Earnings Call Transcript - ALOT Q1 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to AstroNova's First Quarter Fiscal 2023 Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to David Calusdian, the company's Investor Relations firm, Sharon Merrill Associates. Please go ahead, Sir.

David Calusdian, Investor Relations

Thank you, Carl. Good morning, everyone, and thanks for joining us. Hosting this morning's call are Greg Woods, AstroNova's President and CEO; and David Smith, Vice President and Chief Financial Officer. Greg will discuss the company's 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. By now you should have received a copy of the earnings release that was issued today. If you don't have a copy, please go to the Investors page of the AstroNova Web site www.astronovainc.com. 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, June 8, 2022. AstroNova 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. AstroNova believes that the inclusion of these measures helps investors gain a meaningful understanding of the changes in the company's core operating results and can also help investors who wish to make comparisons between AstroNova and other companies on both the GAAP and a non-GAAP basis. A reconciliation of non-GAAP financial measures to their most directly comparable GAAP measures is available in today's earnings release. With that, I'll turn the call over to Greg.

Greg Woods, President and CEO

Thanks, David, and good morning, everyone. Despite the ongoing supply chain constraints and cost increases we faced during the first quarter, we were able to post modest increases in both revenue and operating income compared to last year's first quarter. Revenue was up 6.6% to $31 million, and operating income was up 4% to $764,000. Those supply chain impacts affected both segments of our business. In our Product Identification segment where, again, this quarter several orders could not be fulfilled, resulting in lower segment revenue. Product Identification revenue declined 6% in the quarter, to $21.7 million, and operating income was $1.4 million or 6.5% of product revenue, compared to $2.7 million or 11.8% of product revenue in the same period last year. On the innovation front, as mentioned in this morning's press release, we are about to further extend the breadth of our industry-leading QuickLabel product line, we're launching our first printer specifically designed for the entry-level segment or the onsite digital color label printing market. We've equipped this new printer with a large seven-inch color touch screen, a unique feature for this category, and included ample internal image storage, making it extremely easy to use. It's also a highly affordable solution for smaller businesses as well as larger enterprises that need to deploy multiple on-demand label printers at distributed locations throughout their facilities. This product significantly expands our addressable market to a new large class of customers, those looking for a sub-5,000-hour printer solution. Turning to our Test & Measurement segment, first quarter revenue increased to $9.3 million, up 55% from the same period in fiscal 2022. Segment operating income also increased substantially, climbing to $1.9 million or 20.6% of revenue, from $350,000 or 5.9% in the year-ago period. Our results continue to be bolstered by the ongoing gradual recovery in the commercial aviation market. Most of the rebound so far has occurred with the domestic single-aisle aircraft and the ongoing recovery of the 737 MAX production rate. We're also starting to see encouraging signs of growth in the long-haul dual-aisle aircraft segment. In addition to the increased production rates of commercial and business aircraft, the overall air traffic growth benefits our aerospace parts and repair businesses, which continued to increase during the quarter. One area that is still lagging, however, is Asia, and, in particular, China. We're hopeful that this region too will start ramping up later this year. In the Test & Measurement segment's data acquisition product lines, we're also seeing stronger demand. In particular, we are benefiting from some last year's program wins in the defense sector. Especially in demand are high-end EV-5000 systems that are being deployed at several U.S. installations this year. In addition to the defense segment, we are making inroads with our data acquisition offerings in the power industry, where we have scored design wins in various applications ranging from solar, to battery, to nuclear power monitoring and troubleshooting. In closing, despite the current macro environmental challenges, we are making headway addressing supply chain and cost issues in both segments of our business, including sourcing alternative components and materials, as well as boosting inventories to buffer disruptions. Additionally, we are increasing prices in areas that have seen higher input costs where we have the opportunity to do so. We believe these and other countermeasures will better position us in the future. Although it will take time for the increases to be fully reflected in our results, we expect to begin seeing those in the second half of this year. Now, let me turn the call over to David for the financial review.

David Smith, Vice President and CFO

Thanks, Greg, and good morning everyone. I'm going to highlight a few key items and metrics from the income statement and balance sheet. We plan to file our first quarter 10-Q later today. For segment revenue, Product Identification represented 70.1% of revenue in the first quarter, which is down from 79.4% a year ago. Test & Measurement made up 29.9% of revenue, compared to 20.6% in the same period of fiscal 2022. Gross profit for the quarter was $10.6 million, a decline of 1.5% from the same quarter in fiscal 2022. The gross profit margin decreased by 2.8% to 34.6%, mainly due to rising input costs caused by supply chain disruptions affecting the Test & Measurement segment, particularly in the aerospace business unit. Although volume has increased in the aerospace sector as the industry recovers, we anticipate that the difficult cost and supply chain environment will continue in the near future. Total revenue was $9.3 million, up $1.7 million or 21.6%, mainly driven by increases in aircraft printer sales as well as the data acquisition products Greg mentioned. Supplies revenue was $17.9 million, showing typical resilience but down slightly by 1.5% from Q1 of last year, attributed to decreased revenues from certain specialized consumables in the Product Identification segment. Supplies revenue was also affected by shortages from some suppliers. Service and other revenue grew by nearly 17% to $3.8 million in the quarter, fueled by increased parts and revenue activity in our aerospace business. Domestic revenue constituted 63% of total revenue, rising from 57% previously. In contrast, international revenue represented 37% of revenue, down from 43% last year. Operating expenses for the current quarter were $10.0 million, down 1.9% year-over-year. Selling and marketing expenses decreased by 3.4% from the previous year to $5.9 million, primarily due to a reduction in amortization expenses. In last year’s second quarter, we adjusted the amortization period for aerospace intangible assets and also saw decreases in certain third-party contract services and commission expenses, slightly offset by higher employee wages and benefits as well as increased travel expenses associated with the easing of pandemic restrictions. General and administrative expenses increased to $2.5 million, a 2.9% rise compared to last year’s first quarter, mainly due to higher payments to outside service providers. R&D expenses were $1.5 million. Though this represents an 11.3% decline year-over-year, it is mainly due to slight decreases in supplies and repair costs and should not be seen as a shift in strategy or an indicator of a full-year trend. R&D spending as a percentage of revenue was 4.9% in the first quarter, down from 5.9% last year. Regarding the balance sheet, cash and cash equivalents as of April 30th stood at $11.4 million. In the first quarter, we borrowed $3 million on our revolving credit line to support domestic working capital and had $19.5 million available for borrowing under that facility at the end of the quarter. We believe this will be adequate to meet our operating requirements, including capital expenditure commitments. Supply chain challenges affected both segments, and we expect this difficult cost and supply chain environment to continue in the near term. As Greg mentioned, part of our response has led to increased inventories, which totaled $36.9 million at the end of the quarter, reflecting a 6.5% or $2.65 million increase from year-end. Capital expenditures are down as we have completed most of the NetSuite ERP implementation as of November 1st. We will continue to allocate some of our operating budget to optimize the ERP system, but the major work is complete. We expect capital expenditures to be significantly lower this year compared to last year and the prior two years. Before I pass the call back to Greg, I want to mention that in two weeks, we will be presenting and holding one-on-one meetings at the East Coast IDEAS Virtual Conference. If you are attending, we look forward to the opportunity to connect with you there. Now, I'll turn the call back to Greg for closing comments.

Greg Woods, President and CEO

Thanks, David. While the near-term macroeconomic environment remains challenging, we are taking several measures to diminish those headwinds. The underlying fundamentals of our business remain strong, and we are encouraged by the momentum we are seeing in the Test & Measurement segment as the commercial aviation market continues its recovery, as well as the strong new product pipeline in our Product Identification segment. So, with that, David and I will be happy to take your questions.

Operator, Operator

Thank you. We take our first question from Tom Spiro with Spiro Capital. Your line is open. Please go ahead.

Tom Spiro, Analyst

Good morning.

Greg Woods, President and CEO

Morning, Tom.

Tom Spiro, Analyst

On the Test & Measurement side of the company, the revenues were quite strong in the quarter, strongest it did in a while. Were there sort of one-time transactions inflating that? Do you see that as kind of a sustainable level for the next several quarters? What does that portend?

Greg Woods, President and CEO

No. Like mentioned, Tom, it's mainly driven by kind of increases across the board in Test & Measurement. Really, the data acquisition piece contributed to that, but it's primarily via aerospace recoveries boosting that up. And we're not back to where we were, but it's coming back in a pretty nice fashion. So far, it looks like it's going to continue doing that, yes.

Tom Spiro, Analyst

The margins in that segment were also quite strong, approximately 20%. Is that level potentially inflated by a few unusually profitable transactions, or is it sustainable in a broader sense?

Greg Woods, President and CEO

I think it's generally a pretty good mix. It's really a function of better absorption as the volume increases.

Tom Spiro, Analyst

That's great. Thank you. The inventory is high due to supply chain issues. Do you anticipate inventories increasing from this point, or do you have any insights on whether the current inventory levels are adequate for these sales?

Greg Woods, President and CEO

Yes, there's still some challenges there, Tom. So, when we can get things, we tend to buy quite a bit of it just because we have a lot of things that we still can't get our hands on. So, broadly, for the next, I don't know, couple of quarters it's going to be on that kind of trend where we're going to get what we can get, maybe even looking out at four, five months' worth of inventory if we can lock it up, so. Thank you. You had a comment, David?

David Smith, Vice President and CFO

Yes, I believe we are likely to remain in a heavy inventory period for a while. I do not expect a dramatic improvement in the near term, but I anticipate it will align with the trends in revenue and cost of goods.

Tom Spiro, Analyst

Okay, that's helpful, thanks. On the Product Identification side, you've noted that in recent quarters some sales were deferred due to supply chain issues affecting the following quarter. As I consider this, it seems to me that unless the amount of deferrals is increasing, the impact should balance out in subsequent quarters. In other words, what we couldn't ship this quarter due to supply chain issues might be offset by the shipments brought in from the previous quarter. Am I thinking about this correctly? Or are the deferrals on the rise? What’s the situation?

Greg Woods, President and CEO

Yes, that's basically correct. It's somewhat universal. A significant development is that a major paper supplier, which provides a lot of our media, has resolved its strike. In the area of Product Identification, media is a larger component of our supplies business than inks and toners. During the strike, we were sourcing from different companies, and it takes time to produce these materials. We can't simply send an ink tank to production immediately. We are optimistic that we will begin to address this around the end of this quarter and into the third quarter.

Tom Spiro, Analyst

Well, that's great. Let's see. I'll get back in line now, thank you.

Greg Woods, President and CEO

Okay.

Operator, Operator

Thank you. We take our next question from George Milos with MKH Management.

George Milos, Analyst

Yes. Hi, good morning, guys.

Greg Woods, President and CEO

Hi, George.

George Milos, Analyst

Hi. Following up on Tom's question regarding the margins in Test & Measurement, David, I believe you mentioned that the gross margin was impacted a bit mainly in the T&M segment. Is it correct that the margin would currently be slightly higher?

David Smith, Vice President and CFO

Well, yes. If we hadn't had some margin difficulties, the gross margin would have been more profitable. But it's primarily a function of the supply chain stuff that we've been talking about, to a lesser extent mix. As those unwind, which hopefully they will as supply chain conditions improve, we hope to be able to take advantage of some of that.

George Milos, Analyst

Okay. But the major impact of the supply chain issues on the gross margin was in the T&M segment?

David Smith, Vice President and CFO

They affected both segments, but we didn't provide a breakdown of the impacts by segment, which is challenging in any case.

George Milos, Analyst

Right.

David Smith, Vice President and CFO

Which is a challenge in any event.

George Milos, Analyst

Okay. And on the revenue on the T&M side, it seems like is there a way to break down the printer with the data acquisition? I know, usually, you don't do that, but I'm just curious if you would do that this time because data acquisition seemed to have had a nice rebound?

Greg Woods, President and CEO

Yes, we don't break out specific product lines in either segment, actually.

George Milos, Analyst

Okay.

Greg Woods, President and CEO

Yes, it's encouraging to see the improvement. The majority of that segment is still focused on the aerospace area.

George Milos, Analyst

Yes. So, the aerospace is really driven by aircraft production. On the data acquisition side, it's maybe a little bit more project-oriented, right?

Greg Woods, President and CEO

Yes, that's correct. It's a bit more predictable in terms of tying it to aircraft production and, actually, aircraft usage, yes, which those numbers are pretty well known. Whereas in data acquisition it's a lot of different projects.

George Milos, Analyst

Yes, okay, great. And then just one question on the Product Identification segment, the new product that you have, the QL-E100, seems like it's interesting how it sort of both touches sort of the SMB segment, but also large companies that may have multiple facilities. Do you see that more as a defensive move to sort of secure the entry-level category or do you think that there is a great deal of growth potential in that space?

Greg Woods, President and CEO

Yes, from our market research it's a much higher unit volume space. We've seen it with our own sales force clamoring for something like this. We look at a number of me-too type products, and there's a lot of them out there that look the same. But our R&D focus really puts the emphasis on kind of that differentiator. We would have liked to have had this probably a couple of years ago, but we don't. We think the wait was well worth it. And to answer your other question, yes, it's in both spaces. Sometimes you find customers that would really love to get one of our, let's say, QL-120 product but they can't really afford it yet for a variety of reasons. So that's one part of the market that we can address. The other one is these production facilities where they may want to replace a zebra black-and-white printer with a color printer at the end of a production line, but they have 20 production lines in their building. So, each one would need a printer, and they don't necessarily want a $10,000 printer at each of those spots. That's kind of the other big market that we see for it with our own internal demand.

George Milos, Analyst

Okay, great, great. That sounds great. Okay, thank you very much.

Greg Woods, President and CEO

Sure, George.

Operator, Operator

Thank you. We have a follow-up question from Tom Spiro with Spiro Capital. Your line is open. Please go ahead.

Tom Spiro, Analyst

You have a new product on Product Identification. Do you see much potential for cannibalization of your existing products?

Greg Woods, President and CEO

Not likely. It's primarily an entry-level product that I mentioned. We expect that some of these businesses will make up for the QL-120, which is one of our higher-end, high-volume printers. As their operations expand, they could upgrade to it. Additionally, the same media used in this printer is designed so that you can take that roll from the smaller printer and use it in the QL-120, allowing for higher resolution and faster production rates. It's intended to be part of a family of products.

Tom Spiro, Analyst

And how many new products in Product Identification do you anticipate rolling out this year?

Greg Woods, President and CEO

As I mentioned in the beginning of the year, we are looking to introduce at least these two. This is kind of one and in fact two, you know, it depends on production cycles and whatnot. Maybe there is another beyond that, but at least two this year.

Tom Spiro, Analyst

Okay, thanks so much. And good luck.

Greg Woods, President and CEO

Thanks, Tom. Have a good day.

Operator, Operator

It appears we have no additional questions in the queue at this time. I would like to turn the call back to management for any additional or closing comments.

Greg Woods, President and CEO

Okay. I would just like to thank everyone for joining us here this morning. We look forward to keeping you updated on our progress and look forward to seeing some of you at the IDEAS conference. Have a good day.

Operator, Operator

Thank you and that concludes this call. Thank you for your participation. You may now disconnect.

Greg Woods, President and CEO

Thank you.