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Edited Transcript of LUNA earnings conference call or presentation 4-Mar-19 1:30pm GMT

Q4 2018 Luna Innovations Inc Earnings Call

ROANOKE Mar 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Luna Innovations Inc earnings conference call or presentation Monday, March 4, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Soller

Luna Innovations Incorporated - VP & GM of Lightwave Division

* Dale E. Messick

Luna Innovations Incorporated - CFO

* Scott A. Graeff

Luna Innovations Incorporated - President, CEO & Director

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Conference Call Participants

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* Gregory Thomas Gibas

Northland Capital Markets, Research Division - Analyst

* Joichi Sakai

Singular Research, LLC - Equity Research Analyst

* Lee T. Krowl

B. Riley FBR, Inc., Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q4 2018 Luna Innovations Incorporated Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes. It is now my pleasure to turn the conference over to the Luna team. Please go ahead.

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Unidentified Company Representative, [2]

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Good morning, and thank you for joining us today. This morning we issued 2 releases. Our fourth quarter and full year 2018 earnings press release and also a release announcing the acquisition of General Photonics.

In addition, we posted to the Investor Relations section of our website a presentation with supplemental information on both announcements. If you do not have a copy of the releases or the supplemental materials, please check our website at lunainc.com. We will also post a replay of this call to our website.

Some of our comments and discussions today are based on non-GAAP measures, specifically adjusted EBITDA. These adjusted numbers exclude the effect of certain noncash 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 websites, which are not historical facts, may be 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 website and our website.

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 this morning, Scott Graeff, our CEO; Dale Messick, our CFO; and Brian Soller, Senior Vice President and General Manager of our Lightwave Division, will be available to take your questions. And at this time, I'd like to turn the call over to Scott Graeff, President and CEO of Luna Innovations.

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [3]

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Good morning, everyone, thanks for joining our call. As Alison mentioned, we issued 2 press releases this morning. One on our quarterly and full year financial results and one announcing the acquisition of General Photonics.

We have a lot to discuss today. I'm excited to share with you the details of the significant progress we have made over the last year.

We have delivered very strong consistent financial results from quarter-to-quarter. We've simplified our product portfolio, and we've put some of our capital to work in acquiring extremely complementary technologies that will allow us to drive exponential growth. Simply put, if we normalize for the divestitures we've completed in the past year or so, 2018 was the best year in Luna's history.

I have to start by thanking the Luna team, who stayed laser focused on delivering our goals for the year and continue to serve our customers with excellence.

As you all know, even with a robust strategy, nothing happens without the right team.

2018 saw a lot of changes at our company. But my Luna colleagues, including those whom we welcomed from Micron Optics in Q4, remain dedicated to our vision of being a leader in optical measurement technology that improves accuracy and precision while reducing risk and cost and to power growth and value for our global customers. And I think the results speak for themselves.

In addition, I want to extend a hearty welcome to all of our new colleagues from General Photonics. You have built tremendous value for your customers, and together, we'll be able to deliver even more value and growth. We're thrilled to have you join the Luna team.

So switching gears, let me now provide an overview of our very strong results for the fourth quarter and full year.

In addition, we will review the M&A activity over the past 12 months, including details of today's announcement and an update on the integration progress of the Micron Optics acquisition announced last fall.

The fourth quarter of 2018 marks the fifth consecutive quarter of double-digit year-over-year growth in our revenues from continuing operations and the seventh quarter of very strong revenue growth.

And the performance in Q4 just builds on the enormous progress we have achieved over the course of fiscal 2018.

We've spoken consistently about executing on a strong, clear and focused strategy. And in 2018, saw us do exactly that in a disciplined manner.

As a result, our existing businesses continue to perform well with strong top line growth, which I believe is clear evidence that we're getting a return from some of the internal investments we made that we discussed throughout last year.

In addition, we continue to be interested in further M&A investments that fits squarely within our strategy, and which we believe would accelerate our performance in our 2 important market verticals, communications testing and structural testing based on optical sensing.

Luna's being recognized for the strength of our portfolio and the expansions of our capabilities enabled by some of the M&A work we did in 2018.

I was just in Germany a couple of weeks ago with about 20 channel partners, and the discussions about and response to our recent acquisition of Micron Optics were some of the most exciting I can remember. Micron channel partners were really excited about Luna's ODiSI, and the Luna partners were equally pleased with the addition of Micron's products and capabilities to our solutions.

So now digging into more details of the financial performance. We grew revenue 37% in the quarter and 30% for fiscal 2018 versus the comparable year ago periods.

Gross profit margin grew from 42.5% to 49% in the fourth quarter and 40% to 45% for the full year 2018. This is an exceptional expansion of gross margin rate when you consider the puts and takes of the divestitures and acquisitions during the year.

This gross margin expansion highlights the focus of our team. They continue to execute at a high level even with the movement of assets in and out of Luna.

Revenues from our Products and Licensing segment, which includes Lightwave and ODiSI, grew at a very strong 69%, while revenues from our Technology Development segment grew almost 8% in the quarter.

As a reminder, in addition to ODiSI, Lightwave includes our instruments for testing fiber optic components and networks used for high-speed communications. These products target the growing demand for bandwidth, fueling the development of Silicon Photonics and the building of more and more data centers.

Our ODiSI instruments measure structural health and integrity of components and structures. Let me share with you some of the highlights of the progress at our various business divisions.

Starting with Lightwave. Total revenues in the fourth quarter were up 75% year-over-year, partly due to the acquisition of Micron in October of 2018.

Revenues in both our sensing part of Lightwave as well as communications test were up double digits. In our sensing business, our ODiSI system continues to gain traction in the market, with 12 units sold in Q4 2018. We were able to drive this strong performance as a result of investments in the addition of new direct sales hires, enhanced channels and the introduction of our new ODiSI 6100 platform.

The main drivers for ODiSI adoption continue to be the use of new materials such as composites in our main target vertical markets of aerospace and automotive.

In Q4, we delivered multiple ODiSI units into both of those markets, including our first systems directly into one of the big 3 U.S. automotive manufacturers, certainly a positive sign for the adoption of the ODiSI technology.

In addition, the acquisition of Micron Optics last October was very important to the future of expansion of our sensing capabilities.

Due to the complementary nature of Micron Optics products, we're experiencing a smooth integration with our existing product lines. With our combined portfolios, in particular, their HYPERION line of optical sensing interrogators and sensors with our ODiSI product, we have the ability to provide our customers with a broader range of capabilities, including higher speeds and sensing over longer ranges. An example of this integration of 13 of our HYPERION optical sensing integrators into a new bridge tunnel system, which connects 3 major cities in China's Pearl River Delta region. Known as the HZM Bridge, this megastructure consists of 3 cables-stayed bridges, 1 undersea tunnel and 2 artificial islands. This bridge tunnel system spans a total length of 55 kilometers, making it the longest sea crossing link ever built.

Given the complexity of this bridge, constant and reliable measurement of structural health is critical and our sensors allow that to happen.

Now let's turn to the communications test business. This part of the business finished the year with over 10% growth, which was right on track with our internal estimates. Drivers here continue to be the integration of optical and electric systems in Silicon, or generally known as Silicon Photonics.

Over the course of 2018, we invested in our communications test segment by adding engineering staff to accelerate our new product platforms, which will result in 2 product -- new products in 2019.

There are new analyzer aimed at Silicon Photonics test and a new portable reflectometer designed for aerospace and short-haul test applications.

As we think about the priorities for Lightwave in 2019, certainly, we will continue the integration of the Micron Optics team into the division.

In addition, we will also be focusing on building the team to support continued growth by adding engineering and sales resources.

We have some exciting opportunities for growth this year. We have several major new product releases coming in our communications test segment, increased performance and feature updates to our ODiSI platform and new sensors which allow even more functionality.

Our Terahertz division is continuing the strong momentum built in the first 3 quarters. In the fourth quarter, we posted a 72% increase in product sales year-over-year and delivered a robust 68% growth in product sales for the full year.

Importantly, in 2018, we expanded sales channels with the addition of 6 new distribution partners and increased market exposure through 10 trade shows.

We made robust progress on product sales with a large government defense contractor, achieving a formal manufacturing readiness level 7 assessment and purchasing 5 Terahertz systems for production of the F-35 fighter jet.

And on the expense side, we created cost efficiencies for the future by moving to a new facility, which is scaled appropriately to the size of our business and allows for much greater levels of collaboration.

As we move into 2019, we'll be focused on leveraging the efficiencies provided by the new facility and our expanding team. In addition, we will promote new products and capabilities with successful applications, market presence and compelling collateral and web content.

In our Technology Development segment, full year revenue grew 13% year-over-year. As a reminder, revenue in this segment comes largely from third-party contract research. We're seeing more and more requirements for multidisciplinary solutions, and our diverse and experienced team is able to quickly develop those solutions for our customers.

As we use this segment to investigate future growth opportunities, we can sell early-stage products to test the market and receive valuable customer feedback.

For 2019, we expect another successful year of innovation and growth. We're entering 2019 with a larger contract backlog then we had a year ago. Now I'd like to provide some color on our recent M&A activity, starting with an update on the integration progress for the Micron Optics acquisition. You'll remember that we acquired Micron Optics in mid-October 2018. The company has products in sensing solutions, filters and lasers with a significant piece of revenue driven by sales of its fiber optic sensing instrumentation, which is very complementary to our ODiSI product and additionally fits right into our structural test vertical.

Luna and Micron Optics sell into some common end markets, but Micron also brought exposure to oil and gas and civil engineering, newer markets for Luna. And both companies are fueled by continuing trends driving demand for higher bandwidth.

We closed the Micron transaction in mid-October and immediately began working on the process of integration.

We're right on track with our expectations. We've taken the first steps towards cross-functional integration, starting with the integration of sales, marketing and the engineering teams, and we've already begun the full integration of those teams.

Throughout the next 6 months, we'll be focused on unifying our brand presence through vehicles like our website and marketing collateral. We're developing a channel and marketing integration strategy to accelerate the penetration of core markets and maximize our channel leverage.

We'll be merging sales channels to drive both revenue and energy synergies, which, while early, are also proceeding to expectations. And we have begun the process of system integration across all platforms including sales, ERP and MRP.

Overall, I'm extremely pleased with the progress. When we announced, we said that Micron was a great strategic acquisition, with a profile that would allow us seamless and quick integration, and which was adjusted EBITDA accretive in Q4 2018, and we anticipate to be fully accretive in 2019. And we're right on track, which gives me confidence about the acquisition we announced today.

General Photonics is another acquisition with a terrific strategic profile. Just like the acquisition of Micron Optics that fits squarely within our sensing business, General Photonics is in the sweet spot of our Comtest business. We acquired the company for $20 million, $19 million at closing and a $1 million earn-out.

Although 2018 numbers have not yet been audited, I want to give you a better sense for the size of that asset.

Last year, General Photonics achieved approximately $11 million in revenue and approximately $2.5 million in adjusted EBITDA. So we expect it to be immediately accretive.

The company is based in Chino, California, has approximately 60 employees, approximately 80 patents and has been in business almost 25 years.

In addition to providing strong opportunities for deeper penetration into our existing customer base, with complementary capabilities at differing price points, General Photonics also brings greater exposure to certain geographies, particularly Asia and expanded exposure to various end markets.

The combination will also allow Luna to continue to improve value to customers in critical applications such as these 3.

First, a precise measurement in high-speed communication networks and data centers that enable faster networks and higher performance devices at a lower cost.

Second, precise optical assemblies for gyroscopes used in guided weapon systems, deployed in our country's security systems.

And third, precise measurement and control optoelectronics that can be used to make better LiDAR systems, which are key to autonomous vehicles.

As with the Micron transaction several months ago, we're very excited about this acquisition and are confident that this is the right deployment of capital for the right asset.

We again expect a smooth integration, and I look forward to providing updates on our progress in the months to come.

In the meantime, both Luna and General Photonics will be exhibiting at the OFC event beginning tomorrow, March 5, in San Diego. This is one of the biggest trade shows of the year. OFC is the premier event in telecommunications and data center optics. We look forward to sharing our exciting announcement with industry leaders, who come from around the globe, both Brian and I will attend, and if you're in San Diego, we invite you to stop by the Luna and General Photonics booths.

Finally, I'd like to discuss our outlook for the current year. As discussed last quarter, we had not historically given financial guidance, but indicated that we regularly evaluate disclosures made -- make the -- what disclosures make the most sense.

With the close of 2018 fiscal year and a good track record of strong and consistent performance, we feel that the time is right to provide guidance for 2019.

We've bought and sold certain assets over the last 18 months, which resulted in a more focused organization, better situated to scale consistently.

So for fiscal 2019, we expect full year revenues to be in the range of $60 million to $65 million, with full year 2019 adjusted EBITDA to be in the range of $6 million to $6.5 million.

So to summarize, I'm incredibly proud of the progress and results delivered by the Luna team in 2018. We achieved strong organic growth across largely all of our businesses, while also executing well on strategic acquisitions and divestitures.

We've capitalized on the advancement of optical-based technologies. And as I've mentioned before, our products and capabilities fit squarely into the sweet spot of this growth. I'm really excited about what we accomplished this past year.

We see this performance as a validation that our strategy is working and that our target markets are rich with opportunity for continued growth. And with that, I'll turn the call over to Dale to review the fourth quarter and full fiscal 2018 financial results in more detail. Dale?

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Dale E. Messick, Luna Innovations Incorporated - CFO [4]

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Thanks, Scott. Let me first cover the performance for the fourth quarter and then I'll talk about our full year results.

As a reminder, with the sale of our optoelectronic components business in July of 2018, the operating results of that business for both 2018 and 2017 have been reclassified to discontinued operations in our income statement.

The income statement also includes the results of Micron Optics from the October 16, 2018, close through the end of the year.

Our revenues for the quarter ended December 31, 2018, were $13.5 million compared to revenues of $9.9 million for the same period of the prior year, representing a 37% year-over-year increase. The year-over-year increase in fourth quarter revenues was comprised of a 69% increase in our Products and Licensing segment along with an 8% increase in our Technology Development segment, continuing the strong revenue growth performance delivered throughout the fiscal year.

Within the Product and Licensing segment, revenues in our Lightwave division grew 75% versus the fourth quarter of last year and Terahertz revenue grew 72%.

Our gross profit increased to $6.6 million for the quarter compared to $4.2 million for the same quarter of last year, representing a gross margin of 49% in Q4 2018 compared to 42% in Q4 2017.

The gross margin improvement reflects the changing mix of our revenues, with 59% of our revenues coming from the Products and Licensing segment in the fourth quarter of this year, compared to 48% in the fourth quarter of last year, in addition to smaller margin improvements within both of the operating segments.

Operating expenses were $6.1 million or 45% of revenue for the 3 months ended December 31, 2018, compared to $4.6 million or 47% of revenue for the 3 months ended December 31, 2017.

The increase in SG&A expenses was primarily due to $751,000 in transaction-related costs associated with the acquisition of Micron Optics in October, and $800,000 of expenses associated with the operations of the company following the acquisition.

With the year-over-year increase in revenues and gross profit and close management of our operating expenses, we recognized pretax income from continuing operations of $0.6 million for the fourth quarter of 2018 compared to a loss of $0.5 million for the fourth quarter of 2017.

Net income from continuing operations declined slightly to a loss of $0.1 million for the fourth quarter 2018 compared to approximately breakeven for the fourth quarter of 2017 due to the allocation of income taxes between continuing and discontinued operations.

In terms of income related to discontinued operations for the fourth quarter of 2018, we recognized an additional gain of $1.1 million from the sale of our divested Opto business. Amount shown as discontinued operations for the fourth quarter of 2017 also reflect the operations of the Opto business during that period.

Net income attributable to common stockholders for the 3 months ended December 31, 2018, was $0.9 million compared to a net income of $0.4 million for the 3 months ended December 31, 2017.

For the full year 2018, our revenues were $42.9 million compared to revenues of $33.1 million for the same period of the prior year, representing a 30% year-over-year increase.

We drove more of that revenue to gross profit, delivering $19.4 million or 45% of revenues in the period compared with $13.4 million or 40% of revenues in 2017.

Further, with our continued focus on expenses, we improved our operating income to $0.9 million for the full year from a loss of $2.2 million last year, despite the increased but very necessary investments we made in sales, marketing and interim resources that we've mentioned on the past couple of earnings calls.

Net income attributable to common stockholders was $10.7 million for 2018 compared to $14.5 million for 2017. The decline in net income attributable to common stockholders was due to discontinued operations, which included the gain recognized on the sale of the high speed optical receivers business in 2017 compared to a lesser gain associated with the sale of the Optoelectronics business in 2018.

And finally, we improved net income per diluted share from continuing operations to $0.04 for fiscal 2018 from a loss of $0.005 per diluted share during 2017.

We ended the quarter with $42.5 million of cash, up 37 -- up from $37 million at the end of 2017.

At the end of 2018, the principal debt balance was $0.6 million, which is scheduled to be paid off in May of 2019.

Our working capital increased to $56.1 million at December 31, up from $44 million at the end of last year. And I want to conclude by saying that from a financial perspective, I cannot be more pleased with the strong and steady performance our team delivered throughout the past fiscal year.

We took a strategic and deliberate approach to investments and managed our expenses prudently, ensuring that we were able to provide a greater percentage of our revenue through to profit.

Scott provided you with our annual guidance, so you have a sense for how we believe the year will shape up. I do want to add a reminder about Luna's typical seasonality. As you consider our annual guidance, remember that each year Q4 is typically our strongest quarter and Q4 is usually our slowest -- or Q1 rather, I'm sorry, is usually our slowest. That said, we've entered 2019 with good momentum and we're well-situated to deliver another strong year. And with that, I'll turn the call back to Scott.

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [5]

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Thanks, Dale. At this time, I'd like to open the call for questions. Brian Soller, our Senior Vice President and General Manager of our Lightwave Division, which is the fiber optics test and measurement business, is with Dale and me at this time and also available to ask -- address any of your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Dave Kang of B. Riley FBR.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [2]

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This is actually Lee Krowl filling in for Dave this morning. First, just wanted to start out on the General Photonics announcement. Obviously, very in line with your M&A strategy, but I was wondering if you could provide additional color just perhaps deal timing, closure, synergies as well as maybe break out the $19 million, whether that's cash or stock?

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [3]

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Sure. Well, General Photonics is right in our communications test vertical. So they sell components and equipment that are on the lower end of the vertical that we sell on. So it completes our market vertical nicely, and we use a lot of the same rep firms and have known them for years and well-respected. The $19 million is cash that we used to acquire General Photonics. I don't recall the other -- was there another part to that question?

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [4]

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Just the anticipated timing of the deal closure?

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Dale E. Messick, Luna Innovations Incorporated - CFO [5]

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Yes. We closed it at the -- last Friday.

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [6]

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Yes, the deal closed on Friday, Lee.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [7]

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Got it. And then are there any associated cost savings, perhaps synergies, consolidation of facilities, anything like that?

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [8]

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Yes. I don't think, right now, we're looking -- there are some cost savings associated with some overlap in potential positions but for the most part, we are -- we're continuing to run the operations in California. And I think there's a lot of structural synergies that will go on with combining the sales teams at the -- our sales folks know the products that General Photonics sell and will be able to sell and vice versa. So there's a lot of synergies from that perspective, but not a lot of expense synergies.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [9]

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Got it. That makes sense. Obviously, providing guidance for the full year is a significant vote of confidence. Could you maybe just break out the sources of visibility that gives you the confidence in that guide and maybe some of the specific drivers?

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [10]

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Yes. I mean, I think we looked at it, and we've always thought that guidance was something we wanted to get to, we wanted to do it at the right time. And I think in seeing the consistent quarter-over-quarter performance in the Lightwave Division and the backlog that we have in our Technology Development division, we felt this was the right time. We gave guidance in Q4 of 2018. There were enough moving parts in '18 that we felt we needed to provide some guidance to you folks in Q4. And when we stepped back and looked at it, we thought giving top line and adjusted EBITDA for the year was the right time. Again, there's -- there was a lot of moving parts in divestitures and acquisitions in 2018. We put a supplemental deck out there on our website that gives you kind of a normalized pro forma 2018 that includes a full year of the Micron Optics. And then we've given a little bit of color here on what General Photonics did in 2018. And we thought to help sum that all up providing the guidance for full year was the right time. And we felt that the last 6, 8 quarters that we've had, that it was the right time to give guidance.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [11]

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Got it. Last one for me. Just based on where we had EBITDA for 2019 and kind of backing out -- excuse me, yes, 2019, and just kind of backing out the assumption for General Photonics. It seems like there's some gross margin accretion. Can you maybe talk to the trend in gross margin for the full year?

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Dale E. Messick, Luna Innovations Incorporated - CFO [12]

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Yes. Lee, certainly, we expect the product side of the business to continue to grow at a faster rate than the Technology Development side of the business. And so with that comes an overall increase in the blended margin. I wouldn't look for monumental jumps in the margin. I think that's -- the 2 segments individually will kind of maintain where they are and that will -- as the mix changes that will draw the blended rate out.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [13]

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Got it. And then, you guys mentioned a facilities transition. I have to go back and remember if you guys mentioned it on the last call, but is there a CapEx component to that to start the year as you guys move over and bring that facility online?

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Dale E. Messick, Luna Innovations Incorporated - CFO [14]

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No. This was a relatively small facility for the Terahertz operation in Michigan.

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [15]

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Yes. When we sold the Picometrix to MACOM, Teramatrix stayed within the MACOM facility for 18 months, and it was time to move. We moved into a facility that fit and moved all of our equipment into that. We don't see a capital expense.

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Dale E. Messick, Luna Innovations Incorporated - CFO [16]

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Of course, with the -- yes, there's no accounting standard that all the leases will be capital leases. Of course, it will -- yes, our 2019 will reflect that, but there's not an incremental lease that comes in.

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Operator [17]

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Our next question comes from Christopher Sakai of Singular Research.

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Joichi Sakai, Singular Research, LLC - Equity Research Analyst [18]

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Just wanted to touch on the gross margin improvement for the quarter and the year. Just wanted to see what were the main drivers to this improvement?

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [19]

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Yes. I mean, I think what you're seeing is our gravitation to clean the story up and become a fiber optic-based test and measurement instrumentation company here. And adding the Micron Optics piece of the business and divesting the Optosolutions business helped our gross margin a lot as well as adding more -- a higher percentage of instrumentation versus the Technology Development. So I think the combination of the 2, you saw where the blended gross margin has increased. And we'll continue to stay that course, if not get even better, with -- on a blended basis due to the acquisition we announced today, which maintains -- is consistent with our Lightwave gross margins.

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Joichi Sakai, Singular Research, LLC - Equity Research Analyst [20]

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Okay. So the acquisition of General Photonics, will that help gross margins?

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [21]

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Yes, on a blended basis. I mean, they -- like we talked in 2018, they did nearly $11 million, and they have instrumentation-like gross margins, which are in the mid-50s to lower 60s.

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Joichi Sakai, Singular Research, LLC - Equity Research Analyst [22]

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Okay, great. And then lastly, I mean, on your revenue guidance, what are the main drivers there to get to that $60 million to $65 million guide?

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [23]

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Well, we continue to believe that, on the product side of the business, that we'll be mid to upper teens. And when you blend that in with the acquisition that we have. And if you look, like I said, I encourage you to look at the supplemental deck that's out on the website that gives you a pro forma look at '18 including a full year, as if we owned Micron Optics for a full year, and then adding this General Photonics and seeing that type of growth. We've always said that we were looking at mid- to upper teens -- overall company I should say, I stand corrected there, overall company, mid to upper teens. So -- and the Technology Development piece of the business is in the 8% to 10% growth, like they did last year. So when you blend that together with the product side that kind of gets you into that range of revenue growth.

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Operator [24]

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(Operator Instructions) Our next question comes from Tim Savageaux of Northland Securities.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - Analyst [25]

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This is Greg on for Tim. First, could you provide an update on where you are seeing growth opportunities within Silicon Photonics?

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Brian J. Soller, Luna Innovations Incorporated - VP & GM of Lightwave Division [26]

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This is Brian. Yes, so the market for Silicon Photonics continues to clip along pretty well. And the latest, kind of, overall growth statistics we're seeing for the next few years are sitting in the low-20% range. A lot of that's driven by continued build-out of data communications infrastructure and the kind of looming 5G implementations. So what we're seeing is some tooling up amongst the component manufacturers, given those 2 kind of macro drivers in our customer base, in particular in the U.S. and Indonesia. And in fact, the first few months of the year here we've seen an uptick in the, kind of, production demand flowing through to the main OEMs. And in order to increase production typically you need more test equipment. And so that's been a nice year for us, and we expect to see that. It's still early, but we do expect to see that trend continue in -- here in 2019.

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [27]

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Yes. I got to say, we're big believers in this communications test vertical that we're in, and that really is what led to the acquisition we announced today. General Photonics is squarely right in the middle of that vertical, at a lower price point. And we believe there's a lot of ability to leverage off that to get into some customers and upsell them into some other products as well. So we really believe in this vertical as well as the sensing.

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Brian J. Soller, Luna Innovations Incorporated - VP & GM of Lightwave Division [28]

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Yes. As we touch a lot of the same customers. And so from a strategic perspective, we have historical Luna products at the kind of high end of the market. And what this acquisition does for us is really fleshes out the product portfolio and gives us a blend of entry-level price points, mid-level price points and then the kind of typical high-end Luna test equipment to sell into customers that we've been -- we're working with for years already. So that'll be a nice addition for our plan here in 2019.

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [29]

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Yes.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - Analyst [30]

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Got it. That's very helpful. And then I guess, secondly, appreciate the color that you provided on General Photonics' market focus, and I guess, specific applications. Just wondering, do they have any major customers?

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Brian J. Soller, Luna Innovations Incorporated - VP & GM of Lightwave Division [31]

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They do. Yes, they do. They have a handful of major customers for their coil -- fiber coil and module business. They have a pretty strong diversification of customers, so the revenues in that $11 million range that Scott mentioned are well-blended throughout quite a few customers. But they have a handful of customers at the top of the range, and we've talked to them and they're happy, and we're looking forward to continue to move forward with them.

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [32]

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Yes. And I don't think we see anything that jumps out from a customer risk perspective, or we heavily weighted in any 1 or 2 customers, nor do we see geographic concentration that would provide pause on us on risk. So pretty well diverse.

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Operator [33]

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(Operator Instructions) And I'm showing no further questions at this time. So I'd like to turn the call back over to Scott Graeff for any closing remarks.

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Scott A. Graeff, Luna Innovations Incorporated - President, CEO & Director [34]

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All right. Well, thanks everyone for joining us today. As you heard on the call, we're incredibly proud about the strong results our employees delivered through 2018, and we have no reason to doubt that we will carry that growth momentum forward throughout 2019. This completes today's call. Feel free to reach out to me directly if you have any questions. Thanks.

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Operator [35]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.