Good day and thank you for standing by. Welcome to the Q1 2022 Luna Innovations Incorporated earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Allison Woody, Director of Administration. Please go ahead.
Thank you. Good morning, and thank you for joining us today. This morning, we issued our first quarter 2022 earnings press release. In addition, as usual, we posted to the investor relations section of our website a presentation with supplemental information for the quarter. If you do not have a copy of the release 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. 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 websites, which are not historical facts, may be forward-looking statements that involve risk 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, Scott Graeff, our President and Chief Executive Officer, Gene Nestro, our Chief Financial Officer, and Brian Soller, our Chief Operating Officer, will be available to take your questions. At this time, I'd like to turn the call over to Scott.
Good morning, everyone, and thanks for taking the time to join our call. This first quarter was again full of accomplishments for Luna, operationally and financially. I'm incredibly proud of the team for delivering a solid start to 2022, with first quarter results coming in above our expectations. This recent first quarter includes puts and takes when compared to last year's Q1. Gene and I will review some of these in our remarks, and after we do, I hope you'll see that Luna's underlying operational performance is very strong. For Q1 2022, we reported total revenues up 7% and above the first quarter guidance range we provided on our Q4 call. Gross margin expanded to 64% compared to 58% in Q1 2021. Gene will talk more about this in a moment.
Adjusted EBITDA increased by $400,000 and adjusted EPS came in at $0.05, a full $0.02 higher than Q1 of last year. Let me provide a little color on the puts and takes I just mentioned and what gives me confidence about Luna's future. I'll provide an update on the business lines. First, recall that in December 2020, we closed on the acquisition of OptaSense with only two weeks left in that year. At the time of the closing, and as we said on our earnings calls, OptaSense exited 2020 with a large backlog because the revenue recognition from this business depends on delivery and installation of products. With the virus raging in December 2020 and availability of vaccinations only beginning, OptaSense had been unable to deliver and install before year-end.
As vaccines became available and the world opened up, OptaSense made significant progress in clearing out the backlog and getting deliveries made to customers during Q1 2021 before Delta challenged deliveries again. In addition, the OptaSense business was historically on a different fiscal year than Luna, where Luna's Q1 was OptaSense's Q4 and strongest quarter. These combined factors created an unusually high Q1 for OptaSense in 2021. When the team and I sat down to review operations and budget for this year, we planned for this, knowing that the comparison of our Q1 2022 to last year's Q1 would be challenging. That is why I'm so pleased that the team drove solid top and bottom-line growth this quarter. A few additional reminders as context for Q1 2022 and comparisons against last year's corresponding quarter. First, the difficult comparison involving OptaSense that I just highlighted.
Second, the impact of the investments that we've made and continue to make in order to be best positioned for future growth. More about this in a minute. Third, the fact that LIOS, our most recent acquisition, only contributed two weeks to the quarter based on the timing of the acquisition close. To underscore, overall the performance of the business in Q1 and start to 2022 was very solid. I wanna speak for a moment to the investments we've been making, as they are critical to our long-term success and how we think about and measure that progress. You heard me say on our Q4 call that 2021 was a year of blocking and tackling. We put into place many of the processes and systems that will allow us to scale well into the future.
I told you that we made these investments because as we look to the future, we see significant opportunities for strong and rapid growth. These investments help to ensure that we are well-positioned to capitalize on that growth and can scale appropriately. On the Q4 call, I also mentioned that you should expect to see us continue to invest in our business as we progress through this year and into 2022, and we have done just that. When I look at the performance at the end of 2021 and in the beginning of 2022, we're extremely pleased and excited about the technologies, products, and talent that we've acquired. We're also pleased with the payoff we've seen from the organic internal investments about which you've heard us talk.
As a result of this, I'm not using operating leverage as a metric to measure our M&A, because at this point, we're still investing in our future. Instead, I'm looking at operating efficiency. How well is the organization performing overall, and have the acquisitions integrated well into Luna's culture? Do we have the right people in place, and do they have the right tools required to perform at the highest levels? Is the sales force right-sized? What is our backlog? Do we understand our customers' challenges, and are we addressing customers' needs while servicing them with excellence? As CEO, those are the questions that I wanna make sure that we address. Because if we get the operating efficiency right, then the operating leverage and increasing profitability will quickly follow. We have focused on this and are seeing the results.
For example, divesting Luna Labs frees us up to grow and take on larger contracts and orders. Simply put, we are no longer constrained as a small business since the limiters imposed on us as a government SBIR contractor are gone. While the divestiture creates a bit of short-term top and bottom line gap, the freedom created has just begun to result in some larger orders and larger contracts. In coming quarters, you'll see us build on the traction that we've already begun. In addition, with respect to our pipeline and backlog across nearly all businesses, it was what our COO, Brian Soller, characterized as a knockout quarter. As an example, for our Terahertz products, our order backlog is no longer the typical 14-week lead time, but instead, we are booked through year-end 2022 due to the rapid increase in demand for these products.
This impressive accomplishment is a result of tremendous focus and execution by the team. As we move forward, in addition to continuing the effort on selling Luna's Terahertz capabilities, the team is also working on a significant expansion of manufacturing capacity, which is expected to increase four-fold within the next year. There are similar significant pipelines for several of our other product lines. As you know, we've now acquired two organizations, LIOS and OptaSense, and have been working to fully integrate them. I've been out meeting with the engineering and sales teams, and Salvan Farooqui, our senior vice president and head of sales, has been working nonstop to ensure that our sales forces are appropriately integrated, incentivized, and highly motivated. That now, beginning in 2022, we've been able to incorporate the technologies and products from what were previously three distinct companies into one compelling Luna offering.
Let me illustrate what I mean. The DAS, or Distributed Acoustic Sensing System, and expertise that we acquired with OptaSense, combined with LIOS's leading temperature and strain sensing technology and Luna's own product and technology improvements, creates an offering to the customer that is more compelling than ever before. Luna is no longer only a test and measurement business that generates revenue by shipping boxes off the dock, relying mostly on turns in any given quarter with lower levels of backlog. We're now also selling systems and solutions which are delivered over longer periods of time and are often repeat in nature and come in much larger dollar amounts. For example, when a customer comes to us, Luna can now provide them with the hardware, install the software, and run the data analytics. We're now the biggest player in the distributed fiber sensing market.
The work that we've done in M&A has filled out the breadth of Luna's capabilities and allowed us to bundle solutions. This now allows us to do more strategic selling, which in turn supports stronger growth. It broadens our playing field relative to test and measurement, greatly expands the market for our products, and results in strategic sales and customer stickiness. Especially with the combination of LIOS and OptaSense, the hardware, software, and data analytics that we provide creates long-term customer relationships. One example of how we're seeing this evolve just over the past 12 months is by looking at both percentage of repeat customers as well as the size of our larger orders. When we look at the size of our larger orders in dollars, that has doubled over the past 12 months. We are continuously focused on building out capacity, thus my comments about investing for our future.
In sum, with all three of these leading entities now integrated, we're working with customers to do the installations as quickly as possible while continuously innovating our product offerings and fulfilling larger blanket orders. The powerful combination capabilities from Luna plus OptaSense, plus LIOS truly positions us as a world-class leader in fiber optic sensing. Now I'd like to briefly cover some highlights for the first quarter. For the first quarter of 2022, total revenues were up 7% to $22.5 million compared to the prior year's quarter. In sensing, revenues overall were flat year-over-year, but given the dynamic in the first quarter comparison at OptaSense that I described earlier, if we exclude that business, revenues grew in the solid double digits.
In communications testing, revenues grew double digits compared to Q1 2021, driven by record sales for Luna's high-speed communications test instruments, the OVA and OBR. Overall, commercial demand continues to be strong in both sensing and comms test segments, and we are looking at a record backlog overall as we exited Q1, driven by another quarter of book-to-bill of 1.2. We delivered adjusted EBITDA of $1.7 million in Q1 2022, a $400,000 increase compared to the prior year quarter. Adjusted EPS increased by $0.02 to $0.05 in Q1 2022 compared to last year's Q1. Gene will provide more financial details on the quarter, but before I turn it over to him, I want to highlight some exciting accomplishments and opportunities in our two business units, sensing and communications test.
As you've heard me mention before, we have a good number of significant customers in the aerospace, automotive EV, infrastructure, and industrial process control industries. For our sensing business, ODiSI, Hyperion, Terahertz, OptaSense, and now LIOS products, we made significant progress this quarter in a number of areas with customer orders and expanding existing accounts. I'll highlight a few of these. First, we quickly got our newest team members at LIOS working globally with our legacy sales teams to identify opportunities to bring a combined solution to customers. I'm happy to say this early work on identifying top-line synergies is going very well for applications like power cable and pipeline monitoring. I am more confident than ever in our ability to take one plus one and make three with the addition of LIOS to our portfolio.
Second, you may remember us speaking about a very large customer order for our Phoenix lasers that we received in 2019. That order was on a four-year delivery schedule, and I'm pleased to say that we have not only met that schedule but are likely to complete these deliveries by the end of this calendar year, about a year ahead of that original schedule. Stay tuned for some more news on this front in the coming weeks. Third, you'll recall our multiyear partnership with Meggitt in regards to work with Airbus. We're making good progress with that partnership and hope to be sharing an update with you sometime this summer. Fourth, our terahertz products continue to rapidly penetrate industrial process control applications like the production of EV batteries. In Q1, we continued to successfully penetrate this and several other fast-growing industrial applications.
Switching to communications testing, you may have seen the release earlier this month announcing that we secured an incremental multi-unit purchase order for OBR 6200, the portable backscatter reflectometer, through a continued strong relationship with Lockheed Martin. You'll recall that Lockheed is using the OBR 6200 for sustainment of the F-35 airplanes. This demonstrates Luna's strong partnership with customers and the traction we've had with these leading products. Shipments on this order will start in the second half of this quarter. Our comms test segment includes both instruments and control modules and OEM lasers. Sales of modules and lasers account for slightly more than half of all communications test business. During Q1 2022, we saw growth with several larger strategic wins.
Notable wins include our orders fulfilled for Luna's tunable filters with RIO Laser products for customers in medical, fiber sensing, aerospace, and industrial markets, and for fast-growing applications such as LiDAR in the case of the RIO Laser. There are further growth opportunities for modules to be sold to customers in green energy, medical imaging, fiber optic gyros, as well as the space and satellite communication industries, to name a few. There's one comment I wanna make relating to supply chain. We're still managing pandemic-caused delays in both our supply chain and that of our customers, particularly in availability of printed circuit assemblies. Delays are specifically caused by semiconductor part availability, combined with increasing lead times and prices. The Luna team is doing its best to manage through this, including, where possible, design changes to replace unavailable components and pre-ordering in larger quantities than we would have in the past.
While there is significant demand from our customers for Luna 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 through 2022. We believe we have sufficient supply to fulfill customer orders for the near term and are focused on managing this impact. On a related note, Luna's new composition as a pure play in fiber sensing and measurement, combined with our relatively larger size as a result of recent M&A, now allows us to evaluate and optimize our sourcing in a more strategic manner. The team is working on aligning products in categories and evaluating vendors in order to best maximize our ability to source efficiently and cost-effectively.
We will expect that this will create a more scalable structure and help to identify and eliminate any bottleneck in our supply chain. There is no question that the strategic moves we've made over the past 18 months already have had a positive impact on Luna. One of our key priorities will always be the prudent and thoughtful deployment of capital. That hasn't changed. Right now, and for the near term, we're very focused on the execution to grow our existing businesses. Before I turn the call over to Gene, I just want to reiterate that based on the solid start to 2022, we are again reaffirming the 2022 outlook that we provided on our Q4 call.
As a reminder, that guidance for 2022 is total revenue of $109 million-$115 million and adjusted EBITDA of $10 million-$12 million. In addition, to help you, our shareholders, with understanding the new quarterly cadence for Luna, given the recent mix of acquisitions and divestitures, we are once again providing quarterly top-line guidance. For Q2 2022, we anticipate revenues in the range of $25 million-$27 million. In summary, the year for Luna is off to a great start, and we remain optimistic about 2022 and beyond. As always, I am grateful to the Luna team for their focus and hard work, and I continue to be confident that Luna has the right strategy and will continue to make significant progress against it as we progress through this year.
We continue to be sharply focused on our purpose, to enable the future with fiber, and we will continue to make the changes necessary to capture the opportunities in front of us. I'll now hand the call over to Gene for more of the financial details on the quarter. Gene?
Thank you, Scott. Before I proceed, I want to highlight three topics. First, our reported numbers for Q1 2022 include two weeks of LIOS, our most recent acquisition. Second, we have fully lapped the acquisitions of OptaSense and New Ridge Technologies, so the results for both companies are now included in organic results. Third, and perhaps most importantly, I want to reiterate Scott's comments about operating efficiency. That's an important term, efficiency. What I mean when I say efficiency is that Luna will continue to invest in capabilities and talent to support our growth, while at the same time streamlining and rightsizing where appropriate. For example, as our products move more frequently from the laboratory to the manufacturing floor in the field, we need to invest in modification of those products and the manner in which we're manufacturing them.
While we are constantly looking to remove redundancies and inefficiencies as we integrate our acquisitions, we are also identifying areas where investments are needed in order to sufficiently support future growth, both near and long term. Now that we are in this growth phase, we think about operating efficiency rather than leverage because we're investing in the right and key areas for Luna's future. With that as context, let's move on to reviewing this quarter's financials. As Scott noted, our Q1 2022 revenues were $22.5 million, compared to revenues of $21 million for Q1 2021, representing a 7% year-over-year increase. The increase is primarily due to revenue generated by our LIOS acquisition.
Gross profit increased to $14.3 million for the quarter, compared to $12.3 million for the same quarter last year, representing a gross margin of 64% in Q1 2022, compared to 58% in Q1 2021. The improvement was primarily due to product mix for the quarter. In Q1 2022, we had higher sales of higher-margin products in both our sensing and test and measurement products relative to Q1 2021, which had a higher portion of project revenue. I want to note here that we do not anticipate a gross margin run rate in the mid-60s going forward, but rather in the high 50% range, as we previously stated.
Operating expenses were $16.6 million in Q1 2022 as a result of the continued investments we've made and are making to prepare for our next stage of growth. In addition, included in the $16.6 million is $700,000 of LIOS OpEx, $1.8 million of fuel costs related to the acquisition of LIOS, and $800,000 of amortization related to intangible assets. We recognized an operating loss of $2.4 million in Q1 2022 compared to an operating loss of $1.6 million in Q1 of last year. Net loss from continuing operations for Q1 2022 was $1.3 million. During the quarter, we recorded a $10.9 million gain on the sale of Luna Labs. Including this gain, net income for Q1 2022 was $9.6 million or $0.30 per share.
Adjusted EBITDA for Q1 2022 was $1.7 million, up $400,000 compared to Q1 2021. Correspondingly, adjusted EPS increased to $0.05 in Q1 2022 compared to $0.03 in the prior quarter. Income tax benefit for Q1 2022 was $1.1 million and was primarily impacted by stock compensation and the LIOS acquisition. We estimate our 2022 effective tax rate to be in the 22%-25% range. Let me now move on to the balance sheet. We ended the quarter with $10.8 million of cash and cash equivalents compared to $17.1 million at the end of 2022. The decrease in cash is due to our acquisition of LIOS in March, which we funded with the proceeds from the sale of Luna Labs, existing cash, and our revolver.
Our working capital was $47.4 million at March 31, 2022, compared to $49.8 million at year-end 2021. We have a debt facility comprised of two separate financing vehicles, a term facility and a revolver facility. At the end of Q1 2022, we had total debt outstanding of $22.3 million. Of that amount, $7.3 million is in term debt, and $15 million was drawn on our revolver. As a result of the solid start to 2022 and based on what we see already for Q2, we are reaffirming the 2022 outlook that we originally provided on the Q4 2021 call. As a reminder, that 2022 outlook is total revenue of $109 million-$115 million for the full year 2022, adjusted EBITDA of $10 million-$12 million for the full year 2022.
As Scott mentioned, we're providing Q2 2022 revenues in the range of $25 million-$27 million. With that, I will turn the call back over to Scott to open it up for Q&A. Scott?
Thank you, Gene. At this time, I'd like to open the call for questions. Brian Soller, Chief Operating Officer, is with Gene and me at this time and available to address any questions that you may have. Tanya, please open the Q&A line.
Certainly. As a reminder, to ask a question, you will need to press star then one on your touch tone telephone. As a reminder, to ask a question, please press star then one on your touch tone telephone. Our first question comes from Barry Sine of Spartan Capital. Your line is open.
Hey. Good morning. A good way to start the week, huh? Couple questions, if you don't mind. First on LIOS, the acquisition, a number of questions to get us more acquainted with that. If you could discuss the product line, maybe size it a little bit, what was their historic organic growth, the integration status, especially on the top line, cross-selling between the sales forces, and then, you know, what kind of long-term growth does this now present for the company as a whole?
Yeah. Hey, Barry, I'll start it off, and I'll let Brian Soller and Gene jump in as need be. You know, LIOS was something a little bit different than, say, OptaSense, for example. You know, it was a division, you know, pretty much under one roof there in Germany. Did not come with the big senior, you know, C-suite type titles that OptaSense came with. Those folks all stayed at NKT. That allowed us to immediately out of the gate on the original, you know, the first all hands meeting, we were able to identify right out of the gate with who the different folks reported to inside of Luna's organization.
The integration into our organizational structure was much cleaner, you know, than some of the other acquisitions just 'cause it didn't come with some of those bigger titles. That's worked out really well. They've already been here. We've been there. That's kinda hit the ground running. We see those top-line synergies that I mentioned earlier right out of the gate. There were customers that they were kind of in a holding pattern on because they didn't have some of the expertise that we had. Vice versa. There were some things that customers wanted, temperature, that we couldn't fulfill. We were immediately able to see some of those synergies right out of the gate. We see this together.
It's really blending into our European operations. OptaSense and LIOS are really running as one organization blended over there. Continue to drive that. Brian, if you wanna talk about the product and how it's fitting in and some of those growth opportunities that you've seen while being over there.
Sure. Hey, good morning. The strategy we've been executing in terms of our distributed sensing products has been to add modalities and/or performance that really fill out our portfolio. With LIOS, what we bring is a long-range sensing system
World-class in the market in measuring temperature, for instance, over very long ranges with fiber sensors. We can also add, with the acquisition, distributed strain measurement capability over long ranges. When combined with the OptaSense products and Luna's legacy products, we really have the suite now, nearly fully covered. There will always be areas we wanna improve, but now we can really bring a fulsome solution to the market. They've had a focus historically on infrastructure, tunnels, power cable monitoring, where you know, Luna has not had those longer-range solutions in-house. We're marrying those now with our legacy and DAS solutions to bring a full suite to the market.
We've already identified, as we've gotten our teams working, dozens of opportunities that require both what Luna already had in terms of DAS and these LIOS products. We can actually combine them and even early days here out of the gate, drive some early synergies through finding these low-hanging fruit. Historically, they've actually been running over the last several years in those growth rates, mid-teens% kind of growth rates. Everybody's kind of had a little impact from COVID, so it doesn't necessarily account for the last 18 months. We expect to get them back on a growth path that's similar to Luna's. You know, we've seen even in the early days here, as I've mentioned, we've seen the capability to do that.
Does that put Luna as a whole on a kind of a mid-teens long-term growth capability?
Yeah. You know, when we had the Luna Labs business with us, we believed we had a mid- to upper-teens growth business, Barry. Now with the divestiture of Luna Labs and the pickup of OptaSense and LIOS, we believe that is a high-teens to low-20s. And that's organic, and that's, you know, over the next 12-24 months.
Obviously getting out of COVID and supply chain constraints.
Certainly. You know, we certainly are hedging ourselves on that, especially from a guidance perspective, just being careful with that. We do believe that what we're seeing and the book to bill and the amount of business certainly that is where we believe we should be.
Okay. My second question, you mentioned that you're not just shipping boxes off the loading dock. You now have a services component to your revenue stream. Maybe more visibility on that because, you know, that presumably has higher margin potential. What exactly are you doing? Presumably, those are recurring contracts. What kind of margins do those carry, and what percent of revenue is that today?
Yeah. Well, you know, you've heard us talk about it for several years about that we believed we needed to be in the pockets of our customers in providing them that service after the installation. And when we talked about this, we did kick off a program internally that was moving slowly. But in the acquisition of OptaSense and LIOS, they had already been doing this, so it really kickstarted across all of our products in moving to this not only, you know, kind of the box sale, but the installation, the servicing, and the data analytics. So, you know, it's still a small portion of our revenue right now, but it is a huge opportunity for us that will carry a larger margin for us.
You know, you've seen it this quarter, just like, you know, we saw it, I think it was maybe Q3 last year, where we pop and we show a 62%-64% gross margin, and then it goes down to 58%. We believe overall, we're trying to guide to that upper 50s, low 60s is where we'll be average-wise. It really does relate to that product mix. If we have, you know, a quarter that's bigger on having some service revenue, it does carry a higher revenue, I mean, higher margin. It's a smaller portion right now. I don't know, Brian, if you wanna talk a little bit more about how it...
You know, these guys were well sophisticated in this position, and it's what excited us about these acquisitions that they already had the 24/7 monitoring in place.
Yeah. Just to add a little bit, maybe more detail about the area. If you look at the revenue mix for us, and you just look at this year, for instance, annualized. About $45 million-$50 million of that revenue is going to have a project flavor to it, which is to say that we'll deliver hardware, software, and service to a larger project, say a pipeline or a bridge, a tunnel, et cetera. Of that $50 million, predominantly still hardware and software, but you might see 15%-20% of that actually service in terms of field, you know, installation and turnups. What we're trying to do from a strategic perspective is to take that service element and make it purely recurring.
As we stand today, that's not, strictly speaking, a recurring revenue element because it comes with the system and the project delivery. Once that's done, we go on to the next one. We do have about 5% of our total revenue pure in kind of a purely recurring flavor today. That is to say, after the project is done, and as it lives on for years in the field, it produces revenue for Luna through you know, service warranty, software, etcetera. That's what we're looking to grow. We're looking to take that 5% and over the next couple of years, make it 10%, just as a starting point.
Okay. My last question, I think I heard you say that you're investing in increasing your manufacturing capability. I think you said a 4x. Where are you doing that? Are you knocking out walls? Can you do that in your existing footprint? If I combine that with the comment you made on Terahertz being sold out through year-end, obviously, you know, you'd wanna take a look at increasing capacity there. Can you give us a little more color on what you do in manufacturing and also include the impact on capital spending as a result of that?
Yeah, sure. You know, if you remember, when we sold the Picometrix business to MACOM back in 2017, you know, we held on to that Terahertz piece of that business out in Ann Arbor, and folks like Steve Williamson, who were key and instrumental, we just felt like it was being starved a little bit. We invested some money into that because when we would talk to customers who were using the Terahertz system, they were overwhelmed. They thought it was the greatest thing ever. It just took some time to get some processes in place and to engineer out some things of the laser and do some things. Sure enough, those investments are paying off in spades now.
You know, you heard me mention, we now are quoting delivery times well, you know, into Q1 of 2023 for the Terahertz products. That's not because we can't get parts. We can get all the parts in the world. The problem is capacity. We have to increase capacity. We're doing that. We're building out additional facilities in our Atlanta facility to make the Terahertz products, to make the laser. You know, we were able to make about one of those a week. In Q3, we'll make two of those a week. In Q4 or into Q1, early into Q1, we're gonna make four of those a week.
You know, we have all these processes set up, you know, that our Senior Vice President of Operations, Jackie Kline, has been all over setting up these processes. But that's the real expansion in being able to quadruple our output of these Terahertz. You know, we are seeing more business than we can handle right now, and we see it continuing to grow once we've been able to get that product really out, get the right sales approach to it, the right marketing approach, put more engineers around it. So we're seeing that grow. The RIO Laser, you know, again, we're quoting many quarters out for the RIO Laser.
There's a lot of opportunity there that we're expanding our facilities to be able to handle this. You know, it's a good problem to have.
Does that include expansion in Virginia and then also the CapEx impact on manufacturing expansion?
Barry, it's Gene Nestro. Just to highlight a couple things that Scott said there. You know, there are two major areas this year that are gonna require more than our normal CapEx, and that's, you know, building out not just our Terahertz product and moving that to Atlanta, but also our laser side. Normally we're about 1% of revenue, so we would normally be about $1 million or so this year. This year we'll probably double that, maybe even a little more, depending on the timing. Then going forward, we're modeling instead of, you know, the 1%-1.5%, we're modeling more like 2% going forward because we do see a lot of growth, you know, coming down in the pipeline.
Okay, great. Those are my questions. Thank you, gentlemen.
Thanks, Barry.
Thanks.
Our next question comes from Alex Henderson of Needham. Your line's open.
Good morning, Alex.
Hello?
Yeah, can you hear me?
Again, Alex, your line is open.
I guess my headset wasn't working properly. I had it off mute. Anyway, hi, guys. Just following up on that last question. I apologize for the speaker phone since the headset wasn't working properly. Can you quantify the Terahertz size of that business today, just to help scale it for us?
Yeah, I mean, you know, I think it's still a smaller portion of our overall revenue. If you look at where we got it, I would say it's right in that 10% range or so, a little bit less maybe, but growing, you know, kind of in that. Call it 8%-10% of our overall business is in the Terahertz. But it's coming off of a small number, and, you know, last two years, it's in essence doubled year over year.
Well, it sounds like if you're getting to four a week from one a week, that's a pretty big increase in the 2023 revenue stream on a year-over-year basis. If I'm doing my math right, that alone could give you a double-digit increase in revenues.
I mean, I think if we continue to be, again, like we've talked about before, and I tried to mention on the call here, getting away from the onesie twosies and being box stores into selling multiple units, getting spec'd in to a lot of these organizations is what's driving some of this. I mean, these are no longer someone placing an order for one unit. You know, we're now getting orders for eight, 10 units. The Terahertz product sells, you know, in the mid-$150 range or so. Getting an order for eight, 10 units is a meaningful order.
Just going back to the visibility on that. That's a pretty big increase in capacity. You're sold out through year-end. As you get into the first quarter of next year, and I didn't realize this is starting to look out, you know, beyond a reasonable level of, for the thought process. Do you think you will have, you know, half a year plus of visibility to that business so that you can be confident that that production will be adequately utilized in 2023, 2024 timeframe?
Yeah. Hey, Alex, it's Brian. We do. The nature of the customers that are the big customers that are filling the capacity are such that we have really strong visibility into where these systems are going, what they're being used for, why they're needed, and then and how many that, you know, they need. Yeah, we have really nice visibility into that.
You talk about increasing your capacity on inventory by, you know, ordering more and purchasing commitments. Can you talk about the degree to which that inventory that you're bringing in is safe to stock? Let's hypothetically say we went into a, you know, a recession globally, would you have any risk carrying that inventory having obsolescence occur? Or is this stuff that is just so fungible that you're not at risk at all on that inventory carry?
Yeah, our inventory is primarily, you know, electronic boards and other electronic components. There's a couple things going on. To answer your question directly, we don't think so because, you know, we see. It's not like we're ordering two years' worth. We're just ordering out a little further than we normally would. Also, you know, Scott alluded to it in his comments. As we see this growth, you know, coming over the next couple of years, we're doing a lot on our procurement side of operations, and so we're putting in a more global view and working on combining our buys and working with, you know, some other vendors, you know, to utilize our buying power. There's a lot going on in the inventory right now.
I think you'll see we're up a little bit on inventory right now, but we expect that to hold steady, the inventory as our sales are increasing, and we start to consolidate some of our commodity codes and things like that.
Just going back to EMEA, given the macro conditions there, can you talk about any exposure you think you might have to a meaningful slowdown in that economy?
Yeah. A lot of times, remember, the products that we're selling, you know, are kind of the next thing that people are doing, so it's for safety, it's for efficiency. Certainly, you know, that could impact us, but a lot of these things, we don't really see having a huge impact. You know, when you look at our overall sales, EMEA is roughly around 20%, but we're not seeing that right now, you know, coming through the sales team, coming through our orders or coming through our backlog.
Just to be clear, you price in dollars in EMEA?
For the most part, it's a little bit. You know, the LIOS business is more in the euro, but a lot of the OptaSense, again, when you're in the oil and gas industry, a lot of that is in the US dollar.
No currency impact from the double-digit decline in the euro currency versus the dollar?
We have seen a little bit there, I think maybe a couple hundred thousand, but nothing super significant at the moment.
Going back to the backlog for a second, and then I'll cede the floor. The backlog, is that a function of supply chain causing, you know, delays in shipments, or is that just simply you've got a very robust orders because you've got great products? I assume it's probably a mixture of it. Could you talk a little bit about, you know, that record backlog and the 1.2 book-to-bill, the mix between change in duration versus, you know, real order growth?
Yeah. I'll answer the first part of that. It's not related to supply chain. It's more related to a really robust pipeline for orders.
No duration issues there, the, "Gee, I can't get the part, and therefore I'm gonna order further out"?
No, we're not seeing any of that, Alex.
Perfect. Great. Okay, I'll cede the floor. Thanks.
All right. Thanks, Alex.
Our next question comes from Chris Sakai at Singular Research. Your line is open.
Hi. Good morning.
Hey, Chris.
I had a question on the growth of the book to bill ratio. You know, what were the main drivers there, and how much do you expect that to grow with LIOS coming into full swing in the next quarter?
Yeah. I mean, you know, I think we've mentioned before, historically, Luna has run at a flat 1 book to bill, you know, as long as I can recall, certainly the last five years. Really that has, you know, obviously with COVID and some other things going on, it has crept up, but we're now seeing more of a 1.2, where a lot of demand for our business and just not, you know, not able to get it necessarily off the dock with some larger orders, shifting from just a box seller to solution seller and needing to get, you know, out into the field and things like that.
We do see that book-to-bill LIOS brings that same kind of dynamic to it that OptaSense brought, a solution type of sale, you know, where it requires, it's a bigger order, and it requires getting out to install. Not just getting the product off the dock but actually getting out into the field and doing the installation and things like that. We do see that going up. Brian, if you wanna talk a little bit about. You know, we obviously track by business, by location what our book-to-bill is and, you know, it's larger in some areas and lower in others. So I don't know if you wanna give a little more color on that, Brian, I know you have.
Yeah, sure. The way our business runs and the seasonality actually tends to be a little lower book-to-bill in Q1 as we harvest the higher book-to-bills we have at the end of the year in Q4. What you can see is a little bit of that shift in the business Scott was talking about here in that, you know, we're still for quarter one here in that 1.2 range, which means we're, you know, we're booking business, you know, for not only delivery in this quarter, but for the balance of the year. You know, I think our exiting backlog for Q1 was in the $40 million-$46 million range.
You know, certainly there will be quarters where we, you know, we try to harvest that and, you know, accelerate the actuation of that revenue. In general, as the business has shifted towards a larger portion being more of a project nature, you're just gonna see, you know, more larger orders that will affect over a longer period of time versus the, you know, the legacy business where, you know, we'd get an order in on, you know, on any given day and typically had the capability to ship that out and recognize the revenue within a week. There's nothing wrong with either. They're both good, but it's the mix that's really driven the higher book-to-bill.
Okay, great. To go on the acquisition of LIOS, you know, how is that being integrated? Are you seeing any extra costs in Q2 from that?
Yeah. Like I said earlier, that was an immediate integration into Luna's organization. We had identified the four or five key business unit heads there and rolled them right into Luna's existing from a sales, marketing, engineering, operations perspective, rolled immediately into our organization. Those key leaders were on site the day that we announced it to all those folks. That has done really well and moved a lot more quickly than some of our other acquisitions. Like I said, since it rolled in, it was so synergistic with our OptaSense business. It was critical to move quickly on that. Brian, I don't know if you wanna talk about we continue to still.
You know, when I say we're fully integrated, we're integrated from a structure perspective. There's still some things that need to be done from an IT perspective to make sure we get on all the same system, from a finance perspective to get on the same systems. This has moved very quickly in helping to identify immediate synergies. You know, you've heard me say before when we look at these acquisitions, I don't like using the word synergy to justify any purchase price, but obviously we all want synergies from a cost perspective and from a revenue perspective going forward. I just don't like them when people try to use them to justify a certain price, which we will not do.
We do believe that there are cost synergies, and we do believe there are revenue synergies that we're seeing immediately.
Yeah. The teams are fully integrated into our management structure. All the functional elements in terms of sales, marketing, operations, et cetera, engineering, product development are all integrated within my team. You know, we've got everyone working together to go, as I mentioned, previously, to go after those, you know, those low-hanging fruits, if you will, the synergies. We've identified right out of the gate within the first couple weeks, you know, over a dozen opportunities where we can bring a combined solution. That part's going really well. You know, we're operating under a TSA for a few more months to get, you know, the rest of the back-office things fully connected inside Luna.
That just takes some time in terms of the ERP systems and the finance systems, et cetera. Yeah, all in all, it's gone very smoothly. The ability to travel has certainly helped immensely in getting the teams working together. I mean, I personally and my whole team is very excited about the addition of this team and these products to Luna.
Chris, it's Gene. Yep, you'll see a couple hundred thousand, you know, over the course of Q2 and Q3, for a third-party integration expense that we'll have, particularly around the IT side. You know, we're using BDO Digital again. They helped us with OptaSense. There will be a little, you know, some integration costs you'll see in Q2 and Q3, you know, couple hundred thousand probably.
Okay. Great. Thanks for the answers.
Our next question comes from Dave Kang of B. Riley. Your line is open.
Thank you. Good morning. My first question is, may have missed it, but did you give the mix between sensing versus comm test? Which has a better pipeline?
I don't know. Did we give the mix? I don't know if we gave
We didn't give it.
We did not give the mix. Typically, it's 2/3 sensing and 1/3 comms test. Both pipelines, both backlogs are very strong. With the acquisition of LIOS, and it only represented a couple weeks, but with OptaSense, we certainly guide to sensing makes up about two-thirds of the revenue. And it was about 65%, 64% or so. So 65/35, Dave, is the mix between sensing to comms test. Both backlog on both businesses, both end-market segments here are very strong.
Got it. Regarding, yeah, your 2022 revenue outlook, how much of LIOS are you expecting to contribute?
Yeah, you know, we talked about that in when we announced the deal. I think, you know, 2021, you know, they did somewhere in the EUR 12 million type of a business. From a guidance perspective, you know, we've kinda run that flat in our guidance. You know, we believe that there is opportunity now that we've gotten into it. You know, we put together these numbers and came out with the annual guidance for Luna, you know, prior to really being able to bring them across the fence here and bring them in.
Their management team has been here spending several days in deep dives and things like that with all of Luna's management and down into our organization. We feel very, very strongly about, you know, the value add that they will have to our top line, and the synergies going forward with the other businesses that we have.
Got it. My last question is regarding supply chain. I don't know if you talked about the impact of both revenue as well as on your margins.
Yeah.
Yeah. Hey, Dave. From a revenue perspective, what we're seeing is about 5% impact to the top line. You know, we were anticipating a little bit more at the margin line, frankly, maybe 50 basis points, 50 to 100. What you saw in our results was that our combination of the team really getting on top of these issues and the mix being as strong as it was towards higher margin business. Yeah, fair to say, no impact at the margin line in quarter one.
We did in Q1 implement a price increase to help offset that. Did not see the full impact, I don't think, here yet in Q1, 'cause, you know, obviously we have purchase orders in the pipeline. So again, a couple things mitigating it with the price increase, also with pulling our purchasing, you know, globally together and renegotiating some opportunities, we're actually hoping to keep our material costs flat, if not see a little bit of a benefit as we get through the year.
Got it. Thank you.
All right. Thanks, Dave.
Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then one. Our next question comes from Charles Knowles, an investor. Your line is open.
Hello, Scott, and group. "The report of my death was an exaggeration" by Mark Twain comes to mind. I see the stock is up tremendously pre-market. I chuckle when I remember Scott saying you can't go after every rabbit hole. Back when I first went up to meet with Steve and Rob and Greg , they told me about this Abbott Labs study where they could, with the Terahertz, determine with 100% accuracy the purity of prepackaged pharmaceuticals. That just seemed like the way they check drugs, one out of every 1,000 for human and every 10,000 for veterinarian, that would be a great thing. That's just another rabbit hole I wanted you to know about. I get nervous talking to you guys, but I'm really happy with what you're doing.
The one question I sorta had with this money extra that seems like you have. I know you're having to do a lot of incentive stock incentives to keep scientists and find new ones. I was just wondering if you do have any plans in your buybacks to, if while the stock is low, to offset these incentives.
Yeah. Well, you know, thanks, Chuck. I appreciate it. I think, you know, what you're seeing, and I know you followed this for a long time, and I think the hard work and dedication that was put in, you know, all through the years by folks like Steve Williamson, who really is the inventor and brains behind a lot of this. You know, what he did early on with guys, you know, we have the Gregs that are out there that have done phenomenal work. The works that Rob supported for years. You can't underestimate the many hours that Irl Duling put into this. You know, it was. You had to be a believer in this.
I'm telling you, boy, what we're seeing now is this is just taking off and becoming instrumental to the customers that we're working with, you know, some of the big companies out there, this is a critical piece to be measuring, not just thickness, but density in real time on their production line. This really is paying off. In regards to, you know, stock buyback, believe me, we would love to do some of those things. We just, you know, these things that we've done recently, these acquisitions that we've done, you know, we chose to take the approach of funding those off of our own balance sheet, using cash plus any kind of divestiture that we could do. This all started back in 2017 when we divested Picometrix.
You know, since then OptaSense. Using that cash to redeploy, you know, in our space to, you know, to reiterate this fiber optics, you know, fiber is the future. You know, enabling the future with fiber has been our North Star, if you will. I don't, you know, we're just not in a position right now. You know, we're in a comfortable position with our balance sheet. We just don't believe that would be a good use of our cash right now, to do that. From a lockdown perspective, look, these things have to happen. We have to make sure the market is crazy out there with the phone calls that we all get, you know, in trying to entice us away.
Big companies are paying big incentives to, you know, to make you whole, to walk away from what you're walking away from. You know, you have to firm up the foundation pieces, you know, these things that we have, you know, guys like Gene and Brian and Salvan, these are foundation blocks of the company, along with many others in the organization. We reach down deep in the organization to try to keep them seated and not return those calls, and we'll continue to do that. We have to do that. That's in the company's best interest and certainly in the shareholders' best interest to make sure that there is no cracks in the foundation. We'll continue to do that.
There'll be a time when it makes sense to, you know, as you know, historically, we have done stock buybacks, you know, repurchase, but now's not the time to do that. We gotta make sure that foundation doesn't have one hairline crack in it, and that's my focus right now.
Hey, Charles, it's Gene. I would tell you something you can get excited about, you know, today is with all these acquisitions, and I know you've followed the company for a long time. Where we're at today is we have the DAS technology, the DTS technology and, you know, the classic Luna stress and strain technology. You know, we believe we're the only company that has all of those. So we have products today and IP today for all three of those. Then what we have are the engineers, experts in all three of these through all the acquisitions. We have the expertise in the engineering and on the manufacturing side to combine these and develop the solutions for customers in the future.
We have products and IP for today, and we have, you know, the people and the talent that we need for, you know, what's gonna be coming down. I would just pass that on to you.
Yeah. I've enjoyed reading the bios of all of you guys, quite accomplished. I hope you had some fun too.
Yeah. Yeah.
Well.
Let's get out of this pandemic, and maybe we'll get back to fun. Right now, you know. I think, you know, again, setting that strategy was the best thing that we've done five years ago to really stay the course through this and put the processes in place. You know, look, I mean, we've done what is it? Five or six acquisitions and three divestitures over the last five years. You know, we stay focused on what we're trying to do to make this a pure play, and I think we're there. Thank you.
Great. Thank you. Bye.
Again, ladies and gentlemen, if you do have a question, please press star then one. I'm showing no further questions. I would now like to turn the conference back to Scott Graeff for closing remarks.
All right. Thank you everyone for joining us today. With a great start to 2022 and the teams executing well, we are optimistic about this year and our long-term potential. We continue to believe that we are on the right side of a market shift in trends towards lightweighting and 5G. We're seeing Luna's offerings helping to accelerate these trends. We will continue to invest in our business, ensuring we have the right leaders and that they are appropriately supported and empowered. With that, thank you for your attention on today's call, and I hope to see some of you next week in California at the B. Riley conference. Feel free to reach out with any questions. Tanya, that concludes this earnings call.
Thank you. Ladies and gentlemen, thank you for participating. You may now disconnect.