AstroNova Inc

NASDAQ:ALOT

Earnings Call Analysis

AstroNova faces challenges but expects long-term growth post-MTEX integration.

In the third quarter, AstroNova reported a 7.7% revenue increase to $40.4 million, mainly from its Test & Measurement segment, despite a decline in the Product Identification segment. Margins were affected, with gross profit dipping to 33.9%. The integration of MTEX has been more complex than anticipated, resulting in an operating loss of $1.1 million. The company initiated a cost reduction and product rationalization initiative, anticipating enhancements to margins as it consolidates its ToughWriter brand by 2027. No revenue guidance was provided for fiscal years 2025 and 2026, pending evaluations due in March.

Q3 Performance Overview

In the third quarter of fiscal 2025, AstroNova reported net revenues of $40.4 million, reflecting a 7.7% increase from the prior year. This growth was primarily driven by the Test & Measurement (TM) segment, which saw significant sales momentum, particularly in aerospace products. However, this was offset by a slight revenue decline in the Product Identification (PI) segment, where revenues decreased by 1% to $26.3 million.

Challenges from MTEX Integration

AstroNova acknowledged that the integration of the MTEX acquisition has faced challenges, leading to a $1.1 million operating loss on revenue of $1.7 million from MTEX alone. This integration has proven more resource-intensive than anticipated, impacting overall margins. Consequently, gross profit margins decreased to 33.9% from 39.4% year-over-year, primarily due to adverse sales mix and lower European hardware sales.

Costs and Expenses

Total non-GAAP operating expenses for the third quarter rose by 19.3% to $12.1 million, largely influenced by costs associated with the MTEX acquisition and headcount additions in key roles. As a result, non-GAAP operating income fell to $1.6 million compared to $4.6 million in the same period last year. Adjusted EBITDA also declined to $3.2 million from $5.7 million.

Future Revenue Guidance and Strategy

AstroNova has decided to halt guidance for fiscal 2025 and 2026 due to the extended integration timeline of MTEX, opting instead to provide longer-term targets. They anticipate a comprehensive evaluation of costs to ensure alignment with strategic goals and are optimistic about future growth driven by integrating MTEX's technology.

Product Launches and Market Confidence

Despite the challenges, AstroNova began shipping a significant inkjet printer order in fiscal Q4, expected to contribute several million dollars to the PI segment over the coming quarters. This reflects early successes in their rationalization initiative aimed at refining their product portfolio.

Long-term Vision for the Aerospace Segment

AstroNova is transitioning its aerospace printer shipments predominantly to its proprietary ToughWriter brand, expecting it to represent approximately 89% of shipments by fiscal 2027. This shift should enhance margins through reduced manufacturing costs by simplifying the product lineup and improving technology integration.

Financial Health and Challenges

At the quarter's end, AstroNova reported $4.4 million in cash and cash equivalents, a decrease from previous quarters. Funded debt rose to $48.9 million. The company recognized liquidity challenges, prompting a $2.7 million working capital loan to support MTEX. Cash flow from operations for the first nine months of fiscal 2025 was down to $2.3 million, compared to $5.9 million in the previous fiscal year.

Commitment to Improvement

The leadership at AstroNova remains determined to overcome current integration challenges, focusing on cost reductions and aligning MTEX's operations with broader corporate strategies. They believe that despite short-term obstacles, the strategic upsides from the MTEX acquisition are substantial, contributing to their goal of sustainable long-term growth.

Earnings Call Transcript 2025-Q3

[Operator]

Good morning, and welcome to the AstroNova Fiscal Third Quarter 2025 Financial Results Conference Call. Today's call is being recorded.

I would now like to turn the conference call over to Scott Solomon of the company's Investor Relations firm, Sharon Merrill Advisors. Please go ahead, sir.

[Scott Solomon]

Thank you, Ezra, and good morning, everyone. Our Q3 fiscal 2025 earnings release and the slide presentation accompanying management's prepared remarks are posted to the Investors page of our website, www.astronovainc.com.

Turning to Slide 2 of that presentation. 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 12, 2024. 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 that 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 helps investors who wish to make comparisons between AstroNova and other companies on both a GAAP and a non-GAAP basis. The non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in today's earnings release.

Turning to Slide 3. Hosting this morning's call are Greg Woods, AstroNova's President and Chief Executive Officer; and Tom DeByle, AstroNova's VP and Chief Financial Officer. Greg will begin the call with an overview of the company's third quarter performance. Tom will discuss segment results. Greg will make some concluding comments, and then management will be happy to take your questions.

Please turn to Slide 4 as I turn the call over to Greg.

[Gregory Woods, executive]

Thank you, Scott. Good morning, everyone, and thank you for joining us today. Let me start by addressing our third quarter performance. Overall, the results were disappointing. We saw a significant decrease in consolidated margins and a notable year-over-year increase in our operating expenses. Much of this is tied to the ongoing integration of MTEX NS into our Product Identification segment, an integration that has proven to be far more time consuming and resource intensive than we anticipated when we completed the acquisition in May.

In the third quarter, MTEX had an operating loss of $1.1 million on revenue of $1.7 million. While we did see some sequential revenue improvement, the initial sales volumes, revenue contributions and margins did not meet our expectations. We have been mobilizing quickly to rectify this situation. Our focus now is on accelerating MTEX's path to profitability and ensuring its foundational capabilities are positioned to support stronger performance in the quarters ahead.

To facilitate this, we recently completed a full realignment of MTEX's organizational reporting structure. All of MTEX's key functions, sales and marketing, manufacturing, technology, finance and human resources, now report directly to AstroNova leadership. This change aims to speed up the implementation of consistent best practices within MTEX's sales process, ensuring it aligns with our Product Identification segment standards, and the broader operational excellence we strive for across our company.

During the MTEX integration process, the AstroNova team discovered certain details that appear to be inconsistent with the information originally provided by the seller as part of our definitive agreements. We are continuing to research these matters and are seeking potential remedies from the seller under these agreements. Given the confidential nature of our customer relationships, we will not be taking questions on this topic on today's call.

As part of the integration process, we have launched an astronobl-wide cost reduction and product line rationalization initiative. This is a comprehensive effort aimed not only at reducing expenses, but also at refining our product portfolio to sharpen our competitive edge.

Early progress is encouraging. We've closed some significant new orders that underscore the market's confidence in our evolving offerings. However, we anticipate that the full integration and optimization of MTEX's operations will extend through mid-calendar year 2025. We recognize that this is a multi-phase journey but we are committed to working through each step deliberately and strategically to drive sustainable long-term gains.

One product launch update from our PI segment. In fiscal Q4, we began shipping a large inkjet printer order that had been delayed to allow some customer-requested enhancements. We expect that the order will contribute several million dollars to our PI segment's top line over the next several quarters.

Moving to Slide 5. Despite the integration-related challenges, I want to emphasize our continued confidence in MTEX's technology. Their inkjet printing solutions, combined with their unique real-time printer monitoring and management software remain compelling. In the quarters ahead, and in conjunction with our product rationalization program, we intend to integrate MSIs technology into most of our product lines.

We also plan to retrofit several models within our large global installed base. We believe this approach will ultimately give our customers improved performance and a lower total cost of ownership.

Turning to Slide 6. Our total revenue increased nearly 8% in the third quarter, driven largely by the momentum in the aerospace product line within our Test and Measurement segment. Our role is the leading supplier of Flotek printers and electronics for commercial, defense and business aviation continues to provide strong competitive advantage for AstroNova.

The segment's performance would have been even stronger had it not been for the nearly 2 months balling strike, which delayed shipments. With the strike now resolved, we're ramping shipments back up and we expect stronger sales volume as we close out fiscal 2025.

As shown on Slide 7, when considering the longer-term outlook for our T&M segment, Keep in mind 2 key factors that are expected to drive margin enhancement in the coming years. Today, about 43% of our aerospace printer shipments are represented by our proprietary ToughWriter brands. The remaining 57% of shipments, our acquired flight deck printer brands.

As we have discussed on prior calls, we are in the process of upgrading customers from the 3 acquired brands to our ToughWriter branded wide and narrow format printers. I think of fiscal 2027, we estimate that our ToughWriter brand will account for approximately 89% of our shipments.

We expect this ToughWriter transition plan to be completed by the end of fiscal year 2027, resulting in enhanced technology experience and streamline parts and services for our customers. By having fewer SKUs, the transition will reduce our overall manufacturing costs, thereby improving margins.

In addition to those benefits, our projected royalty expenses, as shown on Slide 8, dropped dramatically from over $4 million per year in fiscal '25 through '27 to just $375,000 in fiscal 2028.

Now let me turn the call over to Tom for the financial review. Tom?

[Thomas DeByle, executive]

Thank you, Greg, and good morning, everyone. Let me begin with an overview of our financial performance on Slide 9. Net revenue for the third quarter was up 7.7% to $40.4 million, with growth in our TM segment, offsetting a modest revenue decline in PI. Excluding the MTEX, total net revenue increased 3% for the quarter.

Gross profit margin for the third quarter was 33.9% compared with 39.4% in the prior year period. Gross profit margins were down in the quarter due to lower margins at MTEX, sales mix and lower European hardware sales. Non-GAAP operating expenses for the third quarter were $12.1 million, up 19.3% from the prior year period. MTEX accounted for $1.3 million of the increase. The remaining cost increase is related to head count additions of key personnel and sales and finance organization, prototype expenses and higher information technology costs.

Non-GAAP operating income came in at $1.6 million for the third quarter versus $4.6 million in the year earlier period, primarily due to higher costs in 2025 period and a loss of $1.1 million related to MTEX. As in the second quarter, costs and management intention to further align the MTEX's product, services and control environment with those of AstroNova affected our results.

Adjusted EBITDA for the third quarter of fiscal 2025 was $3.2 million compared with $5.7 million in the prior year period. Non-GAAP diluted earnings per share was $0.06 compared with $0.37 in the third quarter a year ago. Bookings were $37.6 million in the third quarter compared with $35.5 million in the year earlier period. Backlog as of November 2, 2024, was $27.1 million compared with $31.2 million at the end of the third quarter of fiscal 2024.

Turning to our PI segment results on Slide 10. Revenue was down 1% from the prior year period to $26.3 million. Excluding the MTEX acquisition, sales in PI were down 7.2%, primarily due to lower hardware sales. PI segment operating profit in the third quarter of fiscal 2025 was $1.9 million or 7.2% of revenue. This compares with $4.8 million or 18.1% of segment revenue in the third quarter of fiscal 2024. The decrease reflects higher costs in fiscal 2025, and in part associated with the MTEX acquisition, product mix, lower sales volume in Europe and the delayed product release.

Moving to Slide 11. Test & Measurement segment revenue increased 28.2% from the prior year period to $14.1 million, driven by the aerospace product line. Reflecting the top line growth, operating margins were $3.3 million for Q3 fiscal '25 versus $2.6 million in the prior year, up $0.7 million or 26.9%.

Looking at our balance sheet and leverage on Slide 12. Cash and cash equivalents at the end of the quarter were $4.4 million, down $400,000 from the end of Q2. Funded debt increased to $48.9 million at the end of Q3, up from $45.6 million at the end of Q2. The liquidity was $14.7 million at the end of the quarter, down from Q2 by $7.2 million.

The drop in liquidity reflects higher accounts receivable and aerospace shipments with longer payment terms. Lower accounts payable as the timing of payments to key suppliers, all occurred in Q3 FY '25. AstroNova also supported MTEX with $2.7 million of working capital loan directly from our revolver.

Turning to cash flow on Slide 13. Through the first 9 months of fiscal '25, we generated cash from operations of $2.3 million compared with $5.9 million for the same period of fiscal 2024. Year-to-date, free cash flow was $1.2 million versus $4.6 million for the same period a year earlier.

During the quarter, we used cash from operations of $4.7 million. This was driven by higher aerospace accounts receivable, lower accounts payable and lower EBITDA versus prior quarter.

As Greg noted, we are initiating a comprehensive evaluation of costs and expenses to ensure they align with our strategic priorities and operational goals. Given the extended integration time line for MTEX, we no longer will be providing guidance for fiscal '25 and '26. Instead, we plan to provide longer-term targets. We look forward to presenting the results of these evaluations, along with the financial targets on our call in March.

Now I'll turn the call over to Greg for closing comments. Greg?

[Gregory Woods, executive]

Thanks, Tom. Summarizing on Slide 14. We believe that the integrating of MTEX's innovative technology with AstroNova's existing strengths, our operational excellence, established customer relationships and strong brand recognition, we can accelerate growth in our core markets and strengthen our position as the innovative leader in advanced product identification solutions. Although the path to fully realizing the benefits of the MTEX acquisition is longer and more complex than anticipated, the strategic upside is significant.

Now Tom and I will be happy to take your questions. Operator, please open the line for Q&A.

[Operator]

[Operator Instructions] Our first question comes from Brandon Daniel with Atai Capital.

[Brandon Daniel, analyst]

Sorry if I missed this in my earlier comments. Just to have some clarity here. On that [indiscernible] order that's been delayed. Is that related to the legacy business or the MTEX's business?

[Gregory Woods, executive]

It's a little bit hard to hear you, Brandon. Can you repeat that question quick?

[Brandon Daniel, analyst]

Yes, sorry. Is this better, Gary, can you hear me now?

[Gregory Woods, executive]

Yes, just kind of a little bit muted, but go ahead, go ahead.

[Brandon Daniel, analyst]

Yes. So I'll talk a little bit louder. On that jet order, is that related to the legacy PI business or MTEX, as far as I [indiscernible]

[Gregory Woods, executive]

That's a legacy business. It actually relates back to an order we got back at the beginning of the year, actually. It's from a very large customer and a very good customer. And as they got the first units that we shipped out, they said, could you add this, could you add that? And obviously, we want to accommodate them.

So we put all those enhancements and get even better product out of it. And we just started shipping those this month. So -- but yes, that's -- it's a legacy product, but it's a new generation of product with also a different inkjet technology, but not the MTEX technology.

[Operator]

[Operator Instructions] Our next question is from Robert Favera with Capital Management.

[Unknown Analyst]

Can you guys hear me now? Sorry about that. So I just have a couple of quick questions. So for corporate G&A, can you just confirm how much of MTEX's expenses are in that line item? I think from the filing I could gather, it was around like $570,000. I think it's $270,000 G&A and then the $300,000 onetime expense. So I'm just curious, can you provide any color on that? Or is that right?

[Gregory Woods, executive]

Yes. Tom, go ahead, you can grab that one.

[Thomas DeByle, executive]

Okay. If you look at our press release, you can -- it's broken out on the final Page 12, where you can see that the selling expenses for MTEX were $839,000 for the quarter, $209,000 on research and development, and we had $273,000 for the MTEX general and administrative expenses.

[Unknown Analyst]

Okay. And so -- and just the $300,000 onetime acquisition expense, I assume that, that is sort of in corporate G&A for the general and administrative line item below the segment operating profit, is that right?

[Thomas DeByle, executive]

Yes. So in our corporate, we paid $420,000, actually, and then it was offset by a credit balance at MTEX, which is reflected in their results. So MTEX, that's the real figures for MTEX as a stand-alone entity.

[Unknown Analyst]

Okay. Got it. And then just a quick question on T&M. So I assume the delayed Boeing orders, those are pretty high margins. So is that 1 of the reasons why margins would have declined sequentially? That would be my guess.

[Gregory Woods, executive]

Yes, you're pretty much on track there. Yes. Those are typically higher margin orders. It varies between the different shipments we make there. But those are good orders, and we're glad to see them come back online now.

[Unknown Analyst]

Okay. Got it. And then just my final one, should be pretty quick. I think Brandon kind of answered this with the answer to his question. But just on sequential PID margins, I assume that's primarily a mix, right? That's just a result of the delayed order and then maybe some other stuff in the legacy business?

[Gregory Woods, executive]

Yes. That's a significant order that we have a lot of the inventory for already, which is good. So we're kind of cranking those out. But that was a big part of it. There's other mix things in there, but that's the biggest factor in the traditional business. Yes.

[Operator]

Thank you very much. We have no questions. At this time, I will now turn the call back to Mr. Woods for closing comments.

[Gregory Woods, executive]

Well, thank you all for joining us here this morning. We look forward to keeping you updated on our progress. And I hope everyone has a wonderful holiday season. Have a good day.

[Operator]

Thank you very much, Greg, and thank you, everyone, for joining. This concludes today's call. You may now disconnect your lines.