AstroNova Inc

NASDAQ:ALOT

Earnings Call Analysis

Improved Margins and Positive Outlook

The company's Test and Measurement segment saw a 16% year-over-year increase in revenue to $11 million, with operating profit growing to $2.6 million, up from $1.7 million, attributed to favorable product mix and higher revenue driving margins. Operating income grew more than twofold to $3.6 million with a non-GAAP operating margin of 12.3%. Net income was up significantly to $2.8 million ($0.37 per share) from the previous year's $289,000 ($0.04 per share). The company completed strategic restructuring to improve cost structures and margin profiles, with consistent performance expected in both segments for the fourth quarter. Despite a 20% decrease in backlog to $31.2 million, the expectation is income consistency with Q3, highlighting strong demand and barriers to entry as positive long-term signs for the Aerospace Products group.

Projecting a Brighter Future in High-Quality Aerospace and Digital Printing

The company has painted a positive outlook, indicating that by the second half of fiscal 2024, it anticipates significantly higher profitability, with operating income already having increased threefold to $4.6 million. This uptick is bolstered by an 890 basis point improvement in operating margin to 12.3%, alongside an adjusted EBITDA surge of 81% to $5.7 million, representing 15% of revenue. These results reflect a strong bounce back and suggest a robust pathway ahead.

Strategic Product Focus and Partnerships Enhancing Market Position

The company is strategically focusing on its ToughWriter printer, enhancing its market position by making this advanced printer a standard on Boeing's new 777X aircraft, expected to enter service in 2025. This move amplifies the company's commitment to quality, as reflected by positive feedback from international pilots. Coupled with a decline in royalty payments to Honeywell International by the end of fiscal 2028, cost efficiencies are expected to improve.

Performance Highlights Indicate Mixed Results

Revenues for the quarter hit $37.5 million, showing a year-over-year decline of approximately 5%. This dip primarily resulted from weaker performance in the PI segment, slightly offset by Test and Measurement growth. Nevertheless, the Test and Measurement segment enjoyed a 16% revenue increase year-over-year to $11 million and demonstrated a marked profitability surge with operating profits climbing to $2.6 million or 23.2% of revenue.

Innovative Product Launches to Meet Market Demand

The company is launching innovative products such as the T2-PRO and T3-PRO, solidifying its market differentiation through unique total printing solutions that prioritize quick, high-quality outputs with reduced waste. This approach, along with the anticipated release of two new digital printing and addressing systems, is poised to strengthen market foothold in existing and new verticals.

Balanced Global Revenue Streams

Revenue sources are well-divided between domestic and international segments, with domestic revenue comprising a slightly reduced percentage of total revenue compared to the previous fiscal year, and international revenue seeing a growth to 44%. The overall revenue breakdown issues a healthy signal of balanced global market penetration.

Operating Efficiencies Driving Margin Enhancements

The ongoing shift to the ToughWriter branded printers is expected to drive down manufacturing costs and improve margins[19†source]. Alongside this, a reduction in operating expenses by about 9% has contributed to a significant improvement in non-GAAP operating margin and to operating income, which more than doubled to $3.6 million.

Financial Strength and Recovery From Setbacks

With a modest 1% increase in bookings to $35.5 million compared to the previous fiscal year, the company is recovering from a 20% decrease in backlog. The management is addressing the issue of faulty inks affecting approximately 150 printers, aiming for complete resolution by the end of fiscal 2024. By reducing inventory levels and focusing on debt repayment, the company is taking a disciplined approach to cash flow management and financial stability.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the AstroNova Fiscal Third Quarter 2024 Financial Results Conference Call. Today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Scott Solomon of the company's Investor Relations firm, Sharon Merrill Advisors. Please go ahead, sir.

[Scott Solomon]

Thank you, Carla, and good morning, everyone. With me on this morning's call are Greg Woods, AstroNova's President and Chief Executive Officer; and David Smith, Vice President and Chief Financial Officer. Greg will discuss the company's segment operating highlights. David will take you through the financials at a high level. Greg will make some concluding comments, and then management will be happy to take your questions. If you've not received a copy of this morning's earnings release, please go to the Investors page of the AstroNova website, www.astronovainc.com.

Statements made on today's call that are not statements of historical fact are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties. Accordingly, actual results could differ materially, except as required by law. Any forward-looking statements speak only as of today, December 6, 2023.

AstroNova undertakes no obligation to update these forward-looking statements. For other information regarding the forward-looking statements and the factors that may cause differences, please see the risk factors in AstroNova's annual report on Form 10-K and other filings the company makes with the Securities and Exchange Commission.

On today's call, management will refer to non-GAAP financial measures. AstroNova believes that the inclusion of these financial measures helps investors gain a meaningful understanding of the changes in the company's core operating results and also helps investors who wish to make comparisons between AstroNova and other companies on both a GAAP and a non-GAAP basis. A reconciliation of the non-GAAP financial measures to their most directly comparable GAAP measures is available in today's earnings release. And with that, I'll turn the call over to Greg.

[Gregory Woods, executive]

Thank you, Scott, and good morning, everyone. We began the second half of fiscal 2024 with a significantly more profitable third quarter where operating income increased more than threefold to $4.6 million. Operating margin improved 890 basis points to 12.3% and adjusted EBITDA hit an all-time record up 81% to $5.7 million or 15% of revenue. This profit improvement is a testament to the great agility, hard work and execution by our teams around the world. The increased profit generation was achieved despite an 11% year-over-year revenue decline in our Product Identification segment.

This was primarily from the supply side of the business, or the lingering negative impact of an ink quality issue from one of our suppliers has decreased ink utilization on some of our printers. To a lesser extent, the temporary effect of higher customer ink inventories ahead of a price increase from that same supplier and to a degree, the impact of exiting certain product lines as part of the restructuring we announced last quarter.

We believe the ink related slowdown issues will abate as we move through the next few quarters. Additionally, we expect to realize strong margins from several new product releases as they gain traction in the market. Meanwhile, the commercial aviation industry continues to experience robust demand closing in on and in some cases, exceeding the 2019 highs. Both aircraft operating hours and new aircraft orders are up markedly. These trends are expected to continue and bode well for the aerospace product line within our Test and Measurement segment in the fourth quarter of fiscal 2024 and beyond.

Now let's review our segment results in a bit more detail, starting with the PI segment. Operating profit increased 62% to $4.8 million, with margin up to 820 basis points to 18.1%. The vastly improved performance primarily reflected favorable product mix as some of the margin improvement actions we implemented earlier took hold. Additionally, we reduced expenses, had lower warranty costs and improved operating efficiencies from the restructuring. We have simplified the PI segment by transitioning more printer manufacturing from Asia and West Warwick to our AstroNova -- Astro Machine plant rather in Illinois, exiting low-margin or low-volume label printers, consolidating international sales and distribution facilities, and streamlined our global channel partner network.

As an ongoing fundamental of our strategy, we continue to invest in new products that meet our customers' needs for printing solutions that are compact, efficient and flexible. In the third quarter, we unveiled three new printers. The QuickLabel QL-900 and TrojanLabel T2-PRO and the TrojanLabel T3-PRO. The rugged QL-900 is a desktop inkjet label printer designed for full color labeling applications, manufactured at our Astro Machine plant in Illinois. The product features a touchscreen interface and internal job library, enabling users to easily manage printer setup and operation.

The new T2-PRO is the latest addition to our TrojanLabel brand of compact digital label presses targeted towards industrial and professional printing segments. With a print width of 12.75 inches, and a print resolution of 1600×1600 dots per inch. The T2-PRO offers superior cost of ownership across all available aqueous inkjet technologies on the market. The T3-PRO has a compact CMYK digital print module ideal for OEMs that want to easily integrate a print station into conveyors or other specialty equipment to offer full color digital printing solutions for envelopes, corrugated and a wide variety of flat surface products.

In addition to those three printers, we recently unveiled the VF-280 0, a high-speed commercial vacuum feeder. This product is designed to handle a variety of materials like bags, envelopes, heavy card stocks, corrugated cardboard, jewel cases, calendars and sheet stocks. When integrated with the TrojanLabel T3-OPX, the VF-280 offers a modular direct-to-package post printing system that enables high-quality, full-color automated printing. Customers benefit from faster time to market and reduced waste. In recent months, we've had the pleasure of integrating and interacting with the thousands of current and prospective customers who demoed our digital label printers, envelope printers and direct-to-package printing solutions at major trade shows such as PACK EXPO in Las Vegas, LabelExpo Europe in Brussels and the PRINTING United Expo in Atlanta. What we heard from customers is clear. Within the digital printing market, what differentiates AstroNova is our ability to provide customers with a unique total printing solution.

We consistently earn high ratings, not only for the breadth of products we offer, but also for the consultative services and support that we provide that tailors a solution to each customer's application and business needs. For instance, within our Astro Machine subsidiary, we are continuing our product innovation initiatives with the upcoming launch of two new digital printing and addressing systems, purpose-built for a large OEM customer. These products embody the voice of the customer methodology that is a central tenet of our AstroNova operating system. Engaging with customers on the design engineering of new products has enabled us to apply that valuable learning to gain traction in both existing and new market verticals.

Switching to the Test and Measurement segment. Third quarter revenue increased 16% year-over-year to $11 million, with growth in both our Aerospace and Test and Measurement product groups. Segment operating profit was $2.6 million or 23.2% of revenue compared with $1.7 million or 18% of revenue a year earlier, driven primarily by favorable product mix and the impact of operating leverage on the higher revenue in that unit. As we've discussed on prior calls, we are gradually upgrading OEM and direct airline customers to our more advanced ToughWriter branded printers from the other three brands in our portfolio.

Pairing the number of brands that we offer will allow us to reduce our overall manufacturing costs, thereby driving higher margins. By the end of fiscal 2027, we estimate that 9 out of every 10 printers we ship will be a ToughWriter compared with a little less than 4 in every 10 today. As we execute that transition, we want to also point out to investors that an additional benefit of this transition will be that the royalty we pay to Honeywell International under our asset purchase and licensing agreement will decline, and it will disappear completely at the end of the third quarter of fiscal 2028. We'll not be forecasting that decline for you, but we will report on that as it happens beginning next year.

Finally, I'd like to mention another platform design win for our ToughWriter printer. The ToughWriter will be standard equipment on Boeing's new 777X, a wide-body twin-engine jet line are expected to enter service in 2025. Last month, our Aerospace group exhibited at the Dubai Air Show, where I had the privilege of touring the 777X flight test aircraft and hearing from a number of commercial aircraft airline pilots about the favorable experiences with our printers. An Embraer Captain captured it best when he referred to our printer as a lifesaver. We agree.

With that, let me turn the call over to David for some further financial comments.

[David Smith, executive]

Thanks, Greg, and good morning, everybody. I'll reinforce and add some comments about the third quarter financial performance. As Greg said, total revenue for the quarter was $37.5 million, down about 5% year-over-year with the lower revenue in the PI segment, partly offset by growth on the Test and Measurement side. Hardware revenue of $12.9 million was about 8% higher than last year's third quarter, and supplies revenue was about 13% to $20 million. While the service and other revenue grew about 4% to $4.7 million. Domestic revenue was $21.8 million for the third quarter, a 55.8% of the total compared to 57% in the year earlier period.

International revenue was $16.6 million or 44% of revenue compared to 43% in the third quarter of fiscal 2023. Gross profit increased 770 basis points to 39.4% in the third quarter, driven by better product mix lower manufacturing expenses and better absorption and reduced period costs. Of the improvement, the directly trackable impacts on the PI segment restructuring benefits was approximately $450,000 in the fourth quarter -- third quarter rather, and that impacted both gross margin and operating expense. Operating expense declined about 9% in the third quarter to $10.2 million on a non-GAAP basis.

This and the factors Greg outlined for why the operating income increased more than twofold to [ $3.6 million ], while non-GAAP operating margin improved over 710 basis points to 12.3%. On the bottom line, we reported net income of $2.8 million or $0.37 per diluted share for this -- just the next quarter versus $289,000 or $0.04 per diluted share in the year earlier period. But keep in mind that the GAAP net income for the third quarter of fiscal '23 included transaction costs of $540,000 or $0.07 per diluted share associated with the August '22 acquisition of Astro Machine. On a non-GAAP basis, net income for the third quarter of fiscal '23 was $0.11 per diluted share.

Adjusted EBITDA in the third quarter of this year was $5.7 million or 15% compared to $2.4 million or 6% of revenue in the same period last year. Excluding transaction costs last year's adjusted EBITDA for the third quarter was $3.1 million or 8%. Bookings for the third quarter of fiscal '24 increased 1% to $35.5 million from $35 million in the third quarter last year. Backlog as of October 28, 2023 decreased 20% to $31.2 million from $39.3 million a year ago. But this decline is largely due to the timing in the T&M segment and is not indicative of what we expect in the fourth quarter this year when we expect the income statement overall to be consistent with the third quarter.

As previously discussed, we had identified about 150 printers sold to customers that were affected by the faulty ink and we're working with those customers to either repair or replace the effective printers on a gradual basis. We anticipate this will be largely done by the end of this fiscal year at the end of January 2024, with maybe some of it trailing into the first quarter. In Q3, we incurred costs of about $240,000 for that program, which had been reserved for in connection with the restructuring.

Inventory reduction was modest. And while the supply chain challenges are abating, we're still recovering in the inventory level reduction tests that we have. Inventory was $46.3 million at the end of the quarter, down 9% from the end of fiscal '23. Term loan debt at the end of the third quarter was $9.5 million compared with $12 million at the end of last fiscal year. The revolving credit is down $1 million to $14.9 million. Our expectation is to generate cash from earnings and working capital reduction in Q4 and to continue the current focus on using available cash to reduce debt. So I'll turn the call back to Greg for closing comments.

[Gregory Woods, executive]

Thanks, David. Our operational and financial momentum entering the final quarter of fiscal 2024 is strong. The recently completed strategic restructuring has significantly improved the cost structure and margin profile of the business and we expect both segments to perform in line with these results again in the fourth quarter. The restructuring of our PI segment allows us to focus on those products with the strongest volume and margin potential while continuing to drive demand through innovative new solutions, such as the QL-900, the T2-PRO and the T3-PRO, and we're very excited about the new OEM products in our Astro Machine pipeline.

In the Test and Measurement segment, the key demand drivers are commercial air traffic, new aircraft orders and OEM market forecasts, all of which are pointing up and to the right. Based on strong demand, high barriers to entry and the extended nature of the contracts, we feel very good about the prospects for our Aerospace Products group over the long-term. Now with that, I'll turn the call back to the operator for questions.

[Operator]

Thank you, Greg. [Operator Instructions] So we have no questions registered at this time. So with that, I will hand back to Gregory for final remarks.

[Gregory Woods, executive]

Well, thanks, everyone, for joining us here this morning. As always, we look forward to keeping you updated on our progress and hope you have a wonderful holiday. Bye now.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect your lines.