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LUNA INNOVATIONS INC (LUNA)·Q3 2023 Earnings Summary

Executive Summary

  • Q3 2023 revenue was $30.7M (+5% y/y), gross margin 57%, adjusted EBITDA $4.2M, adjusted EPS $0.07; GAAP EPS was $0.01 .
  • Communications Test rebounded strongly (+26% y/y), while Sensing declined 6% y/y on tough terahertz comps and project timing; product mix pressured margins .
  • FY2023 revenue guidance was lowered to $120–$125M (from $125–$130M), while adjusted EBITDA guidance was maintained at $14–$18M; management cited customers “tapping the brakes” on project timing into year-end .
  • Liquidity improved: cash rose ~$3M sequentially to $6.0M, working capital reached $65.2M; total debt was $31.9M as the company utilized its revolver to support operations and inventory amidst supply chain constraints .
  • Potential stock catalysts: hyperscale data center win tied to AI data center testing, record ODiSI demand, and expected F-35/F-22 orders; offset by lowered FY top-line guide and macro-related project delays .

What Went Well and What Went Wrong

What Went Well

  • Communications Test delivered 26% y/y growth, aided by recoveries vs. Q2 and strength in RIO lasers (LiDAR/sensing) and polarization modules across defense, quantum, and medical applications .
  • Record ODiSI high-resolution sensing sales (+72% y/y), driven by strong demand and an infrastructure project requiring multiple systems; multiple wins across pipeline monitoring, seismic DAS instruments, and power cable monitoring .
  • Strategic hyperscale data center contract positions Luna’s technology to test optical sockets in parallel, enabling large-scale AI data center deployments; management believes “it has legs” with a growing sales funnel .

What Went Wrong

  • Sensing revenue fell 6% y/y due to tough terahertz comps and timing of large backlog deliveries; elongated customer sales cycles weighed on the quarter .
  • Gross margin declined to 57% (vs. 58% y/y), primarily on product mix; operating income contracted y/y to $1.2M (from $1.5M) .
  • FY revenue guidance was cut to $120–$125M as certain customers slowed project execution late in the year, pushing deliveries/installations across periods and increasing revenue timing uncertainty .

Financial Results

Consolidated Results vs Prior Quarters and y/y

MetricQ1 2023Q2 2023Q3 2023
Revenue ($USD Millions)$25.045 $29.164 $30.703
Revenue YoY Growth %+11% +11% +5%
Gross Margin %60% 58% 57%
Operating Income ($USD Millions)$(2.132) $(0.214) $1.152
Adjusted EBITDA ($USD Millions)$0.854 $2.732 $4.172
GAAP EPS ($USD)$(0.06) $(0.05) $0.01
Adjusted EPS ($USD)$0.00 $0.04 $0.07
  • Drivers and context: Product mix drove lower gross margin y/y; Communications Test recovered vs. Q2; Sensing was pressured by timing/tough terahertz comps .

Segment/Business Commentary (quantitative where disclosed)

Segment/TopicQ1 2023Q2 2023Q3 2023
Sensing revenue YoY changeNot disclosed; cited strong terahertz demand Not disclosed; project-based solutions grew −6% YoY (timing, tough terahertz comps)
Communications Test revenue YoY change“Strong, double-digit” growth cited (no % disclosed) Pressured by broader communications market +26% YoY; recovery vs. Q2
ODiSI high-resolution sensingNot disclosedNot disclosed+72% YoY; record sales
Hyperscale data center testingNot disclosedSeven‑figure blanket order for polarization modules from major hyperscaler Announced “large contract” with major technology provider; scalable across AI data centers

KPIs and Operating Metrics

MetricQ1 2023Q2 2023Q3 2023
Gross Profit ($USD Millions)$14.973 $16.865 $17.629
Operating Margin %−9% −1% 4%
Working Capital ($USD Millions)$57.3 (from slides) $63.8 (from slides) $65.2
Cash & Equivalents ($USD Millions)$3.6 $3.3 $6.0
Total Debt ($USD Millions)$25.2 (from slides) $30.7 (from slides) $31.9

Actual vs Guidance (near-term)

MetricPrior GuidanceActualNote
Q3 2023 Revenue ($USD Millions)$29–$32 (guided on 8/10/23) $30.703 Within the guided range

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total RevenueFY 2023$125M–$130M $120M–$125M Lowered
Adjusted EBITDAFY 2023$14M–$18M $14M–$18M Maintained
  • Rationale: Certain customers slowed project execution late in the year, shifting delivery/installation timing and revenue recognition across periods; large project-based orders in backlog can swing between quarters .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
AI/data centersSeven‑figure blanket order for polarization modules from a major hyperscaler (Q2) Large hyperscale data center contract; parallel high‑speed optical socket testing enabling AI data centers Strengthening adoption and pipeline
Supply chain/inventoryNoted foundational work; no specific issues (Q1) Still dealing with supply constraints; inventory up vs. 2022, managed turns; opportunistic purchases when inputs available Ongoing constraints but improving sequentially
Terahertz/EV batteriesStrong order wins for EV battery process monitoring (Q2) Tough y/y comp, but backlog/bookings strong; capacity expansion quantified at ~4x Capacity expanding; backlog supports growth
Communications TestQ2 headwinds from broader communications market (pressure) +26% y/y; segment recovery and visibility into next few quarters Recovering, sustainable per mgmt
International expansionNamed MD for EMEA (Q2) >1/3 employees outside US; >50% revenue outside US; adding EMEA leadership Building EMEA presence and global footprint

Management Commentary

  • “Q3 was a solid quarter for us in spite of macro headwinds… our sensing business was pressured… our communications test business had a strong quarter” (Scott Graeff) .
  • “We’re revising our top line guidance to total revenue of $120 million to $125 million… customers tapped the brakes… we’re still moving forward, just more slowly” (Scott Graeff) .
  • “Gross margin of 57%… decrease driven primarily by product mix; OpEx down ~3.5% sequentially via One Luna cost efficiency initiatives” (George Gomez‑Quintero) .
  • “Cash increased nearly $3 million sequentially… working capital $65.2M… total debt $31.9M, including $12M revolver draw” (George Gomez‑Quintero) .
  • “Record ODiSI sales (+72% y/y)… multiyear pipeline monitoring service contracts, seismic DAS wins, UAE DAS/DTS orders, global supply partnership renewal” (Scott Graeff) .

Q&A Highlights

  • 2024 outlook: Management reiterated prior views; delays push into Q4/2024 but no change in underlying 2024 expectations (tone intact) .
  • Communications Test sustainability: Visibility suggests the rebound is sustainable, not a one‑off .
  • Terahertz/EV battery: Backlog/order book strong; capacity expansion quantified at ~4x, with deliveries expected to finish the year on a high note .
  • AI/hyperscale data centers: New solution enabling parallel testing across many optical sockets; “has legs” with a growing funnel .
  • Defense programs: Expect large OBR 6200 F‑35 order in Q4; F‑22 customization underway with deliveries next year .
  • Cash/working capital: Harvesting pattern continues; larger Q4 revenue expected to drive strong cash generation .

Estimates Context

  • S&P Global Wall Street consensus estimates for Q3 2023 were unavailable for LUNA due to a mapping issue in the SPGI data source; as a result, explicit revenue/EPS/EBITDA consensus comparisons cannot be shown here. Values retrieved from S&P Global were unavailable.
  • Implication: Sell‑side models likely lowered FY2023 revenue toward $120–$125M following the guide cut, while adjusted EBITDA ranges remain intact; near‑term estimate revisions should reflect timing delays rather than demand degradation .

Key Takeaways for Investors

  • Mixed print: Top‑line up 5% y/y and within Q3 guidance, but gross margin down on mix; adjusted EPS $0.07 and adjusted EBITDA $4.2M provide resilience .
  • Segment divergence narrowing: Comms Test recovery (+26% y/y) offsets Sensing timing pressure; management sees sustainable trajectory ahead .
  • Guide cut driven by timing: Customers slowed project execution late in the year, pushing revenue recognition; EBITDA guide unchanged—margin discipline and backlog offer cushion .
  • AI/data center optionality: Hyperscale win and strong polarization module demand create upside exposure to data center/AI capex cycles .
  • Defense pipeline: Expected F‑35 orders and F‑22 customization support visibility into 2024 deliveries .
  • Liquidity and balance sheet: Sequential cash build, ample working capital, and revolver flexibility to manage supply chain inventory timing .
  • Near‑term trading setup: Watch for Q4 cash generation and order timing (F‑35, terahertz), while monitoring backlog conversion and any additional macro‑related delays cited by customers .

Non‑GAAP Notes

  • Adjusted EBITDA and Adjusted EPS exclude share‑based compensation, integration/transaction costs, amortization and other non‑recurring items; reconciliations are provided in the press release and supplemental slides .