Earnings Call Transcript - ALOT Q3 2022

Operator, Operator

Good day and welcome to AstroNova's Third Quarter, Fiscal 2022, Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to Scott Solomon of the Company's Investor Relations firm, Sharon Merrill Associates. Please go ahead, Sir.

Scott Solomon, Investor Relations

Thank you, John. Good morning, everyone and thanks for joining us. Hosting this morning's call are Greg Woods, AstroNova's President and CEO, and David Smith the Company's Chief Financial Officer. Greg will discuss the Company's operating results. David will take you through the financials at a high level. Greg will make concluding comments and then management will be happy to take your questions. By now, you should have received a copy of the earnings release that was issued today. If you do not have a copy, please go to the Investors page of the AstroNova website. Please note that statements made during 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 1934. 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 8, 2021, the Company undertakes no obligation to update these forward-looking statements. For further 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 be referring to non-GAAP financial measures, including non-GAAP net income and non-GAAP net income per diluted share. AstroNova believes that the inclusion of these measures helps investors gain a meaningful understanding of the changes and the Company's core operating results and also can help investors who wish to make comparisons between AstroNova and other companies on both a GAAP and a non-GAAP basis. A reconciliation of these non-GAAP 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.

Greg Woods, President & CEO

Thank you, Scott. Good morning, everyone. Thank you for joining us. As we indicated in this morning's press release, we are seeing continued global demand growth for our products and services. Our teams performed well in the third quarter, despite facing various supply chain challenges that impacted our results. Total revenue for the quarter rose 3% year-over-year to $28.9 million. The ongoing recovery in the commercial aviation sector contributed to both sequential and year-over-year growth in our Test and Measurement segment. Revenue in the TNM segment grew by 35% in the third quarter to $6.9 million, marking our best quarter since the first quarter of last year. This growth more than compensated for a slight decline in product navigation revenue, which decreased 4% to $21.9 million. Our strong bookings in the third quarter reached a rate of $32.3 million, up 16% year-over-year and up 6% sequentially compared to Q2. A significant challenge we faced during the quarter was the difficulty in procuring certain electronic components, which hindered our ability to make several late-quarter shipments. However, thanks to our materials teams, we have since acquired most of the delayed components and anticipate shipping those outstanding orders in the fourth quarter. This includes revenue from the new multi-year government program I mentioned during our last call, which involves supplying advanced data acquisition equipment for aerospace applications. In terms of revenue by type, supplies and hardware revenue remained relatively stable compared to the third quarter of fiscal 2021, while service and other revenue increased by 35% from the same period last year, primarily in T&A. Geographically, U.S. revenue made up approximately 60% of our total sales in Q3. We are actively enhancing our product and education teams, both domestically and internationally. For instance, we recently appointed a Head of Production responsible for our expanding media business in Europe, the Middle East, and Africa. New initiatives in those regions are already starting to yield positive outcomes. In our Q2 call, I noted our return to in-person meetings and tradeshows. During the third quarter, we showcased our latest printing and labeling products at several in-person events, including two major tradeshows: Pack Expo and healthcare packaging shows in Las Vegas, and FACHPACK, the European packaging trade fair in Nuremberg, Germany. Attendees were able to demo our industry-leading technologies, including the Indiscernible 300 and the T2C, along with our new T3-OPX direct-to-package printing system. We also had meaningful discussions with current and prospective customers about how our product and application solutions align with global trends in digital print for packaging and environmental sustainability. Since the end of Q3, we have also taken part in some smaller regional shows across North America, Europe, and Asia. In fact, we have an event currently taking place in New York City. While we are cautious about the costs associated with adding more tradeshows, early feedback suggests that the quality of leads generated from these events remains very high, as attendees are there with solid business intentions. Moving forward, we plan to adopt a hybrid marketing strategy that incorporates select high-value in-person events along with ongoing growth in our digital marketing platforms. On the digital side, we will continue to develop our e-books, case studies, support videos, and other cost-effective digital tools that have proven effective in enhancing our sales and customer support efforts. Looking ahead, we expect revenue to grow both sequentially and year-over-year in the fourth quarter of fiscal 2022. Now, I will turn the call over to David for the financial review.

David Smith, Chief Financial Officer

Thanks, Greg. And good morning, everybody. Rather than repeat the number information in the press release or Greg's remarks, I'm going to briefly highlight a few key items in the P&L and balance sheet. Our press release tables disclose, in all the required detail, the GAAP and non-GAAP reconciliations. To summarize, the non-GAAP figures exclude the benefits we received from the CARES Act, and they include the write-off in the third quarter of our old legacy domestic MRP system. In the interest of efficiency, I'm going to comment primarily on the non-GAAP results. But please also refer to the reconciliation tables we've provided, which include the actual GAAP results. Operating expenses in the third quarter were up about 8% from the same period in fiscal 2021. Last year, we were still at COVID-induced cost and cost-constrained uncertainty postures. We're now responding to visible growth opportunities. The increase is concentrated in higher R&D expenses associated with new product development in our product identification segment, and we will continue targeted investments in organic growth. Year-to-date through the third quarter, non-GAAP operating expenses are running about 70 basis points higher as a percentage of sales than last year. Non-GAAP quarterly OpEx is about 4% higher year-over-year in this current quarter, in line with revenue growth and consistent with our current outlook. Looking at segment operating margins this quarter, product identification posted an operating margin of $1.8 million or 8.3% of revenue, compared with $3.5 million or 15.4% in the third quarter of fiscal 2021; the decrease is primarily attributable to lower revenue and mix effects. The Test and Measurement segment's operating margins in Q3 this year was $1 million or about 16.8%, representing a positive swing of about $1.5 million from the third quarter of last year, which saw an operating loss of almost $700,000 or 14.7%. Year-to-date through Q3, GAAP segment operating profit for product identification was $8.9 million or 13.8%, excluding the benefits; that on a non-GAAP basis, the segment operating margin was $7.5 million or 11%. Year-to-date for test and measurement, GAAP segment operating profit was $2.9 million or 15.1%. On a non-GAAP basis, excluding the CARES Act benefits, the segment operating margin was $2.1 million or 10.9%. Q3 marked a major operational accomplishment for the Company, with the initial go-live of our new enterprise resource planning system. The rollout of a new ERP system requires significant resources for a Company of any size, even more so, given the economic headwinds and business disruptions associated with the COVID environment. This implementation has been a long process, and the large team that has accomplished this has put the Company in a position to grow and prosper in the future. As noted in the press release this morning, on a GAAP basis, we reported a net loss of $425,000 or $0.06 a share, which includes about $700,000 in other expenses associated with the write-down of our decades-old legacy European system. On a non-GAAP basis, excluding that expense, net income was $76 thousand or $0.01 per share. Turning to the balance sheet, cash and equivalents at the end of the quarter stood at $8.7 million, down from about $11.4 million at the end of the year. Total debt at the end of the quarter was $9.4 million, down from approximately $17 million at year-end. We're in a very strong position relative to our bank covenant structure, and we have ample capacity under the bank facility to fund future growth. Tomorrow, we'll be presenting and hosting one-on-one at the Sidoti December Virtual Micro Cap Conference. If you'd like to schedule a meeting, please email us at our Investor Relations email. Now, let me turn the call back to Greg for a few closing comments.

Greg Woods, President & CEO

Thanks, David. In summary, our teams executed well in the third quarter despite the global supply chain challenges. While we remain mindful about the potential for continued economic uncertainty related to COVID-19 on our end markets, with our strong bookings and a solid backlog, we feel we are well-positioned for sequential and year-over-year growth in the fourth quarter. Now, David and I would be happy to take your questions.

Operator, Operator

Thank you. We will pause for a brief moment to allow everyone an opportunity to signal for questions. We will take our first question from Dick Ryan of Colliers. Please go ahead. Your line is now open.

Dick Ryan, Analyst

Greg, how much was the revenue impact in Q3 from the supply chain issues? It looks like you're going to make that up in Q4. But what was the Q3 impact?

Greg Woods, President & CEO

I don't think we disclosed that, but it was a significant number. I would say it was a fairly large shipment. So, I'm going to leave it at that. However, like I mentioned earlier, we have received the components in hand, so I doubt that we'll ship that out this quarter along with our normal business for the quarter.

Dick Ryan, Analyst

Okay. And I may have missed, but did you guys break out what the recurring revenue number was for the quarter?

David Smith, Chief Financial Officer

It wasn't in the new release, Dick. I don't have the number right off the top of my head, but I will ask that question before the call's over and get it to you.

Dick Ryan, Analyst

Sure. No problem. Greg, when you look at future growth, are you considering an M&A standpoint as well? And can you give us a little color as to how that environment looks at the current time?

Greg Woods, President & CEO

Sure. As you know, it has been a part of our strategic plan since we first implemented it about seven years ago. However, we were somewhat on hold during COVID and the associated bank restrictions. Fortunately, those restrictions have eased as you mentioned earlier this year. We have been quite active in screening potential deals. While there is nothing to announce at this moment, our activity has increased. This aspect of our strategy remains significant, and we are optimistic that in the coming quarters, we may be able to execute a deal. This is a very active part of our strategy across both segments, including the measuring segment and the product identification segment.

Dick Ryan, Analyst

Okay. And just on the test and measurement side, was any of this new aerospace business contributing in Q3 or were the results pretty much on commercial transport?

Greg Woods, President & CEO

That was mostly commercial. The orders I referenced and some of the other businesses typically happen in the fourth quarter; it will happen, plus this quarter that we couldn't get out the door will come out in the fourth quarter.

Dick Ryan, Analyst

Okay. Great. Thank you.

Greg Woods, President & CEO

Sure, Dave.

Operator, Operator

And it appears there are no further questions. I would now like to hand the call for closing remarks to Mr. Woods.

Greg Woods, President & CEO

Great. Well, thank you all for joining us here this morning. We look forward to keeping you up to date on the progress. If you're able to, you can join us at the Sidoti Conference that David mentioned tomorrow. Otherwise, have a happy and healthy holiday. Goodbye for now.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.