2023-03-16 21:00:50 ET
Summary
- LUNA misses on both the top and bottom lines in the last quarter.
- It's uncertain how the divestiture of Luna Labs, acquisition of Lios Sensing, and integration of OptaSense will play out in the year ahead.
- With the many changes and slowing momentum, it appears to me the company is struggling to fit the pieces together in the near term.
- Any delay in executing on its strategy and the company has the potential to significantly underperform in 2023.
Luna Innovations Incorporated ( LUNA ) took a big hit in after hour trading on March 14, 2023, as its earnings report for the fourth quarter of 2022 was uninspiring, showing signs of momentum slowing down in the reporting period, and guiding for it to slow down further in Q1 2023.
Based upon management commentary, the company won significant contracts in the reporting period, which based upon its fourth quarter performance and short-term guidance, suggests the presumed benefit of those contracts will take effect sometime after the end of the first quarter of 2023.
If that scenario is the correct one, it means LUNA stock is probably going to remain under pressure until confirmation of the impact from the new contracts hit the top and bottom lines of the company in the quarters ahead.
In this article we'll look at some of the numbers, the implication of it losing momentum, and what to expect over the next year for the company.
Some of the numbers
Revenue in the fourth quarter of 2022 was $31.7 million, missing by $0.48 million, but up 30.9 percent year-over-year, compared to revenue of $24.22 million in the fourth quarter of 2021. Full year revenue for 2022 was $109.00 million, compared to revenue of $87.5 million for full year 2021, a gain of 25 percent.
Gross margin in the quarter was 61 percent, compared to gross margin of 58 percent year-over-year.
Adjusted EBITDA in the reporting period was $4.7 million, compared to adjusted EBITDA of $3.1 million in the fourth quarter of 2021, up 50 percent from last year in the same quarter. Adjusted EBITDA for full year 2022 was $12.14 million, compared to adjusted EBITDA of $7.58 million for full year 2021, up 60 percent year-over-year.
Gross profit in the fourth quarter of 2022 was $19.34 million, compared to gross profit of $14.12 million in the fourth quarter of 2021, up 37 percent year-over-year.
Net income in the fourth quarter of 2022 was $853,000, or $0.02 per diluted share, compared to net income of $1.58 million, or $0.05 per diluted share, in the fourth quarter of 2021. Net income for full year 2022 was $9.28 million, or $0.28 per diluted share, compared to net income of $1.38 million, or $0.04 per diluted share for full year 2021.
As for guidance, management is looking for full year 2023 revenue to be in a range of $125.00 million to $130.00 million. Revenue in the first quarter of 2023 is projected to be in a range of $23.00 million to 25.00 million. Based upon Q4 2022 of $31.7 million, that means revenue in Q1 2023 is going to drop quite a bit, but evidently is expected to pick up in the later quarters.
Full year 2023 adjusted EBITDA is guided to be in a range of $14.00 million to $18.00 million.
At the end of calendar 2022 the company had cash and cash equivalents of $6.00 million, compared to cash and cash equivalents of $17.00 million at the end of calendar 2021.
Long-term debt held at the end of calendar 2022 was $20.73 million, compared to $11.7 million in long-term debt held at the end of calendar 2021.
Changes and vision
LUNA has made a number of changes during 2022, including the divestiture of Luna Labs, the acquisition of Lios Sensing, and the ongoing process of integrating OptaSense into the company.
What the divestiture of Luna Labs has done is remove the limitations associated with the unit's heavy reliance on the SBIR system. So, it not only resulted in selling of the last non-core asset of the company, but also a barrier to future growth.
With the addition of Lios Sensing , the company now has the capacity to be the potential leader in fiber optic-based sensing solutions in relationship to various energy, industrial, and infrastructure applications. Not only that, but it expands its footprint in Europe because of the company being based in Germany.
As for OptaSense, its prior acquisition which is currently being integrated into the company, it also is part of the company's sensing vertical, which combined with LIOS, boosted growth by 16 percent year-over-year in the segment.
Concerning the project side of the sensing business, which usually generates more revenue because it supports large field projects, that was up 10 percent year-over-year, which was fairly impressive when considering it was measured against a tough comp in the fourth quarter of 2021.
Growth in the non-project side of its sensing business was up 26 percent year-over-year, led by an increase in sales in its legacy businesses like Hyperion, ODiSi, and Terahertz.
Assuming the company successfully integrates the new companies over the long term, this should be a positive growth catalyst for the company in the years ahead, but in the near term it looks like it's going to struggle.
When making the above changes the vision management has is to become a company that is primarily focused on " fiber optic measurement and sensing solutions." It now believes it has the foundation in place to produce solid results in 2023 and further out.
While management typically expressed optimism in its vision to scale in a significant way, at this time the fact is, the company is losing momentum, and it has yet to prove it can significantly scale the company now that it has done what it set out to do to prepare to execute on a long-term growth plan.
Management said in the fourth quarter it had closed on some large, new OEM accounts that include recurring revenue. It was also stated that it has won a number of large contracts in relationship to its fiber sensing solutions in the energy and infrastructure industries.
Most companies express optimism when they talk about the year ahead during an end-of-the-year earnings report, but the truth is, successful execution of any vision or plan will determine its efficacy. Taking it all into consideration, revenue guidance of $125.00 million to $130.00 million for full year 2023, isn't that much more than the $109.00 million in revenue generated in 2022, which is roughly 20 percent more if the company comes in on the high end of guidance of $130.00 million.
Conclusion
LUNA had a decent fourth quarter and full year 2022 when measured against 2021 as far as revenue goes, but even with the optimism portrayed by management, it looks like 2023 is not going to grow near the pace 2022 did when measured against 2021. On October 13, 2022, the company hit its 52-week low of $4.06 per share and has since had a nice bounce. But based upon slowing momentum and what I consider to be underwhelming guidance for 2023, I believe the company is going to struggle over the next year or so until it can demonstrably prove the steps it has taken are generating sustainable growth.
It looks to be that LUNA could struggle on the top and bottom lines in 2023 and appears to be sure to do so in Q1 2023, based upon management guidance.
With the current visibility we have concerning LUNA, I don't see the catalysts that are going to trigger a significant boost in the performance of the company, which suggests to me it's probably going to trade flat in 2023 until reports either confirm or deny the effect the changes the company has made on its performance.
Over the long term the addition of OptaSense and Lios Sensing should pay off for the company, but I see it taking time to get a consistent and sustainable benefit from the acquisitions. For that reason, I think it best to be patient and wait for a better entry point.
For further details see:
Luna Innovations: Showing Signs Of Losing Momentum