Good afternoon and welcome to the Q3 2022 Luna Innovations Incorporated Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. Please be advised that today’s conference is being record.

I would now like to turn the conference over to Allison Woody, Director of Administration. Please go ahead..

Thank you. Good morning and thank you for joining us today. After the stock market closed today, we issued our third quarter 2022 earnings press release. In addition, we posted the Investor Relations section of our Web site a presentation and supplemental information for the quarter.

If you do not have a copy of the release or the supplemental materials, please check our Web site at lunainc.com. We will also post a replay of this call to our Web site. Some of our comments and discussions today are based on non-GAAP measures. These adjusted numbers exclude the effect of certain non-cash expenses and other items.

The adjusted results are a supplement to the GAAP financial statements. Luna believes the presentation and exclusion of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance.

Before we proceed with our presentation today, let us remind you that, statements made on this conference call as well as in our public filings, releases, and Web sites, which are not historical facts, maybe forward-looking statements that involve risks and uncertainties and are subject to changes at any time, including, but not limited to, statements about our expectations regarding future operating results or the ongoing prospects of the Company.

Actual results may differ materially as a result of a variety of factors. More complete information regarding forward-looking statements, risks and uncertainties is available in the Company's SEC filings, which can be found on the SEC Web site and our Web site.

We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments, except as required by law.

After our prepared remarks, Scott Graeff, our President and Chief Executive Officer; along with Chief Financial Officer, Gene Nestro; and Chief Operating Officer, Brian Soller, will be available to take your questions. And at this time, I’d like to turn the call over to Scott..

Good afternoon, everyone, and thanks for taking the time to join our call. I'm excited to be with you today announcing quarterly results, demonstrating strong top and bottom-line growth and progress against our operational goals.

This quarter's strong performance underscores that, we have the right long-term strategy and that we are continuing to capitalize on the opportunities in front of us. On calls during the first half of this year, I outlined how the investments we have made and continue to make are critically important to setting us up for future growth.

These include investments in both infrastructure and systems as well as adding capabilities through our recent acquisitions. You will see some of the benefit of those investments and acquisitions start to come to fruition in this quarter's results.

To support future growth, I've made some internal changes, adding Eva Hartmann as Head of Human Resources, naming Brian Soller as Chief Technology Officer and EVP of Corporate Development, and moving Jackie Klein, Head of Operations and Salvan Farooqie, Head of Sales, to report directly to me in addition to Gene and Alison.

We have a strong executive team now in place to help us to grow Luna into the future. On earnings calls earlier this year, you may remember that I mentioned we still have some work to do in our project-based business [Audio Gap] OptaSense and LIOS, which in prior quarters had experienced delays in several large customers taking delivery of products.

I'm happy to say that, most of the delayed projects are back on-track, meaning we are able to complete the install and book the revenue in the corresponding quarter. In addition to creating customer stickiness, these larger project-based sales give us good clarity into future shipments.

Our book-to-bill for Q3 helps us to feel confident about reaffirming our 2022 outlook, more on that in a moment. Gene, Brian and I each visited our overseas operations recently, and in fact, I just returned from a visit to both our German and UK offices.

The team is excited about the growth opportunities and leveraging Luna's assets to create that customer stickiness. And it is clear that, there is a great deal of value to be unlocked in the combination of assets and IP from LIOS and OptaSense and the existing assets at Luna.

We remain very optimistic about the increasing potential in these assets and excited about the future. With that, I'd like now to move on to discuss highlights of the third quarter financials, and then provide an update on operational accomplishments.

For the third quarter of 2022, total revenues were up 43% to $29.2 million compared to the prior year's quarter. On a constant currency basis, revenues were $30.1 million or up 48%. On a purely organic basis, our total revenues grew 25% in Q3 2022 versus the prior year period.

For the first nine months, revenues were up 23% versus the same period in 2021. On a constant currency basis, total revenues increased 25%. We continue to experience strong demand for our Luna products. In fact, we realized robust bookings growth in the third quarter 2022 versus last year.

Our gross margin was 58% versus 62% in the prior year third quarter, while gross profit increased in Q3 '22 versus last year. The decline in the margin rate was largely due to product mix based on the project based sales I mentioned earlier. We do however expect that the blended margin rate for the full year 2022 will normalize somewhere around 60%.

We've reported adjusted operating income of $4.2 million for Q3 '22 versus $1.7 million for Q3 '21. Adjusted EBITDA was $4.5 million in Q3 2022, more than double compared to last year's adjusted EBITDA of $2.1 million. And finally, adjusted EPS was $0.09 per share, tripling to $0.03 we reported in Q3 2021.

Before I move to talk about the businesses in more detail, I want to emphasize the great work and the challenges that the team has work to mitigate, if not overcome completely so far this year. Our mission remains the same.

To build our capability as a company with blue chip customers and to solidify Luna as a clear leader, fully focused on enabling the future with fiber. We will continue to invest capital in our businesses through this year and beyond, because as I've said in the past, the opportunities are virtually limitless.

And as always, we will continue to be prudent managers of our expense structure. But it's all about investing in the right areas at the right time and capitalizing on opportunities for rapid sustainable growth. Now let me discuss the businesses in more detail.

As a reminder, Luna reports as one segment that our capabilities fall into two categories, Fiber Optic Sensing and Communications Testing. For the third quarter 2022, our revenue growth was driven by a full quarter of LIOS contribution and solid sales in the legacy businesses of sensing and comms test.

As I mentioned, our bookings growth once again exceeded our revenue growth in Q3 2022. So, let's first discuss sensing, where we use the fiber as the physical sensor to create a smart materials and structures.

This includes ODiSI for short range high resolution applications, HYPERION for long range discrete applications, DAS acquired through OptaSense for long range continuous acoustic monitoring.

DTS acquired through LIOS for long range continuous temperature and strain monitoring and Terahertz a technique that leverages fiber technology to produce terahertz wave used to measure layer thickness and density of opaque materials.

We achieved very strong double-digit growth in revenue versus Q3 last year, driven both by a full quarter of LIOS as well as strong demand for legacy Luna products. In fact, Luna legacy, ODiSI, HYPERION and Terahertz product lines each contributed strong double digit sales growth.

Our progress relative to strategic growth areas within sensing continues to yield results. We achieved several key strategic wins in Q3 in infrastructure, security and energy markets.

And bookings for Terahertz more than doubled in Q3 2022 versus the same quarter last year and is up strong double digits for the first nine months of 2022 compared to the prior year period.

While Terahertz revenues remain a smaller fraction of our total sensing revenues, the growth we are experiencing these applications is a strong indicator that our strategy to get out of the lab and focus on growth and higher volume production and monitoring applications is starting to have a positive impact.

Our distributed fiber sensing solutions contributed strong double digit revenue growth in Q3. As we mentioned on our last call, we experienced project delays that pushed approximately 2.8 million in this segment to the second half of the year, some of which we recognized in Q3.

We continue to streamline the LIOS and OptaSense' project based sales approach as the assets continue to become fully integrated into Luna. Our Q3 results are proof positive that we are making strong progress and these acquisitions continue to be a key strategic part of Luna's overall offerings and growth.

I wanted to highlight a few key wins in sensing as we continue to experience market acceptance and adoption of our fiber sensing technology into monitoring applications for critical infrastructure.

We won a project for a large offshore wind farm that combines both our DAS and DTS solutions to monitor the high voltage cables for safety and operability, adding significant value to the overall operation. We won an international airport perimeter security project in Eastern Europe adding to our list of major infrastructure security wins.

We are monitoring significant size perimeter with a single redundant system that provides early warning of intruders to cameras in real time. We were awarded a contract to monitor a water storage tank farm in the Middle East where water is a precious commodity and these sites are critical to a nation's water operation.

We continue to provide security systems for oil and gas operators in high risk operating locations with new awards in the Middle East at well pad sites for perimeter security.

We won a leak detection contract for a water pipeline in the Western U.S., oil and gas operations produce significantly more water than oil from the ground, and this often toxic byproduct needs to be piped away and disposed of correctly.

After some recent high profile leaks that were costly and controversial, the industry is seeking to better monitor these lines with leak detection, fiber optics and specifically Luna's unique products are one of the few technologies that can handle the highly transient nature of these pipelines.

And finally, the continued successful penetration of industrial process monitoring markets with our Terahertz product as I mentioned earlier. Moving to comms test revenues grew as expected in Q3 2022. We made strong progress from an operational standpoint.

As a reminder, this area includes our high end line of communications test products such as the OVA and OBR, as well as our polarization measurement and control suite and the RIO laser business that we acquired through OptaSense.

With the addition of recent acquisitions, this business is now approximately 50% test and measurement and 50% optical components and laser modules, the latter of which are used for a variety of photonic applications such as medical devices, sensing systems, and lidar.

On our last call, we discussed a major win for our fiber test equipment securing a large multi-unit OBR 6200 order with Lockheed Martin in continued support of the F-35 aircraft. Deliveries of these units began in Q3 and will continue through year end.

We are expecting significant further follow on orders for this application soon, and we'll keep you updated on our progress as this is an important element of Luna's growth within the comms test area.

Another very important highlight for this segment includes our announcement last month that we signed a $14.2 million multi-year contract with our longstanding partner, Intuitive Surgical.

This new agreement provides for the supply of critical photonic subsystems manufactured by Luna and specked in as part of the FDA approval process for Intuitive's next-generation robotic surgical system.

This is a great example of how many of our products are becoming critical components in large and growing market applications such as surgical robotics, and it speaks directly to our growth potential. We are excited to expand our relationship with Intuitive Surgical and support its visionary leadership in improving human health and surgical outcomes.

Luna is honored to help advance this leadership by supplying critical technologies over the years to come.

And finally, within comms test, we also had solid double digit sales growth in Q3 2022 for Luna’s polarization modules driven by strong sales associated with the intuitive surgical contract that I just mentioned, as well as strong sales of our gyroscope coils for military navigation applications.

I want to provide an update on the ongoing effects of the supply chain challenges. We are still experiencing pandemic cause delays in supply chain, and particularly in printed circuit assemblies. Delays are specifically caused by semiconductor part availability, combined with increasing lead times and prices.

The Luna team continues to manage this as best as possible, including design changes to replace unavailable components and pre-ordering in larger quantities than we would have in the past.

So, while there is significant demand for customers for Luna's products, we have felt and expect to continue to feel the effects from sourcing of semiconductor parts in order to complete customer orders. The industry consensus is that these shortages will continue into 2023.

We believe we have sufficient supply to fulfill customer orders for the near-term and are working hard on managing this impact as much as possible. While we aren't prepared to talk to provide 2023 guidance until our Q4 call, with only two months left to go in the year, I did want to highlight three areas of focus for us next year.

First, we are actively exploring new markets to add growth long-term, more than that in 2023. And as I've said many times in the past, the options for our technologies are virtually limitless. It is up to us to prioritize and capitalize on those opportunities appropriately.

Second, we continue to make progress on integrating systems from the various acquisitions. We are driving hard to complete what we call One Luna. And third, we are starting to see our strategy pay off, as we consistently win larger orders as we have discussed over the past several years and expect this to continue into next year.

A few recent examples of large customers that will move the needle for Luna in 2023 include Lockheed Martin, Northrop Grumman, Airbus and Intuitive Surgical. We remain committed to serving these partners and all of our customers with excellence.

And our sales teams will continue to be trained and incentivized to sell a Luna suite of solutions as opposed to simply individual products. In summary, this quarter underscores the customer demand for Luna's products remains strong despite ongoing global challenges with supply chain and sourcing.

And while I am very pleased with the third quarter results and proud of the Luna team, I also know that we can't rest on these results. As I mentioned on last quarter's call, we still have some work to do to grow profitability, particularly of the acquisitions at a pace that is acceptable to both me and my executive team.

This quarter's results are a good start to getting there. You should know me well enough by now, to know that I'm never satisfied and the team and I will keep pushing the organization to execute against our long-term objectives to capitalize on opportunities and to perform to excellence, while delivering strong growth to our shareholders.

Bottom-line, we continue to focus on blocking and tackling and accomplishing our goals. So with only two months of the year left and three quarters behind us, we feel comfortable reaffirming our outlook of total revenues of $109 million to $115 million and adjusted EBITDA of $10 million to $12 million.

I do want to make one observation about the size of the revenue range. As you are aware, our recent acquisitions primarily include large, project-based orders. While already these transactions are already included in the backlog, the timing of the installation is largely controlled by our customers.

Therefore, the revenue recognition can swing from one period to the next. This means that even with just six weeks left to go in the year, revenue could shift to 2023 and is why we are keeping a broad revenue range. I'll now hand the call to Gene for more of the financial details.

Gene?.

Thank you, Scott. As a CFO, it's always a great quarter when you don't have a lot to explain, and I'm very pleased that this quarter is just that, a straightforward quarter with excellent results.

Q3 represents what we have been working so hard to accomplish during the past 18 months and gives you a glimpse of what kind of growth and results Luna is able to accomplish now and in the future on a more normalized basis. In fact, it was one year ago, in Q3 2021 that we moved and classified Luna Labs as discontinued operations.

So when I provide comparison figures against last year, I'm referring to the reported numbers that exclude Luna Lab's revenue, gross margin and operating expenses. With that, let's dive right into the financials.

As Scott mentioned, our revenues for Q3 2022 were 29.2 million compared to revenues of 20.3 million for Q3 2021, representing a 43% year over year increase. A full quarter of LIOS and solid legacy Luna product performance in Q3 2022 contributed nicely to top line growth.

Our reported revenues were impacted by the dollar to euro and dollar to pound exchange rates, on a constant currency basis our revenue in Q3 2022 was 30.1 million or a 48% year over year increase. For the nine months ended September 30th, 2022 our revenue was negatively impacted 1.6 million by exchange rates.

On a constant currency basis, our nine month year to date revenue for 2022 is 79.4 million or a 25% year over year increase. Within sensing year over year revenue growth of 80% was driven by our project-based businesses, Optisense and LIOS and strong performance from Luna legacy products.

Within Comms test Q3 2022 revenue grew 6% compared to the prior year quarter. Gross profit was 16.9 million for Q3 2022 compared to 12.6 million for the same quarter last year, representing a gross margin of 58% in Q3 2022 compared to 62% in Q3 2021.

As Scott mentioned, while profit dollars grew, the gross margin rate was impacted by mix as our project based businesses were a higher percentage of total revenue. As we mentioned last quarter, we still expect to finish 2022 with a blended gross margin rate of somewhere around 60%.

Operating expenses were 15.4 million in Q3 2022 versus 12.6 million in Q3 2021, 2.3 million of this increase was driven by the OpEx of LIOS and its associated amortization. Over half of our year to date increase in operating expenses is related to LIOS including its amortization.

I indicated on last quarter's call that Q2 2022 was a high-water mark for our OpEx because it was our first full quarter with LIOS and didn't reflect the impact of cost synergies, we began implementing.

The reduction in OpEx this quarter versus last year was largely due to the result of swift and preemptive measures taken proactively to reduce expenses.

We continue to focus on identifying areas of opportunity for increased expense efficiency without sacrificing infrastructure, product quality, or customer support and we are working to create a nimbler and more efficient Luna. Moving on, we recognized operating income of 1.5 million in Q3 2022 compared to an operating loss of 10,000 in Q3 last year.

Net income for Q3 2022 was 1.2 million or $0.04 per share compared to net income of 355,000 or $0.01 per share for Q3 2021. And finally, adjusted EBITDA was 4.5 million for Q3 2022 versus 2.1 million for Q3 2021 and adjusted EPS was $0.09 per share for Q3 2022 versus $0.03 for the prior year quarter. Let me move now to the balance sheet.

We ended the quarter with approximately 7.9 million of cash and cash equivalents compared to 17.1 million at the end of 2021. The decrease was largely due to the purchase of LIOS, a proactive buildup and short-term inventory to minimize supply chain disruption and the planned expansion and consolidation of production for Terahertz products.

I'm proud to highlight here that the team has never missed a customer shipment date, even through the pandemic. They've done an extraordinary job managing supply chain challenges. Our working capital was 46.7 million on September 30, 2022 compared to 49.8 million on December 31, 2021.

At the end of the third quarter 2022, we had total debt outstanding of 21.7 million, of that amount 19.5 million is in term debt and 2.2 million was drawn on our revolver.

Investments over the past five years have all been funded by using our balance sheet through cash and bank debt, and we have access to approximately 14 million in a revolving credit facility should we need it.

Given the points made by Scott about revenue recognition and project based order shifting, I am comfortable reaffirming the guidance discussed earlier. We continue to focus on blocking and tackling the drive long-term growth, while being prudent about expense management, particularly in light of the current economy.

However, we will continue to invest where we believe it will generate growth opportunities for Luna long-term. With that, I turn the call back over to Scott..

Thank you, Gene. At this time, Brian, Gene and I are available for questions. So Chad, please open the call for Q&A..

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Alex Henderson from Needham & Company. Please go ahead..

Congratulation guys, nice print. Certainly, it's a lot better than some of the other prints I've seen over the course of the quarterly printing period.

I wanted to ask you specifically about the contest piece to what extent you might have seen any change in demand there particularly after watching the [indiscernible] print where they held an analyst day on the 14 of September, and then promptly, missed the quarter after saying they were on track for the quarter and guided down sharply as a result of pull in on telecom contest investments.

So I was curious if you'd seen any change in the trajectory of that business?.

Alex, thanks for the comments, and in regards to this, we see strong demand. We stay very in touch with, out in front of customers, with our sales folks, with our vendors and things like that. And we see strong support. I mentioned that Northrop Grumman and Lockheed Martin are still driving very fast. We've had some other companies in here.

It's really driving forward with what we're seeing that we had backlog $2.5 million that we brought in and continue to see strong demand. I listened to that call, and I was a little perplexed with what they said mid-September and then how they finished the end of the quarter.

So, they must have been counting on us some things that may be slipped, but it was unusual..

That's an OpEx spend, is it out of OpEx or is it more out of CapEx?.

I'm sorry, Alex, you broke up there.

Can you say it again?.

Yes. So with respect to [indiscernible] most of their -- has come in from the OpEx side of the enterprises that they are working with.

Is your sales coming out of OpEx or is it coming out of the CapEx budgets for your clients?.

Yes, Hey, Alex. This is Brian. We're definitely on the CapEx side. So the test equipment cycle flows through our customers CapEx budgets. So that's part of the reason why.

The other thing we are seeing in that business is, don't forget, as Scott mentioned in his remarks that the business is 50% communication test equipment and 50% modules and lasers for a variety of different industries. And we had book-to-bill in that quarter of over two.

So, the growth was a little light based on some timing things, but the bookings were strong..

Yes. Keep in mind, Alex, two point five book-to-bill factors in some of that large Intuitive order. I think it was what was it normalized without that. It was still 1.2 or so, somewhere in that range. So, 1.2, which we are proud of it, 1.2. 2.5, I would have to qualify that 2.5 with that larger order.

But yes, you'd love to see $14 million that's going to come in over the next 18 months or so..

Totally impressed. Thank you so much..

Thanks now. And the next question will be from Chris Sakai with Singular Research. Please go ahead..

Hi, Scott, Dean and Brian, I think I might know the answer to this question or what you are going to say.

But of the revenue growth this quarter, can you give any color as to how much was from OptaSense and how much was from LIOS?.

Yes. We really don't manage the business that way. Those two are so synergistic together we really look at that European project based revenue kind of together. With the DAS systems and the DTS, I talked about an opportunity with Dominion Energy here in Virginia where we are doing the offshore wind farms and the cabling of that.

And that included both DTS and DAS, and we just ran it through one of -- for example, we just ran that through one of the organization. So, it's hard to answer that, Brian. I don't know if you have a clear answer. I don't look at it that way. The way it comes up to me is a blended..

Yes. So we had -- Hey, Chris. This is Brian. We had about 80% growth in that sensing segment, but half of that came from the additional LIOS revenues so the other half was organic, driven actually pretty strongly by OptaSense that had a good quarter..

Okay. Thanks. That's good to know.

And then, can you discuss or share any color about how the contract with Intuitive Surgical, how long-term is that that you mentioned? And do you see any more similar partnerships like that in the future?.

Yes. Intuitive is a long relationship that we have had for, gosh, over 15 years. And we divested that technology out, I guess, probably 2014 or so. And so they have continued -- they have to buy kind of the laser module back through us that goes into their system. So like I talked about, we are specked into their robot that's out there.

The robot, this next generation robot, they call it Ion, that is only right now being sold in North America. So when you look at the $14 million, which is probably over about an 18 month period that's just for North America.

But being specked into an FDA approved product gives us comfort that we're doing something right, really working with them and getting that over them. We do have several, I've talked about it on other calls certainly that we talk about having about a half a dozen of those type of relationships that are in the red zone.

Now, how long it takes to get from the red zone into the end zone that varies. But what we do have a handful of those and have talked about the hopes of 15, 20, 25% in the future in the next two, three, four years going into a year and having that bigger percentage of our revenue in these blanket deliverable type of orders.

So we certainly see more of them. I mentioned, Lockheed Martin, Northrop Grumman, we talked about in the future Airbus providing the solutions on the A320 and certainly Intuitive plays a large role in that as well. So, there's several of these that are hanging out there that we're driving to get them closed.

So that really is, was an initiative of ours to get kind of I talk about being out of the lab, doing the onesie, twosie sales to really doing the dozen or 50 or a 100 of these unit sales.

That's the key to the growth that really is the key to the growth when you get specked in with these larger opportunities and then you get those recurring every year..

Okay, thanks. Thanks for that.

And then what drove operating expenses lower in the quarter as compared to a year ago?.

They weren't than a year ago. It was quarter on quarter..

Sorry. As a percent of revenue, I believe..

Oh yes, yes. As a percent of revenue, you're going to see those as a percent of revenue, Chris, you're going to see those gradually start to decline cause there's a portion of those that are fixed, particularly like the amortization and some of those other things, variability really is commissioned.

So when you see our revenue go higher, you're going to see a certain portion of OpEx go up because of commissions.

And again while we will go forward and add people as we grow, in the last few quarters, as I mentioned, we did put in a profitability type of plan where we were managing our head count to levels that are appropriate based on the fact that we had three companies coming together. So there was, initiatives put in place to lower it as well..

Yes, I mean, Chris, when I look at, the, the proactiveness that we took in Q2 after consummating, the acquisition of LIOS and the divestiture of Luna Labs in March of this year.

We talked about it on the last call of us being proactive in the reduction of how we probably have peeled back maybe 7%, 8% of our workforce back in the end of Q2, primarily due to some of the acquisitions and redundancy of positions. But we really were trying to be proactive and like Gene said, managing that profitability.

I mean, everyone wants, and we talk about this, 15 to 20% top line growth, but we believe that it's very important for that growth to be profitable growth. And we felt like, and Genes went out there and said Q2 OpEx was definitely a high watermark for us. And that's why you saw that reduction from Q2 to Q3.

And you see modest growth from Q3 of last year to Q3 of this year.

We talked about last year, if you take out the LIOS OpEx out of that, we talked about, we felt like we had the OpEx level that could sustain additional growth that we didn't need maybe the OpEx was a little bit ahead of the revenue that we saw coming, and I think you see that come to fruition here in Q3..

Yes. And Chris, what we target when we do our budget is we will, we target to grow our OpEx at half the growth rate of revenue. So if revenue is targeted to grow 20%, we would target to grow OpEx of 10%. And just the math of doing that falls more through the bottom line.

Now, what you will see quarter to quarter you will see slight movements here and there as certain projects that we're doing or, or certain things like that. So quarter to quarter, it's not an exact percentage, but certainly when you look at a full year, we expect that to be coming down as a percentage of revenue..

Yes, not the first time you heard from me, Chris, and we've done it on one-off calls and on these earnings calls. We have a, if you walked around our office, you see the 2006, 20 numbers sitting around and that really is the 20% growth, the 60% growth margin and ultimately the 20% pull through to that operating income.

We have to adjust it due to some of the things that Gene talked about in relation to the acquisitions. But we're not -- we are -- as you see from this quarter we can see, we talk about the organic growth being the 25% the other growth being close to 50%. We do see that organic growth that can be in that 15% to 20% range. We know the 60% gross margin.

We have some work to do to get to the 20 on the adjusted operating income. But you can see sitting at wherever it is this quarter, somewhere in that 15% range that we really are seeing the benefit of some of the things that we've done here in the past..

[Operator Instructions] The next question is from Dave Kang from B. Riley FBR. Please go ahead..

First question is regarding some of the verticals that you serve.

Can you tell us which verticals are strong, which ones are not, that giving you some headache?.

Well, the verticals that we talk about from the sensing and the communications test?.

Yes..

Yes. Well, as you saw from this quarter both of them were strong in this quarter, both the communications tests from a lot of the everyday business that has grown organically to some of the larger deals with the intuitive surgical, the Lockheed Martin, the Northrop Grumman. We see a lot of strength on that communications test side.

And this quarter we saw a lot of, some of the slippage that happened throughout the year that that came to fruition on the sensing side, uh, business as well. So, we've seen -- we really see strong growth this quarter. We saw strong growth in both of those verticals.

Brian, do you want to add in any more to that?.

Yes, sure. I mean, you saw the growth numbers for the two. So the sensing side of the equation definitely came on strong here in Q3 with that level of growth. And as I said, half of it was organic.

So we have talked on previous calls about that project businesses, taking a little bit of time to normalize to our way of doing business at Luna, and we are starting to see that now. And Q3 was a good example of that. And then in the communications test vertical, where we had lower revenue growth in the quarter still grew.

We are seeing a lot of strength there, especially in the order books. So timing wise, didn't quite flow through in Q3, but we have intuitive search forward falls into that category and that's a big one. But we had other large orders in the quarter as well.

And as we said in the remarks, we are expecting another follow on order for our test equipment for the F-35 aircrafts. So we are seeing good indications of continued strength there as well. So, yes, as Scott said, it was pretty strong in both..

Yes. I mean, and I talked about on last quarter's call Dave, about the IDIQ that we will enter into and are in the final stages almost at the signature stage of signing that IDIQ with Northrop Grumman and Lockheed Martin regarding the F-35. So that kind of locks us in.

We like where we have been able to hold our margins on that at much, much larger quantities, and I think that contract will span over a three to five year period. So very excited about that..

Got it. And then just a couple of questions regarding Terahertz.

Are we still getting just like the 1V to 2V? or finally, are we getting some kind of meaningful volume orders?.

Yes, we are seeing larger orders in that. I mean, as we -- I've talked about in the past, it always starts out with one or two, then it turns into five or six. And when it gets specked in and it continues to deliver a lot of the opportunities we are working with now, larger orders that require kind of hot spares.

And these are on manufacturing lines that are out there. There is a reason why we are moving production to our Atlanta office. It's all set up. It's in the process. It will be fully integrated by the end of the year into Atlanta.

And that was going from -- and I've talked about this in the past, one a week, we are now at two a week and striving to shortly within the next quarter to be at four a week. And so that is tremendous growth and it's because we have the backlog already in place. We're quoting Q3, Q4, 2023 on any orders that we're taking.

So the backlog on Terahertz is all there..

And can you remind me what kind of margins they have? Is it above or below corporate average?.

They are right around the average, maybe kind of mid-50s, right, Brian, it's somewhere in that..

Yes. Actually, the team has done a fantastic job getting some of the touch time labor out of assembly. So that's trending north of the corporate average..

And as you can imagine, all the big buzz names out there that you can imagine we are working with, really try to drive your price down when they say, they are going to place an order for larger quantity.

But we -- once and you start getting spec into there, we really do have some -- try to have some leverage at least with holding tight with those margins. So if we were selling a one-off, one-off is clearly in line with the comp, the corporate average.

It's when you get into larger quantities can you hold the line on that margin? And I think we've done a great job of doing that..

Got it. And then earlier you said, moving into our manufacturing line.

So have you moved into the, that battery for EV? I mean, are we in the manufacturing or still kind of to the side at this point?.

We are in manufacturing currently, and that's one of the, that's the biggest growth driver for this product line this year. There are others coming behind it in other industries, but yes, no, we're in production and we're developing delivering systems for that application today..

Got it. And my last question is, I think earlier or last quarter, I think you said that you were planning four times a capacity expansion.

Is that still the case or maybe up to something higher, or what's the plan on that?.

Oh, I didn't hear the question..

We are still planning on implementing four times the capacity. Yes..

Oh yes, yes, yes. I'm sorry. Yes, Dave, we're at two. So, we've doubled capacity we were one a week for earlier this year for the first nine months, we're now at two a week. And once the move is consummated and it gets up and running kind of mid next year, we will be at four a week. So we will quadruple capacity over a one year period.

Is that right, Gene?.

Yep. And Dave, to answer your follow on question, that's basically two lines, one shift. So to your point, if we need to increase it more, it's just adding another shift and training the folks up..

Got it. Thank you..

Thanks Dave..

The next question will be from Charles Knowles, a private investor. Please go ahead..

Hey, great quarter. I guess the joke of the day is, I'm sure y'all don't pay attention to this, but, stocks trading up $0.83 cents $6 a share, that was the joke. Okay.

How were the all the meetings you went to around the world the last couple of months?.

Yes, no, they were great. I think I mentioned, I just got back I got back Sunday night. So I was there all last week. Brian was there probably 30 days ago, and I would say maybe, maybe a month, couple weeks, yes, a couple weeks before after that. So, we do divide and conquer rather than all three of us rolling in there at the same time.

Brian will for a week to 10 days, Gene will go for a week to 10 days, and I go, so to meet with different people, get, let folks ask different questions and things like that. So really trying to rally the team together, we talk about this one Luna.

I don't believe that feeling like you're part of one company when you're around the world happens by accident. I think you have to work hard at that.

So we spend a lot of time, I know I spend a lot of time out in front of in the Atlanta office, in the LA office or Chino, and in San Francisco out at the office is really trying to roll out what the Company culture is really making sure people feel comfortable in asking the questions and they're excited about what the vision is.

People want to know what the strategy is and where they fit. It doesn't matter where you fit.

You may say I'm a small cog in the wheel, but people want to know what's the strategy and what does it mean to me? How can I help? So I think that only happens by being face to face going into an office and leaving the door open and welcoming in for questions and then getting everyone together.

So I think for, at least for my trip, I sensed everyone was very excited to be part of this One Luna. Gene, do you have anything to add to this..

Yes, I would say, one thing that amazed me from both places I went and I visited LIOS and OptaSense. When you start talking to the people in production or the people in engineering or customer service, all of them were very interested about Luna. All of them had great ideas for improvement.

And so, it's just a testament to the employees that we acquired their interest in the Company and their interest in all of us being successful. That is the one thing that really stuck out to me..

I was sort of meaning the different places in the world besides the companies.

Like, the Dubai, thing last week, how those events went, and it would be great if it appears on your news, on your events, but business wire, whoever doesn't pick those things up, it would be nice if on Yahoo when you went and looked at Luna saw today or this week, they're here doing this, and instead of having to hunt for it so much.

And the other thing, the other thing, I sure wish you all would get this on Zoom, that'd be a lot of fun to see your faces when you're talking about these accomplishments. That tells a lot..

Yes, no, we certainly would do that, Brian. You've gotten out a little bit and seen what the reaction Brian has expanded out to the sales force out in the field and things like that.

So you want to, do you want to comment?.

Yes, and that's good feedback, Chuck. Thanks for that. We have been very active as you've been following us globally with trade shows in the last few months. South America, Dubai, all over North America, and it's been fantastic.

And in fact, we're really hitting our stride as it relates to the combined solution set that we have with what we call kind of Luna's legacy products, the OptaSense, DAS products, and the LIOS temperature and strain products. So being able to talk to customer base about all of those things in one solution is really getting some great traction.

We announced Luna that we landed a pretty sizable offshore wind job that will start installation, early next year. And that's a combination of those products and, and so it's been great to see that. So it's going very well..

So, hey, Chuck, as my wife always says, careful what you ask for. So if you really wanted to see our face, I mean, you may not like what you get..

No, I've seen you interview, you did good..

Hey, Charles, this is Gene. I don't know if you have, it's a shame you can't get that on Yahoo, but if you have access to LinkedIn or Twitter, our folks do post a lot of the tradeshow information and things like that. And what you would want to do is follow Luna, follow LIOS and follow OptaSense. There is separate Twitter and LinkedIn for those, so..

Sounds great, well, looking forward to next question..

Yes, me too..

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Scott Graeff for any closing remarks..

All right. Thank you everyone for joining us today. Certainly feel free to reach out to Gene, Allison and Brian or myself with any questions that you have that come out of this that you just didn't have a chance to ask here or have arisen out of this call.

And I certainly look forward to seeing maybe some of you and we have several upcoming investor conferences. And again, I thank you for your time and interest in Luna Innovations. So, Chad, I'll turn it back you. And really that concludes the earnings call from my perspective..

Thank you, sir. The conference has now concluded. Thank you all for attending today's presentation and you may disconnect. Take care..