Executive Summary

Q2 revenue grew 11% year over year to $29.2M, with gross margin at 58% (down 300 bps YoY) as mix shifted toward lower-margin project-based sensing; adjusted EBITDA improved to $2.7M and adjusted EPS to $0.04, while GAAP diluted EPS was $(0.05) .
Management reaffirmed FY23 guidance (revenue $125–$130M; adjusted EBITDA $14–$18M) and introduced Q3 revenue guidance of $29–$32M; the CEO said he is “more comfortable at the low end” of the annual range given project-timing and macro uncertainty .
Sensing delivered strong growth (vertical +21% YoY; distributed sensing lines +43% YoY), terahertz posted triple-digit growth with record bookings (EV battery monitoring), while Communications Test declined 4% YoY amid slower government/defense spend; RIO lasers rose 22% with hyperscaler demand (polarization modules) and LiDAR/satellite comms .
Near-term catalysts: reaffirmed FY guide and new Q3 guide, terahertz capacity and EV battery wins, larger multi-unit/blanket orders (including a 7‑figure hyperscaler order), and book-to-bill >1; headwinds include government program timing, inventory build and migration costs that pressured margin in H1 but expected to ease into Q4/early next year .

What Went Well and What Went Wrong

What Went Well
- Sensing strength and project momentum: “Our sensing vertical had a very strong quarter, realizing 21% year-over-year growth… project-based businesses…43% year-over-year growth,” with wins in pipelines, perimeters, power cables (Italy utility), industrial battery storage, and mining .
- Terahertz inflection: “Triple-digit revenue growth and record bookings,” including a “large follow-on multi-unit order in the EV battery market” and first full quarter of production from the new Atlanta line; capacity built toward 4x .
- Data center/AI demand pockets: A 7‑figure blanket order for polarization modules from a major hyperscaler; management believes AI build‑outs are contributing to bookings .
What Went Wrong
- Mix-driven gross margin compression: GM declined to 58% (from 61%) due to higher mix of project-based sensing; operating margin was (1)% despite revenue growth .
- Communications Test softness: Revenue down 4% YoY, with spending delays for higher-end test equipment and softer government/defense timing; management sees potential pickup with the new U.S. government fiscal year .
- Inventory and migration costs: Higher inventory (strategic purchases and next-gen platforms; supply chain lag) and manufacturing migration created short-term headwinds; CFO noted total debt rose to $30.7M partly due to inventory and taxes from the Luna Labs sale .

Financial Results

Metric	Q4 2022	Q1 2023	Q2 2023
Revenue ($USD Millions)	$31.702	$25.045	$29.164
GAAP Diluted EPS ($)	$0.02	$(0.06)	$(0.05)
Gross Margin (%)	61%	60%	58%
Operating Margin (%)	4.6%	(9)%	(1)%
Adjusted EBITDA ($USD Millions)	$4.692	$0.854	$2.732
Adjusted EPS ($)	$0.08	$0.00	$0.04

Estimates vs. Actuals (S&P Global)

S&P Global consensus could not be retrieved via our tool due to a Capital IQ mapping limitation; therefore, we cannot quantify beats/misses for Q2 2023. Values would normally be sourced from S&P Global.

Segment/Business highlights

Area	Q2 2023 YoY	Comments
Sensing vertical	+21%	Distributed sensing project lines +43% YoY; power cables (Italy), battery storage, mining wins .
Terahertz (THz)	Triple‑digit	Record bookings; large follow‑on EV battery order; Atlanta production ramp .
Communications Test	(4%)	Government/defense timing delays; pipeline/visibility improving with new fiscal year .
RIO lasers	+22%	Demand from satellite comms, LiDAR; 7‑figure blanket order for polarization modules (hyperscaler) .

KPIs and balance sheet

KPI	Q4 2022	Q1 2023	Q2 2023
Cash & Equivalents ($M)	$6.024	$3.559	$3.277
Inventory ($M)	$36.582	$39.675	$42.003
Working Capital ($M)	$54.2	$57.3	$63.8
Total Debt Outstanding ($M)	$23.2	$25.2	$30.7
Diluted Shares	34,354,984	33,331,745	33,634,538

Non-GAAP adjustments (Q2 2023)

Adjusted EPS excludes share-based compensation ($1.118M), integration/transaction expense ($0.160M), amortization of intangibles ($0.918M), other non-recurring ($0.455M), and includes income tax effect on adjustments ($(0.663)M), yielding adjusted income of $1.430M (Adj. EPS $0.04) .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue	FY 2023	$125M–$130M (3/14 & 5/9)	$125M–$130M	Maintained
Adjusted EBITDA	FY 2023	$14M–$18M (3/14 & 5/9)	$14M–$18M	Maintained
Revenue	Q3 2023	N/A	$29M–$32M	New
Revenue (guide vs. actual)	Q2 2023	$29M–$31M (given on 5/9)	Actual $29.164M	In-line with guide

Management color: “The back half of the year, particularly the fourth quarter, are dependent on the timing of revenue recognition from larger project-based sales…more comfortable at the low end of our annual guidance range” .

Earnings Call Themes & Trends

Topic	Q4 2022 (Q-2)	Q1 2023 (Q-1)	Q2 2023 (Current)	Trend
AI/data center demand	Record comms test quarter; large OEM/laser orders incl. space/LiDAR .	Continued strength in comms test (15% YoY); lasers/modules +20%; Intuitive deliveries .	7‑figure blanket order for polarization modules at hyperscaler; bookings tied to AI build-outs .	Improving selective demand; growing AI-linked orders.
Supply chain & inventory	Expanding capacity; 2022 M&A integrations .	Inventory elevated for new product intros and expected sales; migration costs .	Strategic inventory for new accounts/next-gen platforms; short-term margin drag .	Near-term headwind; easing into Q4/early next year .
Government/defense	Multiple wins (F‑35 sustainment, OEM lasers) .	Strong aerospace/defense comms test demand .	Defense/government timing delays; expected pickup with new fiscal year .	Temporarily softer; potential rebound in H2.
Product performance (THz)	47% YoY growth in 2022 .	+27% YoY; capacity plan to 4/week .	Triple-digit growth; multi‑unit EV orders; 4x capacity goal achieved .	Accelerating growth; capacity in place.
Regional/infrastructure	Multiple power cable monitoring awards .	Offshore wind/power cable wins (Dominion, NE US); Europe infrastructure regs .	Italy utility contract (DAS/DTS); mining battery storage .	Steady growth in energy/infrastructure.
Regulatory/legal	—	—	Exploring CHIPS Act eligibility .	Optionality; early.
R&D execution/platforms	Laser tester for silicon photonics .	THz redesign; Atlanta transfer .	Platform commonality; internal synergies across products .	Ongoing platform leverage.

Management Commentary

“Our sensing vertical had a very strong quarter, realizing 21% year-over-year growth…project-based businesses grew…43% year-over-year” .
“Revenue in our communications test vertical was down 4% year-over-year…we believe any slowness was due to macroeconomic factors” .
“Q2…triple-digit [terahertz] revenue growth and record bookings…large follow-on multi-unit order in the EV battery market” .
“Book-to-bill…about 1.2…could be…higher in Q3” .
“Back half of the year…dependent on timing…more comfortable at the low end of our annual guidance range” .
Inventory: “Higher inventory…strategic purchases to ensure we are able to service new accounts…provisioning for next-gen platforms” .
Hyperscaler/AI: “Seven-figure blanket order for polarization modules…we do believe that it’s driven by some AI build-out” .

Q&A Highlights

Comms Test duration: Weakness skewed to government/defense; management expects improvement as new fiscal year begins; broader service provider OpEx commentary mixed vs peers .
H2/FY cadence: Q4 implied step-up supported by larger sensing deals, EV multi-unit orders, and typical defense spending seasonality; CEO comfortable at low end of FY guide given timing risk .
Terahertz capacity/backlog: 4x capacity capability achieved; bookings pulled into late 2023; demand extends into Q4 with deliveries scheduled .
Data center/AI testing: Hyperscaler polarization module blanket order; stress-testing for polarization sensitivity; likely AI-related demand .
Book-to-bill: ~1.1–1.2 in Q2, expected to sustain or be higher in Q3 given multi-unit orders and longer sales cycles .

Estimates Context

S&P Global consensus estimates were unavailable via our tool due to a Capital IQ mapping limitation; as a result, we cannot quantify beat/miss vs. Street for Q2 2023. Values would normally be retrieved from S&P Global.
Directionally, Q2 revenue came in within the company’s prior Q2 guidance range ($29M–$31M), and FY23 revenue/adjusted EBITDA guidance was reaffirmed; Q3 revenue guide was set at $29M–$32M .

Key Takeaways for Investors

Mix-shift story: Projects are driving top-line growth but compressing gross margin in the near term; as THz scales and manufacturing migrations normalize, margins should trend toward ~60% again into Q4/early next year .
Sensing momentum and EV optionality: Strong distributed sensing wins and triple-digit THz growth (EV battery monitoring) provide multi-year growth visibility .
Larger orders improving visibility: Multi-unit/blanket orders (hyperscaler polarization modules; defense sustainment) and book-to-bill >1 support H2 revenue inflection, albeit with timing risk .
Reaffirmed FY guide with conservative tilt: Management is “more comfortable at the low end” on timing of project revenue recognition; Q3 guide anchors near-term expectations .
Watch defense/government spending cadence: Delays weighed on Comms Test; new fiscal year and typical Q4 seasonality could support sequential improvement .
Balance sheet discipline amid inventory build: Working capital rose to $63.8M; total debt at $30.7M—monitor inventory normalization and cash conversion into H2 .
Emerging AI data center tailwind: Early signs of AI-driven test demand (hyperscaler blanket order) could augment Comms Test as inventories normalize .

Appendix: Additional Data

Q2 2023 P&L detail (from press release)

Revenue $29.164M; Gross Profit $16.865M; Gross Margin 58%; Operating Loss $(0.214)M; Operating Margin (1)%; Net Loss $(1.596)M; Adjusted EBITDA $2.732M; Adjusted EPS $0.04 .
Six-months YTD revenue $54.209M; Adjusted EBITDA $3.586M .

Balance sheet and liquidity

Cash & Equivalents $3.277M; Working Capital $63.8M; Total Debt $30.7M .

LUNA INNOVATIONS INC (LUNA)·Q2 2023 Earnings Summary