Luna Innovations Incorporated ( LUNA)

Q2 2011 Earnings Call

August 9, 2011 5:00 PM ET

Executives

Dale Messick – CFO

My Chung – President and CEO

Analysts

Mark Dalton [ph]

John Moses [ph]

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2011 Luna Innovations Inc Earnings Conference Call. My name is Lucinia and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions) I will now turn the presentation over to your host for today’s conference Mr. Dale Messick, Chief Financial Officer of Luna Innovations. Please proceed sir.

Dale Messick

Thank you, Lucinia. Good afternoon and thank you for joining us today as we review our operating results for the second quarter of 2011.

Before we proceed 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 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 or performance, which 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, risks and uncertainties in the company’s filings with the SEC available on our website. And at this time, I’d like to turn the call over to My Chung, President and CEO of Luna Innovations.

My Chung

Thank you Dale, and thank you everyone for joining us on the call today. Overall we had a solid quarter of top line and bottom line growth. This will also be our fourth consecutive quarter of positive cash flow.

Revenues grew by 7% over the second quarter of last year led by 39% increase in sales of test and management products and 29% growth in our product development revenue. While revenues in this segment grew significantly for the quarter, we have however seen the sluggish economy negatively impact our test and management bookings activity.

Based on this, we will be lowering our full-year projections and guidance as we will share with you later. Our product development relationships with Intuitive Surgical and Hansen Medical continue to proceed on schedule with critical milestones being met. We have continued to raise the visibility of these programs internally as we view that to be of strategic importance.

Within our Technology Development segment, revenues from our government research contracts declined to 8% for the quarter relative to the same period last year, principally due to the timing one DARPA project finishing and another one getting released. With our overall revenue growth, and continued control of our operating expenses, we improved our quarterly net loss by 59% compared to a year-ago and as previously mentioned, continued to generate positive cash flow.

Last week we introduced our newest fiber optic sensing instrument. This new product utilizes a single fiber as a distributed sensor providing thousands of measurement points for strain or temperature. We expect this new product to effectively compete in applications where today numerous discrete strain gauges are required. Our value proposition is centered around overall cost savings, the number of locations to be tested simultaneously and the ability to post process these thousands of data points.

Our initial target market will be in testing as large composite structures such as those in the aircraft and automotive industries. Given the overall value proposition, we expect this to be an important component of our growth over the next couple of years.

With that I would turn the call over to Dale for more detail on our financial results.

Dale Messick

Thank you, My. For the second quarter of 2011, we expect to report a net loss to common of $289,000 or $0.02 per share compared to a net loss to common of $711,000 or $0.05 per share in the second quarter of last year.

The improvement year-over-year was driven by growth and revenues of 7% and more specifically a 38% growth on our product and license revenue which simply pulls through a higher gross margin. Revenues from sales and rentals for our products grew by approximately $840,000 or 41% including a 39% growth in revenue from our tested measurement equipment.

Revenues from sales in test and measurement equipment increased by approximately $800,000 to $2.8 million with the highest growth coming from our Optical Backscatter Reflectometer line. Product Development revenues which are also a component of our product and license revenue, increased approximately $250,000 or 29% compared to the second quarter of last year. Revenues in our Technology Development segment declined by approximately $468,000 or 8% due as My indicated to a period of transition between major projects within our Secure Computing group as well as a reduction in other direct contract costs which flows through directly to revenue related to that expired contract.

The anticipated follow-on project was awarded in early August. So we should expect to see a decline in this group for the third quarter as well and net revenue picking back up again in the fourth quarter. Gross margins expanded to 38% in the second quarter compared to 37% in Q2 of last year reflecting the revenue growth coming from our product and license segment which generally carries a higher margin than that of the Technology Development segment.

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