Earnings Call Transcript - ALOT Q4 2020

Operator, Operator

Good day, and welcome to the AstroNova Incorporated Fourth Quarter and Year-End Fiscal 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would now like to turn the call over to Mr. David Calusdian. Please go ahead, sir.

David Calusdian, Host

Thank you, Karen. Good morning, everyone, and thank you 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, 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 do not have a copy, please go to the Investors section of the AstroNova website, www.astronovainc.com. Please note that statements made during today's call that are not historical statements of historical facts 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, March 12, 2020. 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 the other filings the company makes with the Securities and Exchange Commission. I'll now turn the call over to Greg.

Gregory Woods, CEO

Thank you, David. Good morning, everyone, and thank you for joining us today. During the fourth quarter, the 737 MAX grounding situation worsened as Boeing announced a complete production halt in December. This, combined with the product identification softness in Asia, continues to affect our revenue and margins to a greater extent than we had expected entering the quarter. As a result of the revenue shortfall, and particularly the impact of the uncertain outlook of the 737 MAX, we have taken several actions to bring our costs more in line with near-term demand. I'll talk more about that in just a moment. But first, on the positive side, we are pleased to see the continued acceleration in bookings from our Product Identification segment this quarter. This led the way for our overall bookings to post double-digit, quarter-over-quarter growth for the second quarter in a row. The favorable response to our Product Identification products at several trade shows in the fall was a key contributor to this bookings momentum, and we expect that momentum to continue, barring further short-term impacts on demand in the wake of the COVID-19 virus situation. In addition to these positive demand trends, the secular trend towards digital label printing and the market growth for on-site color label printing position us well for long-term growth and profitability. Similarly, our view is that the long-term trend for the global commercial aircraft market remains very strong, despite the short-term MAX issues and the potential COVID-19 short-term impacts on air travel. As we streamline our operations and continue our focus on improving operational efficiencies throughout the company, we also continue to invest in new technologies and strengthen our global talent to achieve our long-term strategic objectives. We see significant growth opportunities in the future for both segments of our business. In the short term, our lower sales volume necessitated that we take action to improve the profitability of the business. As a result, we implemented a 5% headcount reduction and other cost reduction initiatives that we expect to save in the range of $1.5 million to $2 million on an annualized basis. I'd like to emphasize that these cost reductions do not affect our investments in our key strategic initiatives. We continue to focus on those strategic initiatives that we believe will drive growth and profitability for AstroNova and generate value for our shareholders. Taking a closer look at our segments. As I mentioned, Test & Measurement continues to be impacted by the grounding of the 737 MAX. This has affected us, both in terms of new installs, as well as deferrals and optional maintenance and retrofit printer upgrades to aircraft that are needed to fill the void until the 737 MAX returns to service. While Boeing is sticking to its prediction of a midyear return to service, we do not have clear visibility into the actual timing of the return to service, nor post ramp-up schedule. We, therefore, expect this will likely be a continued significant drag on results throughout the current fiscal year. On our past few calls, I discussed the delay of a multiyear upgrade contract for military avionics and related networking gear. While we did not ship any product related to this contract in Q4, we have already made shipments in Q1 and expect to ship additional releases on that contract later in the year. Despite the near-term industry challenges, we believe the strong secular trends in aerospace will drive long-term growth when the Boeing situation is finally resolved. We have the right products and are making the right investments to be prepared to capitalize on these trends when the market returns. AstroNova's latest printer products, in particular, offer the highest level of performance and functionality in the cockpit printer market. In our Product Identification segment, sales continue to be affected by the softness in Asia as a result of weaker demand from a few customers in that region. During the quarter, we completed the transition of our sales organization from a regional structure to an integrated global management organization with dedicated leaders for global hardware, global supplies and global service. We now have greatly improved ability to provide a more effective and rapid response to our customers across the globe. Our products in the segment are performing quite well, and this has been a big help in driving improved bookings. Our new Trojan label T3-OPX is off to a great start with strong initial demand and very positive feedback. In fact, we sold out of our initial production run in January. The OPX is a next-generation overprinting system that features highly durable ink and allows customers to digitally print high-resolution color images directly at a broad range of products, including cardboard, boxes, postcards, paper bags, fabric bags, or even wooden planks. I encourage you to visit our website to view the video demonstration of this new breakthrough technology in its applications, taking us beyond the labeling market and into a direct packaging product identification space. Other new products such as the Quick Label QL-300, QL-120X, Trojan label T2-C and the T5 continue to gain traction in the marketplace. At the end of the fourth quarter, we announced the launch of GetLabels, a new product identification brand that provides blank labels and thermal transfer ribbons for resellers and brand owners. Through GetLabels, we have developed hundreds of unique label materials, engineered to cover the aesthetics, functionality, and durability requirements of a broad range of applications. This enables customers to produce their own labels and tags in-house to their specifications with just-in-time flexibility. Launching GetLabels as a stand-alone brand gives us a platform to feature all of the labeling options available to our customers. Before I turn the call over to David to review our financial results, I'd like to provide an update on our global IT upgrade program. We are on track with the hardware upgrade phase of this, and we expect to complete the company-wide updating of endpoint hardware, software and telephony and related hardware products near the end of this quarter. We're also making good progress on our ERP conversion to cloud-based NetSuite software and expect this to be completed domestically in the middle of the current fiscal year. We're excited by the potential of these initiatives, which we expect will result in a global unified state-of-the-art IT infrastructure designed to significantly improve our competitiveness, reaction time and productivity in fiscal year 2021 and beyond. Now let me turn the call over to David for his financial review.

David Smith, CFO

Thanks, Greg, and good morning, everyone. Revenue for the quarter was $30.5 million compared to $37.2 million during the same period last year. The decline of $3.9 million in the Test & Measurement segment was due to the Boeing 737 MAX situation, as Greg mentioned. Product Identification experienced a decrease of $2.7 million, mainly because our Asian revenues were strong in the last fourth quarter but significantly weaker this quarter. For the full year 2020, revenue totaled $133.4 million, down from $136.7 million in 2019. The Test & Measurement segment saw a drop of $4.5 million, again linked to the Boeing issue. However, Product Identification increased by $1.3 million, or 1.5%. As Greg noted, the results for this fourth quarter were disappointing, prompting us to implement cost reductions that I will address shortly. Domestic revenue was $19.2 million in the fourth quarter, making up 63% of total revenue, while international revenue was $11.3 million or 37% of total revenue. Year-to-date, domestic revenue stood at $83.7 million, also 63% of total revenue, while international revenue was $49.7 million. Hardware revenue for the quarter was $11.4 million, down from $15.2 million, primarily due to issues with aerospace printers and Asian markets. Supplies revenue decreased to $16.4 million from $18.5 million, mainly due to declining supply shipments from Asia. Service and other revenue dropped to $2.7 million from $3.5 million, reflecting lower aerospace revenues. The gross margin fell by 560 basis points from the same quarter last year to 33.6%, attributed to reduced aerospace sales and adverse mix dynamics across our segments. We reported an operating loss of $1.6 million for the fourth quarter, compared to an operating income of $2.9 million a year ago. For the full year 2020, operating profit was $2.6 million, down from $8.7 million in 2019. The net loss for the fourth quarter was $0.19 per share, in contrast to net income of $0.23 per diluted share from a year earlier. Please keep in mind that our net loss for this quarter includes approximately $100,000 in severance costs linked to the workforce reduction that Greg mentioned. Additionally, we incurred around $450,000 in unusual nonrecurring expenses related to settling certain customer disputes and expenses tied to product reconfiguration for an aerospace customer, most of which impacted operating expenses. We expect to incur another $100,000 in severance costs in the current first quarter of this fiscal year. The full-year net income was $1.8 million, or $0.24 per diluted share, compared to $5.7 million, or $0.83 per diluted share the previous year. This quarter, depreciation and amortization amounted to $1.6 million, while stock-based compensation was $199,000. For the full year, normal capital expenditures were $1.4 million, with an additional $1.5 million spent on the NetSuite ERP implementation. We anticipate that full-year 2021 capital expenditures, which include infrastructure upgrades and ERP implementation, will be between $2 million and $2.5 million. The cost reductions Greg mentioned primarily relate to wages across the income statement, affecting both the cost of sales and operating expenses. They also include decisions to postpone certain long-term product development costs, reductions in specific outside service and consulting arrangements, and various other smaller adjustments. Our current plan is to reduce expenses by approximately $1.5 million to $2 million year-over-year, with about half of those reductions benefiting gross margins and half contributing to lower operating expenses. Before I hand the call back to Greg, I want to briefly address the COVID-19 situation. As noted in this morning's press release, we are closely monitoring this viral outbreak to assess potential impacts on our workforce, customer demand, and supply chain. Currently, we have no reported cases among our staff and have not identified any significant supply chain or customer issues. Locally, we are taking measures to enhance the health and safety of our employees in response to the state of emergency declared in Rhode Island, and we will continue to monitor the situation. Now I will turn the call back over to Greg for his closing comments.

Gregory Woods, CEO

Thanks, David. Looking ahead, we are encouraged by the excellent customer reception to our new Product Identification offerings, and the resulting positive bookings performance in the fourth quarter. We are also optimistic that our new sales structure will result in a more efficient and effective global sales process. At the same time, our cost reduction measures have enabled us to reduce our breakeven level and position us for improved profitability as we move forward into fiscal 2021. Longer term, we are even more bullish about the opportunities made possible by secular trends on both sides of our business. As we focus on cost containment across the business, we are also investing wisely in order to capitalize on these opportunities. Now I'll be happy to take your questions.

Operator, Operator

Our first question will be from Samir Patel.

Samir Patel, Analyst

Congrats on the nice launch in product ID.

Gregory Woods, CEO

Thanks.

Samir Patel, Analyst

Yes. So I've got three questions here. The first is in aerospace. I know that Boeing and Spirit and some others have talked about kind of their expectation for MAX builds over 2020. I understand your lack of visibility. But in general, can you provide some color on the cadence of how new builds of 737s would translate into revenue, would your MAX-related revenues kind of ramp ahead of production along with production, behind production, et cetera? Just some timing if you can give that.

Gregory Woods, CEO

It's a bit challenging to predict. We've seen several different estimates regarding this. Most likely, there will be some early demand for the printers, which depends on what's coming down the production line. With the Boeing 737, this relates to buyer furnished equipment. Therefore, we need to ensure that the right components have the correct printers linked to them. Typically, and I want to stress typically because we don't have complete certainty, these would need to drive the production. It's not a just-in-time scenario; usually, these items start arriving months, if not several months in advance. At this point, it remains uncertain.

Samir Patel, Analyst

Okay. Also in aerospace, you guys talked here, and you've previously talked about the MAX-related supply constraints, making airlines unwilling to take plans offline, which impacted your kind of spares and upgrades business. With the coronavirus-driven drop in passenger demand. Have you seen additional opportunities here or airlines deferring maintenance and focused on conserving cash?

Gregory Woods, CEO

No, we haven't seen anything yet. The airline industry has been impacted mostly by issues related to China and within China itself. That's likely the most significant effect on airline travel we've observed. However, as of yesterday, it appears that Europe will also face some challenges. It's difficult to pinpoint the exact extent of these impacts. I haven't spoken directly with any airline CEOs, and during an aerospace event I attended last week in D.C., no one mentioned changing their operational strategies regarding putting aircraft out of service. One aspect that could affect our supply side is that if planes are flying less, there's a reduction in the amount of paper printed in the cockpit since planes that are grounded don't need to print. This will likely have some impact in that area.

Samir Patel, Analyst

Okay, understood. And then the final question. You guys pride yourself on your capital allocation. So can you maybe talk about the decision to maintain the dividend versus using that cash to pay down debt, buy back stock or acquire something?

Gregory Woods, CEO

Yes. So the dividend question is always reviewed at the Board of Directors meeting, we just had one this week, of course. And it's debated back and forth. And though I can't comment on exactly what's said in the Board of Directors meeting, but at this point, they felt comfortable with being able to meet our capital needs and also pay the dividend.

Operator, Operator

We have a question coming from Dick Ryan with Dougherty. Regarding the dividend decision versus using cash for debt reduction, stock buybacks, or acquisitions, Gregory Woods, the CEO, mentioned that the dividend question is regularly reviewed during Board of Directors meetings, with one just occurring this week. While he can't disclose the specifics discussed in the meeting, he noted that the Board felt secure in meeting capital needs while also continuing to pay the dividend.

Richard Ryan, Analyst

Greg, I wasn't sure on your headcount and cost reductions. Is that across both segments or more into one or the other?

Gregory Woods, CEO

It was basically a mix. We evaluated our work to see if we could reduce costs without impacting our long-term programs or customer support. This affected both sides, but not equally; it was really based on the functionality of the different individuals involved.

Richard Ryan, Analyst

Okay. And you talked about this lowering breakeven, where would you kind of ballpark your breakeven level at now?

Gregory Woods, CEO

We don't actually disclose that. I'm unsure if David wants to comment, but we typically don’t publish that information.

David Smith, CFO

Yes.

Richard Ryan, Analyst

And Dave, one for you. I wasn't sure on the $450,000 of cost, how that was split. Could you just kind of run through that one again?

David Smith, CFO

Yes, the split that I talked about was, as between sort of where it hit on the income statement. The bulk of it was in operating expenses. There was a little bit in cost of sales, but primarily in operating expenses, and I didn't go any further than that.

Operator, Operator

Our next question will be from Samir Patel.

Samir Patel, Analyst

I had a couple of others on product ID, since it doesn't seem like there's anyone else. So one is, how quickly do those bookings typically translate to revenue? Is that more of a long-term thing over the course of the year? Is that more kind of quarter-to-quarter?

Gregory Woods, CEO

What exactly about product ID, the new products or just in general?

Samir Patel, Analyst

You mentioned the strong bookings, could you elaborate specifically on the new Trojan products?

Gregory Woods, CEO

Yes. Typically, when new products are released, they tend to sell quickly, but the supplies often take longer to catch up. A customer might purchase a new printer, and our main competitors in that space are commercial printers, who usually have a supply of in-house labels. While these customers get accustomed to using the new product, they are using up their existing supplies at a relatively low production level. Subsequently, we observe that the supplies start to increase 3 to 6 months later, eventually reaching full production levels. This is the common pattern for customers who buy a new printer from us and then gradually ramp up their production. The hardware tends to sell rapidly, while the supplies follow afterward.

Samir Patel, Analyst

That's helpful. And so I guess, in bookings, you're only really reporting hardware because they're probably not ordering those supply 6 months out?

Gregory Woods, CEO

No, no, no. We report both in the bookings. And I guess, as the whole market, we're talking about the complete bookings being ramped up, and that just means more people coming back online. Essentially, what happens is you are kind of making up for that deficit in these Asian customers that have dropped off significantly. Just the general kind of across the globe, people printing more and us placing more units out there on a regular basis. And then they generate more supplies as they ramp up.

Samir Patel, Analyst

Do you have a number in terms of how your hardware supplies typically relate to the units, similar to how software maintenance might be around 20% or 30% of the initial license fee? Does it depend on the specific unit and its size?

Gregory Woods, CEO

Yes, we don't get that granular with it. I mean, we typically write about the 10%, 8% to 10% on the service side of things?

Operator, Operator

We do have a question coming from George Melas.

George Melas, Analyst

Can you talk a little bit about your Trojan product line. You acquired it in February of '17. So you've had it for 2, 2.5 years now. Can you sort of give us a little bit of the story of how that has evolved under your ownership?

Gregory Woods, CEO

Yes, George, you are correct. We acquired it at the beginning of 2017 and went through the integration phase. For the first 7 or 8 months, we operated it as a standalone business alongside our other operations. It didn't have much impact initially as we had personnel cross-selling between the QuickLabel and Trojan labels. Later that year, we fully integrated it with the Product Identification team, creating one unified sales team. Since then, we have seen a consistent increase in product placements and new product development. The T2-C was launched after this integration, and today we introduced the T3-OPX. They have a strong design team working on several future projects as well. These products have been well received in the market, and we distribute them globally through our full channel. In fact, the founder of that organization, Mikkel, now leads our global hardware operations, overseeing the sales of all our products in the Product Identification sector.

George Melas, Analyst

And I guess you won't sort of say what's the revenue sort of that product line, but can you give us a sense of whether sort of it met expectations from a product development perspective or from a sales perspective? And if there are some hurdles to adoption, what might have those been?

Gregory Woods, CEO

Yes, it was mainly that kind of sales team, getting them focused and get identified with our overall channel and not having kind of two different channels. So let me say probably the best way to characterize it is, after a slow start in the first year, it's ramped up and then meeting our expectations ever since. We're very pleased with it.

George Melas, Analyst

Okay. And have you expanded the sort of available market through the product introductions? Or is it still very much focused on sort of that? I think you're really focusing on sort of smaller commercial printers, right?

Gregory Woods, CEO

The Quick Label brand consists of tabletop printers, while Trojan label serves as a bridge between these products. Trojan label features a high-end hybrid model, which can be described as a small production press, expanding our reach into the commercial printing market. The Trojan label brand primarily caters to larger brand owners, global companies, and substantial commercial printers, creating a new niche for us. For instance, with the T3-OPX, we print directly onto boxes or packages, including flexible packaging and wooden boxes, opening up an entirely new market for us.

George Melas, Analyst

Okay. And just maybe a question on the sales reorg, just for very high levels, help us understand how that's going to benefit you guys?

Gregory Woods, CEO

The biggest thing has been better coordination? Sorry, can you say that again?

George Melas, Analyst

And I'm trying to understand what are the plus and minuses of the new sales structure.

Gregory Woods, CEO

Yes, we don’t see any significant drawbacks. The benefit of this approach is that rather than having separate leaders for Asia and Latin America, along with various sales leaders who operate independently, we now have a single individual overseeing global operations. This encompasses areas like supply, hardware, and service, allowing us to improve communication and ensure better consistency. As our company has grown, we now serve major clients, such as Fortune 100 companies, with operations worldwide, ensuring they receive the same level of service and support globally. Additionally, it allows us to quickly address service issues, for example, identifying a problem in Bangladesh and ensuring that everyone worldwide is informed immediately, rather than waiting for an escalation.

George Melas, Analyst

Okay. And just a follow-up on that, are there very large customers that purchase in multiple geographies? Is that a big part of the business? Or is that something that is not so big, but you're trying to expand?

Gregory Woods, CEO

No, it's a more and more significant part of our business every year, and we have a number of those types of customers. And they have a production facility. Typically, these customers have things like a medical products company, and they making those medical products or chemicals or whatever it is on a global basis and they want consistency, not only in the product, but the labeling that goes on to those products, and they need to know exactly what was printed, when it was printed. And so they've got excellent choice and ability.

Operator, Operator

I'm showing no further questions in the queue at this time. I'd like to turn the call back over to our speakers for closing comments.

Gregory Woods, CEO

Thank you, Operator. And thank all of you for joining us here today. We look forward to seeing you on the road or speaking with you again at our next quarterly meeting. Have a good day.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.