Luna Innovations' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Luna Innovations ( LUNA)

Q3 2011 Results

November 14, 2011 5:00 p.m. ET

Executives

My Chung - President and CEO

Dale Messick - Chief Financial Officer

Analysts

Greg Greenburg - Private Investor

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Luna Innovations Incorporated earnings conference call. [Operator instructions.] I would now like to turn the conference over to your host for today, Mr. Dale Messick, chief financial officer. Please go ahead sir.

Dale Messick

Thank you very much operator. Good afternoon everyone and thank you for taking the time to join us today as we review our progress and results for the third quarter of 2011.

Before we 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, may be forward-looking statements that involve risks and uncertainties and are subject to change at any time, including, but not limited to, statements about future financial or operating performance or management transition and future research contract awards.

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 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.

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. For today’s call, I will briefly cover our recent successes and then provide greater insight into the direction we intend to take the company over the next several years.

We realized a significant milestone in the third quarter by achieving our first quarter of profitability since the IPO in 2006. I am especially excited and proud of the team’s accomplishment in a very challenging economic time.

By capturing new revenue opportunities in our secure computing group, and increasing our focus on billable projects, we were able to exceed the expectations that we set at the beginning of the quarter. The work in our secure computing group was able offset a decline in sales of our test and measurement equipment.

As I discussed on our prior call, we had very strong product sales with our predominantly telecom customers in the first half of the year, but began to see activity levels and new orders softening late in the second quarter and into the third quarter.

That weakness in demand did in fact continue throughout the third quarter. While we have seen some hints of optimism in this sector of our business, I believe that the fourth quarter will continue to be a challenging environment for telco-related product sales.

Our shape-sensing development projects with Intuitive Surgical and Hansen Medical continue to progress as planned, with the achievement of critical milestones in terms of accuracy and resolution.

At this time, I would like to turn the call back over to Dale to complete our discussion of third quarter results, and after that I will come back to our strategic growth initiatives.

Dale Messick

Thanks My. As My mentioned already, the real financial highlight for the third quarter of 2011 is our positive net income. We realized a net income to common shareholders for the quarter of approximately $222,000, or $0.02 per basic share and $0.01 per fully diluted share compared to a loss of $517,000, or $0.04 a share, in the third quarter of last year.

Revenues grew 3% overall to $8.8 million, led by a $1.1 million, or 23% increase in our technology development segment. This increase in technology development revenue was recognized in our secure computing group and our optical sensing group.

With our product and license segment, revenues declined 25% to $2.7 million in the third quarter of 2011, compared to $3.6 million in the third quarter of last year. Within this segment, product sales declined $1.1 million, or 40%, compared to the same period last year due to softer demand for test and measurement equipment in the telecom area.

Offsetting that decline, our commercial product development revenue increased by approximately $250,000, or 27%, compared to Q3 of last year, with the greatest growth coming from work performed under the Hansen development agreement.

Our overall gross margin stayed relatively flat at 39.5% to 40% in the third quarter of both 2011 and 2010, with offsetting factors from our business segments. Technology development margins improved from 30% in the third quarter of last year to 41% in the third quarter of 2011, due primarily to new fixed price contracts recognized by our secure computing group where we were able to capture higher margins.

The gross margin recognized in our product and license segment declined from 55% in the third quarter of 2010 to 36% in the third quarter of this year. The decline in overall margin for this segment is primarily attributable to the decline in product sales which typically carry our highest gross margin.

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