Earnings Call Transcript - ALOT Q2 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to AstroNova's Second Quarter Fiscal Year 2023 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, Kyle. 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 Investor page of the AstroNova website, 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 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, September 7, 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 the 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 financial measures helps investors gain a meaningful understanding of the changes in the company's core operating results. We can also help investors who wish to make comparisons between AstroNova and other companies on both GAAP and a non-GAAP basis. A reconciliation of non-GAAP financial measures to the 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, President and CEO

Thank you, Scott. Good morning, everyone. Strong secular trends, including increasing air travel and the growth of digital print for packaging continued to drive demand for our products and services in the second quarter. We delivered solid orders growth with bookings up year-over-year and sequentially. For the first half of fiscal 2023, total bookings reached $67.3 million, just shy of AstroNova's previous first half high set back in fiscal 2020. Revenue also grew nicely in the quarter, though less than expected as certain areas of our business continued to be affected by supply chain disruptions, higher component costs and increased freight expenses. We have taken several actions, including selective implementation of price increases to moderate the impact of those challenges. Reflecting our demand drivers, we generated 8% top line growth in the second quarter, while bookings increased 14% year-over-year and 7% from the first quarter of fiscal 2023. These increases were primarily driven by our Test & Measurement segment, with the continued production ramp-up of Boeing aircraft, especially the 737 MAX, an increase in military-related orders and a considerably higher demand for our repair and parts services associated with the rebound in commercial air travel. Our Q2 service and other revenue was up about $1.2 million or 36% year-over-year to $4.5 million, a quarterly record for the company, demonstrating the importance of recurring revenue in this segment. Turning to our Product Identification segment. Q2 revenue was essentially flat year-over-year but up almost 8% from Q1 of this year. While we are pleased to see the accelerated pace of orders late in the quarter, the volume did exceed our manufacturing and shipping capacity resulting in extended lead times, especially for some of our PI products and supplies. Over the past several weeks, we have improved our production rates, and we expect to catch up on the delayed shipments and return to our normal lead times as we move through the second half of the year. We've also made good progress addressing the supplier quality issue that we discussed with you a couple of quarters ago that affected certain models of our label printers. Having these printers offline at customer sites obviously impacts PI sales. Our technical teams are aggressively working in the process of retrofitting the affected printers to quickly return them to full operating condition for our customers. Although taking these steps has resulted in some unplanned expense in the segment. For us, quality is paramount. Customer first is the foundation of AstroNova Operating System. Our priority is to make sure every customer has a great experience with our products. Within the PI segment, one of the areas we're particularly excited about is the digital print for packaging market. The growth of this market plays directly into the strength of products such as the T3-OPX, our direct-to-package solution for packaging houses and manufacturers. The T3-OPX is becoming the e-commerce printing system of choice for customers to create unique packaging using environmentally friendly materials that showcase their brands while eliminating waste. The global growth of the e-commerce channel is another important mega trend shaping our PI business. That's also one of the reasons we are thrilled about the recent acquisition of Astro Machine, a leading manufacturer of printing solutions and automated equipment for applications, including digital color labels, promotional marketing materials and branded mailers, a new market adjacency for us. As I noted on our acquisition call a few weeks ago, Astro Machine has attractive operating margins and a favorable operating expense profile. Culturally, it's a great fit with our company, and the early weeks of the integration have proceeded smoothly and as planned. From a valuation standpoint, at a purchase price multiple of less than 1x revenue on a full year 2021 and trailing 12-month basis, the transaction is also an effective and efficient use of our capital, checking all the boxes of our M&A strategy. 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 want to share some insights on our financial performance for the first half of fiscal 2023. Our earnings release contains tables that reconcile GAAP to non-GAAP, primarily reflecting the CARES Act benefits that influenced our results in fiscal year 2022. I'll focus on our first half results, excluding those CARES Act benefits from the second quarter of last year, as we believe this provides a clearer view of our operating performance. The detailed GAAP results and reconciliations are included in the press release. At the midpoint of the year, our revenue increased by approximately 7.4% to $63.3 million, largely driven by growth in the T&M segment. T&M revenue surged by 47% to $18.2 million during the first half of fiscal 2023, mainly due to the ramp-up of the 737 MAX as commercial air travel continues to recover from the pandemic. Our aerospace repair, overhaul, and parts product lines have performed particularly well and generally offer higher margins. Product ID revenue for the first half was $45.3 million, reflecting a decrease of about 3% from the previous year because of the challenges Greg mentioned. Looking at revenue types, hardware revenue rose almost 16% to $17.9 million in the first half, while service and other revenue fell by 26% to $8.2 million. Revenue from supplies remained stable at $37.1 million compared to the same period last year. Combined segment operating profit was 7.1%, or 11.3% of revenue, down from $7 million or 11.8% of revenue in the first half of last year. Our operating expenses were well-managed at $20.1 million, an increase of about $200,000 year-over-year, and up roughly $400,000 when comparing Q2 with the same quarter last year. Most of this increase is attributable to employee-related costs as the business recovers, along with some adjustments following two years of cost controls due to COVID-19. We anticipate that as revenue recovers, operating expenses will grow at a slower rate than revenue. So far this year, that has been the case, with operating expenses as a percentage of revenue around 200 basis points lower than last year at 31.8%. Operating income stood at $2.0 million or 3.2% of revenue in the first half, compared to $2.1 million or 3.5% of revenue in the same timeframe last year. Product demand remains healthy, with bookings reaching $67.3 million in the first half of fiscal 2023, an increase of about 6% from last year. In terms of regional revenue, 61% of our total business came from the U.S., with international markets accounting for 39%. Regarding our balance sheet, inventory has significantly increased since last quarter, up nearly $5 million since the end of Q1 and $7.6 million since the end of last year. By the end of the second quarter, the delay of approximately $330,000 in T&M segment parts led to the inability to ship about $2.4 million worth of product, impacting the associated inventory as well. Moreover, T&M inventory has risen to meet higher demand and to establish buffer stocks in response to demand fluctuations. In the PI segment, we have also built significant inventory, increasing buffer stocks to ensure timely and consistent delivery to our customers amid recent supply chain disruptions. Maintaining access to consumables for our customers is crucial to our value proposition and business strategy. We have recently noticed some easing of supply constraints and are starting to reduce these inventories, though it may take a couple of quarters to fully achieve this. As mentioned in our recent press release and conference call, we completed the Astro Machine acquisition after the quarter and will provide more details about its contribution to our income statement and balance sheet in our next quarterly call. Nonetheless, we do expect it to positively impact earnings in the second half of this year, even accounting for transaction expenses.

Gregory Woods, President and CEO

Thanks, David. Let me close with 3 key takeaways from today's call: First, underlying demand is robust with favorable secular trends creating tailwinds for growth. Second, we are confident in our long-term strategy as we continue to build on our track record of value-generated M&A and new product development. And third, we have added an important strategic component with Astro Machine, which gives us expertise in automation and material handling, expands our color label printer offerings, adds to our domestic manufacturing base and creates meaningful cross-selling opportunities with other areas of our PI business. With that, Dave and I will be happy to take your questions. Operator?

Operator, Operator

Our long-term strategy focuses on enhancing our track record in value-driven mergers and acquisitions and new product development. Additionally, we've integrated an important strategic element with Astro Machine, which provides us with expertise in automation and material handling, broadens our color label printer offerings, strengthens our domestic manufacturing capabilities, and opens up significant cross-selling opportunities with other sectors of our PI business. Now, Dave and I are ready to take your questions.

Scott Solomon, Investor Relations

It looks like we have no questions in the queue. So we'll turn the call back to Mr. Woods for any closing comments.

Gregory Woods, President and CEO

All right then. Well, thank you, everyone, for being with us here this morning and enjoy the remaining weeks of the summer. We look forward to catching up with you at Q3 or at one of the fall packaging labeling shows, most notably the FACHPACK end of September and the PACK EXPO end of October. So long for now.

Operator, Operator

Thank you. With that, this concludes today's call. Thank you for your participation. You may now disconnect.