Good afternoon, everyone.
As Allison mentioned, we issued our first quarter 2020 press release at market close and you'll find it on our Web site.
What an extraordinary time it has been since we last got together.
Let me begin by thanking all of you for taking the time to join us today and saying that I hope you and those close to you are healthy and safe. I am incredibly grateful to be at the helm of a company, which for the most part has been able to stay the course. I want to be clear; this does not mean that we are completely immune to the broad effects of this pandemic and the significant macroeconomic downturn which is currently hitting some industries harder than others. And I'm very mindful of how quickly a situation can change.
For context, I was COO of Luna in 2008 when the financial crisis hit.
During that time, we were forced to lay off nearly 25% of our workforce at all levels, halt production and we experienced the negative effect of sequestration on our contract research business. I know firsthand how difficult it is to recreate a talented leadership team and maintain production lines. That's why it is critical for us in the face of this current global challenges related to the coronavirus epidemic to retain and maintain our highly skilled, highly educated workforce.
You just can't flip a switch and quickly rebuild that type of team. And that's why I'm clearly focused on doing as much as possible through this pandemic to stay the course operationally, so that we may remain soundly positioned when these storm clouds clear.
As you will hear from our comments this afternoon, we were able to deliver to our expectations for the first quarter of 2020. And as you saw from the release we issued, we are reaffirming our guidance for the full year, but likely towards the lower end of the ranges.
As we prepared for this call, Gene and I spent quite a bit of time with our operational and sales teams to understand any trends or forward indicators they might be seeing that suggest a softening of the business or any other significant changes.
Just as importantly, Brian, James and I have spent time on the phone with our customers and our component suppliers to better understand how the pandemic may affect their operations.
Our pipeline for the second half of the year has forecasted orders of varying sizes.
For a company of our size, having any of the larger orders pushed out of this year could significantly affect our results. But with the information we have today, we have no evidence of a softening in our business that would cause us to alter our guidance.
Of course, just like everyone else, we have had to make adjustments to the way we are doing business, particularly as Luna is designated as essential.
You may have seen that we issued a release on April 14, with some of the details around what we are doing to adjust to this new environment. I am exceptionally proud of the entire Luna team, which continues to demonstrate dedication, resilience and positivity while delivering results. Their safety and well-being are my top priorities.
I'd like to start by providing an overview of the results for the first quarter, and then I'll share some of the details around how the pandemic is affecting Luna, as well as my thoughts on the remainder of the year.
For the first quarter, total revenues were up 16% to $17.1 million compared to the prior year's quarter. Products and licensing really drove this, with an increase of 26% year-over-year. We expanded gross margin by 320 basis points and delivered adjusted EBITDA of $1.6 million, up $600,000 over last year.
Now let's move on to our businesses, starting with Lightwave. Lightwave reported a strong first quarter with product revenues growing 24% on a year-over-year basis. This year-over-year increase was primarily driven by a near doubling of revenues in the communications test segment.
As a reminder, the acquisition of General Photonics occurred at the beginning of March 2019, resulting in an additional 2 months of revenue in Q1 of this year that we did not have in 2019.
We also achieved strong double-digit growth of our legacy communications test products, driven by sales of our OBR or the Optical Backscatter Reflectometer.
Let me provide a few additional highlights while I'm covering Communications Test. OBR sales were bolstered in Q1 by sales of our 2 newest versions, the OBR 6415 and the OBR 6200, both of which we have discussed in some detail on previous calls. The OBR 6415 was launched last year and is our latest high-speed OBR aimed at enhancing R&D and production of fiber optic components and systems. In Q1, we delivered multiple systems to customers working primarily in manufacturing of fiber optic components and cables. We view this as evidence that our strategy to penetrate manufacturing applications is beginning to pay off.
And in Q1, we officially launched the commercial version of our newest product, the OBR 6200. The OBR 6200 is our new portable OBR test instrument for field test applications. On previous calls, we've discussed our development and delivery of the military qualified version of the OBR 6200 aimed at field maintenance of military aircraft.
In fact, we booked several new orders for the military grade version of the OBR 6200 in Q1.
We also booked a large blanket order in excess of $700,000 for our General Photonics line of products these units will be integrated into a satellite communications system.
Moving on to our sensing segment.
As a reminder, this segment includes our ODiSI and HYPERION distributed fiber optic sensing products as well as our Terahertz instruments. Total revenue in Q1 2020 for this segment versus the prior year period were down. We had several large orders for products in this segment shift into Q2 especially for our Terahertz products.
As a reminder, the timing of Terahertz orders often can be lumpy throughout the year. A highlight in this segment was that we booked a large multiple unit order for our HYPERION product to be deployed later this year in China for an oil pipeline monitoring application.
Our HYPERION system will monitor the pipeline for any damage resulting from seismic activity.
We have continued to invest in our business, particularly in our sales and engineering capabilities and we're seeing the benefits from all the investment and work to lay the foundation. We're well positioned to leverage the growth in fiber optics and we continue to be excited about the momentum that we're seeing. Obviously, a lot has changed since we drove the bulk of these results in Lightwave.
So before I switch over to the technology development or Luna Labs, let me give you some color about our Lightwave operations during this pandemic.
We've been able to continue to operate at all of our locations, with employees either telecommuting or participating in staggered schedules and shifts following all social distancing guidelines. And by implementing these changes, we've been able to continue to deliver our global network of customers.
In fact, during March, two of our locations set record totals for products shipped off the dock. We're also working very closely with our global supply chain. We mentioned on last quarter's call that we were seeing some minor slowdown from our supply base in Asia. I'm happy to report that those impacts in Q1 were minimal and did not result in any delayed shipments of Luna products to our customers.
While we continue to experience some minor delays in the early part of Q2, all indications from our partners are that the supply chain for critical parts in Asia is expected to be fully caught up by the end of May.
Where we've seen a delay, we've been able to draw from our inventory of components to continue production. We're monitoring our supply chain very closely and will remediate any issues that arise.
As we sit here today, we believe we can procure the components necessary to meet our sales needs.
As it relates to our sales activities, historically, an important part of our sales has been through a series of trade shows and conferences, none of which we are currently taking place. We quickly shifted to a robust online presence, hosting and planning to host a total of six webinars to educate existing and potential customers about our key products.
While trade shows have always been successful in filling our sales pipeline, these webinars have allowed very good engagement between sales and customers and allow Luna to curate a specific message over a longer and more dedicated period of customer face time. We're also developing application-specific white papers that highlight each product's unique capabilities and are leveraging broad media outlets to publish these papers.
We certainly recognize that our main target markets will be affected differently and we do expect a slowdown in the aerospace and automotive industries due to the impact of the coronavirus. That said, we do not at this point expect a material impact in the infrastructure, defense and communications segments. The bottom-line is that, to-date, we've not seen a material impact on our pace of sales or the size and health of our sales pipeline within the Lightwave division.
I'll move on to a discussion of technology development, which we are now calling Luna Labs.
As a reminder, Luna Labs works in research areas that are outside of our core strategic fiber optic activities.
Here, we primarily leverage third-party contract research to build a portfolio of technologies that could be future growth areas for Luna. Mature technologies are commercialized by Luna Labs through direct sales, distributors or licensing agreements. Revenues were $6.8 million in the first quarter of 2020, which represents a 3% increase versus the prior year.
Within Luna Labs, one of the biggest challenges stemming from the pandemic is that several of our partners, especially academic collaborators have been forced to shut down.
We have a strong, talented internal team and a diverse network of partners to help us fill any gaps in specific expertise.
For example, all animal studies for our biomedical projects are conducted by external partners. In particular, we partnered with many university laboratories because many universities are closed; this has slowed work on some contracts which will present challenges to realizing the full revenue potential within the original time frame.
We are exploring other options to complete the work that is time critical.
We've kept our focus, working on projects and making up any shortfall in our traditional SBIR Phase I and Phase II revenue with later-stage research and Luna Labs products. Overall, the COVID impact from Luna Labs to our total top and bottom-line is not expected to be significant and the adjusted contribution still falls within our 2020 outlook ranges.
I hope that my comments have given you a clear picture of how we're operating in our two business segments and an idea of some of our challenges.
One of my highest priorities continues to be communicating as quickly and openly as possible as facts and circumstances change both with Luna employees and with all of our stakeholders.
I continue to frequently touch base with employees. I meet virtually with every one of our locations on a weekly basis.
We have enjoyed our several virtual happy hours and have received numerous positive messages from employees.
We have not furloughed any employees or reduced compensation at this point. We've adopted the CARES Act options in the 401(k) plan that allows access to funds that may be needed by individual employees.
We have worked with employees to provide time off under the FFCRA, so they may care for themselves or an affected family member.
Finally, we applied for and were awarded PPP funding.
However, as many of you have undoubtedly experienced, the criteria for qualification have continually changed.
So based on the fact that we have a reasonable balance of cash, we recently made the decision to decline and return the loan. I'm focused on the potential impact to our business if our customers and suppliers don't return to work and production as we've assumed. Based on the facts we have currently, which includes the strict criteria around the loan, we felt the prudent path was to decline the government's assistance.
Most importantly, our strategy and core priorities have not changed.
We continue to serve our customers with excellence and produce outstanding and innovative fiber optic-based products.
As always, we're focused on the value we can and will create long-term.
With that, let me address our guidance for 2020. Because we gave our initial 2020 outlook on March 5, we had some visibility into the COVID-19 issue. There was already some discussion around remote work and how the pandemic might affect our operations.
As we prepared for today's call, our teams conducted a bottoms-up analysis, took a hard look at our pipeline, reached out even more to customers and suppliers, as I mentioned earlier.
So leveraging what we know today, in order to complete our forecast, we're maintaining the 2020 outlook we provided on March 5, which is total revenues of $81 million to $84 million, adjusted EBITDA of $10 million to $12 million.
Although we do believe that our full year 2020 financial performance will trend towards the lower end of these ranges.
As a reminder, in terms of seasonality, we expect that results will continue to be weighted to the second half with the percentage split in H1 2020 being slightly below historical trends. Remember that in recent years, Luna has recorded approximately 44% to 46% of our revenue in the first half of the year. If the global shutdown lasts beyond mid-summer, then we will reevaluate.
However, based on what we know today, it would be completely arbitrary for us to withdraw our 2020 outlook. We realize how complex our current environment is and we're being as transparent as possible as we see shifts in operational or financial trends.
We started 2020 by articulating a strong vision of enabling the future with fiber and we're very clear about our purpose. Despite the challenges COVID-19 has created, we continue to feel good about delivering against our goals including our 2020 outlook with the additional color I mentioned.
I'll now hand the call over to Gene for more of the financial details on the quarter. Gene?