduced during the third quarter a new benchtop model of the OBR with performance up to 10 times faster than our previous model and the first shipment of that also took place in Q3.

While on the topic of product development, I'll just mention that our development projects with both Intuitive and Hansen remain on schedule and we've been able to meet required milestones on time there. The teams continue to work very well together and we are enjoying positive relationships with both of these important customers.

So with our growth in sales, new product rollouts, and continuing to meet the milestones in our Intuitive and Hansen projects, I remain very pleased with the progress being made in the product and license segment of the business.

In our technology development segment, revenues declined 23% compared to the third quarter of 2009. This decline continues a trend that we've seen throughout 2010, reflecting a decline in new program awards during the time that we were operating in Chapter 11 in the second half of 2009 and the beginning of 2010.

Since the programs we are working on in the segment are generally of a long-term nature, the impact of the decline wasn't really seen until 2010. While we were operating in Chapter 11, we were still working the contracts that we had been awarded prior to the filing. As those were later completed and the new awards slowed down, particularly in the higher-value Phase II awards, we saw in 2010 a decline a decline in our contracts backlog and a corresponding decline in 2010 revenues for that segment.


Recently, we have received several new awards in Phase II programs and so our backlog has once again grown. At the end of September, our backlog for technology development contracts was in excess of $29 million compared to approximately $23.5 million at September 2009 and a little under $22 million at the end of the second quarter this year.

The new large awards we received came from several areas, including three awards for an aggregate of $4.6 million in our Optical Systems Group, one in our Advanced Materials Group for $1 million, and two in our Nanomaterials Group for $1.7 million in total, in addition to an incremental funding of $700,000 on an existing grant in the nano area.

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