Luna Innovations, Incorporated (LUNA)

Q4 2010 Earnings Call

March 8, 2011 5:00 p.m. ET

Executives

Dale Messick - Interim President and Chief Operating Officer

Scott Graeff - Interim Chief Financial Officer

Analysts

Mark Dalton - Private Investor

Ed Bustamante - One Source Telecom

Presentation

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2010 Luna Innovations Incorporate earnings conference call. My name is Jeremy and I’ll be your operator for today. At this time all participants will be in a listen only mode. Later we will conduct a question and answer session.

If you need operator assistance at any time during today’s conference please press star, 0 and we will be happy to assist you. I would now like to turn the conference over to Mr. Dale Messick, Interim President and Chief Operating Officer. Please proceed, sir.

Dale Messick

Thank you Jeremy. Good afternoon everyone and thank you for joining us today as we discuss the wrap up to 2010 and some of our expectations for 2011. Before we proceed further with our presentation let me remind each of you that the statements made in this conference call and our public filings, releases and Web sites, which are not historical facts may be forward-looking statements that involve risks and uncertainties and are subject to change at any time.

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 and performance may differ materially as a result of a variety of factors discussed in our earnings release and our latest filings with the Securities and Exchange Commission. We disclaim any obligation to update any such factors or to announce publicly the result 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, risk and uncertainties in the company’s filings with the SEC available on our Web site. So with that I’ll touch on some of the highlights of Q4 and recent events and then Scott Graeff will give more detail on the financial results from last quarter and current expectations for 2011 and then we’ll be happy to take any questions.

The fourth quarter was a strong close to 2010 for us particularly on the product side of the business. Revenues related to our fiber optic test and measurement and sensing applications marketed under our Luna Technologies brand increased 14% compared to the fourth quarter of 2009 with an especially strong uptick in sales to Asia in the last quarter. Along with a higher revenue on the products side, at year end we also carried over a backlog of orders of nearly $1.4 million for shipment in 2011, an increase of more than 60% compared to the backlog that was carried over at the start of 2010.

So we expect to have a good start to 2011 in this area as you’ll hear later in our guidance. This same products group within Luna also supports the shape sensing and localization technologies under development currently for intuitive surgical and enhanced medical. We continue to enjoy strong relationships with these customers and the work there continues to make good progress in the development work for each of them.

In the technology development segment of our business revenues for the fourth quarter increased slightly about 1% over the fourth quarter of 2009 whereas we had been seeing declines throughout most of 2010. Within this area of our business we are seeing some groups that continue to be experiencing program win rates below their historical averages while other groups, most notably our secure computing and communications group and our optical systems group, are seeing significant growth in new programs, creating an offsetting effect when we look at total revenues for this segment of the business.

Q4 revenues for our optical systems group, which has the benefit of being able to leverage the utilization of our OBA and OBR products in their research proposals, increased 27% compared to a year ago while revenues in our secure computing and communications group, which focuses on protecting hardware and software systems and the communications between them, increased 19% compared to the fourth quarter of 2009.

We expect these groups to continue to see solid growth in 2011 and we continue to hire aggressively in these areas to meet that demand. With our revenue growth and continuing control over operating expenses, we were able to achieve a small cash flow positive for the quarter making our second consecutive quarter of positive cash flow. With our Hansen litigation costs behind us we have obviously made significant improvement in both operating expenses and in cash flow.

If we exclude the borrowings under our revolving credit facility during 2010 our net cash usage for the entire year was only a half million dollars. Excluding the revolver we had net cash outflow of nearly $1-1/2 million during the first half of the year, which of course included us paying off our pre-petition liabilities as well as legal fees around our Chapter 11 reorganization. While during the second half of the year we generated almost $1 million of positive cash flow.

So looking back over the year 2010 we increased our product and license revenues by nearly 30% for the year. We extended our development programs for key customers like Intuitive Service Corp. We started a new relationship with Hansen Medical, improved our adjusted EBITDA excluding litigation by 25% and strung together two consecutive quarters of positive cash flow for the first time since our IPO.

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