09 JAN 3 KEY CATALYSTS DRIVE LUNA INNOVATIONS IN FIBER OPTIC INDUSTRY
Luna Innovations (NASDAQ: LUNA), is a global leader in advanced optical technology, providing high performance fiber optic test, measurement and control products for the telecommunications and photonics industries; and distributed fiber optic sensing solutions that measure and monitor materials and structures for applications in aerospace, automotive, energy, oil and gas, security and infrastructure.
Market Cap: $321.71M; Current Share Price: $9.76
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Product and Service Offerings
Luna Innovations’ distributed fiber optic sensing products help designers and manufacturers more efficiently develop new and innovative products by measuring stress, strain, and temperature at a high resolution for new designs or manufacturing processes. In addition, their distributed fiber optic sensing products ensure the safety and structural integrity or operational health of critical assets in the field, by monitoring stress, strain, and vibration in large civil and industrial infrastructure such as bridges, roads, pipelines and borders.
The Company manufactures and sells “terahertz” (THz) products for layer thickness measurements for materials like plastics, rubber, and paint. Their THz products are used in the aerospace and automotive/EV sectors.
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The Company’s communications test and control products help customers test their fiber optic networks and assemblies with speed and precision in both lab and production environments. They also accelerate the development of high speed fiber optic components like photonic integrated circuits (“PICs”), coherent receivers and short-run fiber networks.
Why Luna Innovations Looks So Promising
Luna Innovations Incorporated is headquartered in Roanoke, Virginia. It was incorporated in the Commonwealth of Virginia in 1990 and reincorporated in the State of Delaware in April 2003.
Their key initiative for long term growth is to become a leading provider of fiber optic test, measurement, control and sensing equipment. Based on the following key catalysts, it seems that the Company is well on its way to achieve its goal.
Clear and Strategic Vision
Luna Innovations is on a mission to enhance the safety, security and connectivity of people by leveraging their expertise in fiber optic-based technology and the information it provides. Towards this end, the Company has followed a strategic path since its inception in 1990, and executed several well planned decisions.
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Other than the Company’s established successful history shown above, their acquisitions over the last two years deserve special mention.
With an aim to focus on core capabilities, in December 2020, Luna Innovations acquired OptaSense Holdings Limited. OptaSense, based in Farnborough, United Kingdom was formerly owned by QinetiQ Holdings Limited. It is a market leader in fiber optic distributed monitoring solutions for pipelines, oilfield services, security, highways and railways, and in power and utilities monitoring systems. The acquisition of OptaSense provided Luna Innovations with important distributed acoustic sensing (“DAS”) intellectual property and products. OptaSense’s technology and products and geographic footprint are highly complementary to the Company’s Lightwave segment and is expected to accelerate Luna Innovations technology roadmap and overall growth.
In March 2022, Luna Innovations further acquired NKT Photonics GmbH and LIOS Technology Inc. LIOS Sensing, based in Cologne, Germany and formerly owned by NKT Photonics A/S, provides temperature and strain sensing products which are highly complementary to the Company’s existing portfolio of fiber optic offerings.
In March 2022, the Company also completed the sale of substantially all of their equity interests in their Luna Labs business, which performed applied research principally in the areas of sensing and instrumentation, advanced materials, optical technologies and health sciences.
This decision, too seems to reflect the management’s commitment to expand the Company’s main business and divest the non-core interests, in order to guide Luna Innovations towards a more focused and profitable trajectory.
Consistently Strong Financial Results
For FY21, revenues increased $28.4 million, or 48%, to $87.5 million compared to $59.1 million for FY20. The vast majority of the increase in revenues was due to the revenues from OptaSense which was acquired in December 2020. Overall gross margin for FY21 was 59% compared to 61% for FY20.
During FY21, Luna Innovations realized some of the largest customer orders to date and penetrated into new geographies and markets, while implementing systems to support growth.
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More recently, in Q3 FY22, revenues for the Company increased $8.8 million, or 43%, to $29.2 million compared to $20.3 million for Q3 FY21, mainly due to the revenues from Lios which was acquired on March 10, 2022 and growth in sensing and communications test product sales. During this period, the Company also reported Adjusted EBITDA of $4.5 million, compared to $2.1 million for the prior-year period, proving that it had the ability to deliver strong financial results while still navigating a challenging supply chain and economic environment.
In general, the strategic initiatives that the Company management undertook during the last several years, have placed them in a better position to more fully capitalize on the growing 5G network communications, electric vehicle and other emerging market opportunities.
Going forward, it is expected that this growth story will continue to reflect in Luna Innovations’ financial results. This is evident from the FY22 outlook provided by the management – while total revenues are projected to be in the range of $109 million to $115 million for FY22, adjusted EBITDA is expected to be in the range of $10 million to $12 million during the same period.
The Company is also adequately capitalized to fund growth – as on September 30, 2022, the Company had $145.2M in total assets – $7.9M in cash and cash equivalents, and $46.7M in working capital. It also had total debt of $21.7M outstanding, which consisted of $19.5M in term debt and $2.2M drawn on revolver.
All investments over the past five years – in both business and in M&A – were funded by using the balance sheet through cash and bank debt. The management aims to continue to deploy capital prudently to generate long-term sustainable growth by way of increasing organic sales, reinvesting in the business and identifying inorganic opportunities.
In other words, given their current financial performance, Luna Innovations should continue to enhance their global leadership position in fiber optic technology for the foreseeable future.
Growth Explosion in Industry
There is an increasing trend towards vehicle light weighting and smart infrastructure, increasing needs for global security, and increasing demands on data centers and broadband capacity.
Currently, the total market size for Comms Test and Sensing is estimated to be around $900M and $2.5B respectively. While the key drivers for Comms Test are 5G, Silicon Photonics, for Sensing, they are Lightweighting, Smart Infrastructure and IoT.
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Luna Innovations is well positioned to take advantage of these upcoming opportunities.
As far as the Sensing segment is concerned, while fiber optic sensors are the “nerves” of smart materials. Luna’s products are the “brain” that collects and aggregates data from fiber sensor “nerves”. Moreover, recent acquisitions OptaSense and Lios acquisitions also added missing capabilities to Luna’s Sensing business, making the Company well equipped to benefit from growth in this sector.
The Comms Test sector is also poised for exponential growth, due to
- increased data and video consumption (video forecasted to represent 82% of all IP traffic in 2022, growing at 34% CAGR)
- growth in mobile and 5G (mobile data traffic growing at 46% CAGR)
- cloud services and adoption of Internet of Things (data center traffic growing at 26% CAGR, 28.5 billion IoT networked devices by 2022)
In the Comms Test segment, two Luna Innovations products deserve special mention.
The Optical Vector Analyzer (OVA) is revolutionary because it ensures speed at the chip level and unprecedented visibility inside devices. It also reduces time and cost associated with the development of high-speed optical components and enables the carriers to move to 5G networks.
On the other hand, the Optical Backscatter Reflectometer (OBR) delivers unprecedented visibility into short-haul networks and caters to the emerging market for on-board aircraft communications by ensuring network “up time” on Lockheed Martin’s F-35.
Backed by these two products and its impressive Comms test product portfolio, Luna Innovations is expected to experience significant growth in this segment as well.
To summarize, Luna Innovations is well known for its corporate culture of innovation and integrity, proprietary fiber-optic based measurement technology and presence in numerous markets including defense, communications, infrastructure, energy, automotive and aerospace. This, combined with expected growth in relevant industries, make Luna Innovations a stock to watch out for.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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