AstroNova (ALOT) Q3 2025 Earnings Call Transcript

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Date

Thursday, December 12, 2024 at 9 a.m. ET

Call participants

• President & Chief Executive Officer — Gregory Woods
• Vice President & Chief Financial Officer — Thomas DeByle

Takeaways

• Consolidated Revenue -- $40.4 million, representing a 7.7% increase primarily driven by Test & Measurement segment growth.
• Net Revenue Excluding MTEX -- Up 3%, indicating underlying growth stripped of the acquisition contribution.
• Test & Measurement Segment Revenue -- $14.1 million, up 28.2% attributed to Aerospace product line momentum.
• Product Identification Segment Revenue -- $26.3 million, down 1%; excluding MTEX, sales declined 7.2% reflecting lower hardware sales.
• Gross Profit Margin -- 33.9%, down from 39.4%, with decline attributed to lower MTEX margins, sales mix, and weaker European hardware results.
• Non-GAAP Operating Expenses -- $12.1 million, up 19.3%, with $1.3 million increase from MTEX, and added costs for headcount, prototypes, and IT.
• Adjusted EBITDA -- $3.2 million, compared to $5.7 million in the prior year period.
• Non-GAAP Diluted EPS -- $0.06, down from $0.37.
• Product Identification Segment Operating Profit -- $1.9 million (7.2% margin) versus $4.8 million (18.1% margin) in prior year; decline tied to costs from MTEX, mix, lower European sales, and delayed product release.
• Test & Measurement Operating Profit -- $3.3 million, up 26.9% from $2.6 million in prior year, linked to revenue increase.
• MTEX Results -- $1.7 million in revenue and $1.1 million operating loss; integration described as more resource intensive than anticipated.
• Backlog -- $27.1 million as of November 2, 2024, down from $31.2 million for the previous year's comparable period.
• Bookings -- $37.6 million, up from $35.5 million in the prior year quarter.
• Cash and Cash Equivalents -- $4.4 million, a $400,000 decrease from last quarter.
• Funded Debt -- $48.9 million, up from $45.6 million at prior quarter-end.
• Liquidity -- $14.7 million, down by $7.2 million from the previous quarter attributed to higher Aerospace accounts receivable and lower accounts payable.
• Working Capital Loan to MTEX -- $2.7 million provided by AstroNova via its revolver during the quarter.
• Cash from Operations (YTD) -- $2.3 million versus $5.9 million in the prior-year period; free cash flow (YTD) at $1.2 million versus $4.6 million.
• Aerospace Mix Shift Plan -- Management expects ToughWriter branded printers to move from 43% to 89% of segment shipments by end of fiscal 2027, aiming to cut SKUs and royalty expenses.
• Projected Royalty Expense -- Royalties are expected to fall from over $4 million annually in fiscal 2025-2027 to $375,000 in fiscal 2028 as segment mix shifts.
• Delayed Large Inkjet Order -- Legacy PI business began shipping a customer-requested enhanced order in fiscal Q4, with several million dollars of expected revenue over coming quarters.
• Cost and Product Line Rationalization -- New company-wide initiative underway, with early order wins supporting management's confidence in process improvements.
• Integration Realignment -- MTEX sales, marketing, technology, finance, HR now report directly to AstroNova leadership to accelerate harmonization with AstroNova practices.
• Guidance Withdrawn -- Management discontinued specific guidance for fiscal 2025 and 2026, intending to present longer-term targets at the next call.
• Potential Seller Remedy -- Management is researching "details that appear to be inconsistent with the information originally provided by the seller" regarding MTEX and pursuing possible remedies under acquisition agreements.

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Risks

• President & CEO Woods said, "Overall, the results were disappointing. We saw a significant decrease in consolidated margins and a notable year-over-year increase in our operating expenses."
• MTEX integration has proven "far more time consuming and resource intensive than we anticipated," and in the third quarter had an operating loss of $1.1 million on $1.7 million revenue.
• Gross profit margin fell to 33.9% from 39.4% "due to lower margins at MTEX, sales mix and lower European hardware sales."
• Liquidity fell to $14.7 million, down by $7.2 million from the prior quarter, as a result of "higher accounts receivable in Aerospace shipments with longer payment terms. Lower accounts payable as the timing of payments to key suppliers, all occurred in Q3 FY '25."
• AstroNova no longer providing guidance for fiscal 2025 and 2026, citing the "extended integration time line for MTEX."
• Year-to-date free cash flow is $1.2 million versus $4.6 million prior year, with $4.7 million used in operations in Q3, reflecting reduced operational cash generation.

Summary

AstroNova (NASDAQ:ALOT) reported revenue growth of 7.7%, powered by strength in the Test & Measurement segment's Aerospace product line, while the Product Identification segment experienced a 1% decline due in part to integration headwinds and delayed order shipments. MTEX integration complexities resulted in a $1.1 million quarterly operating loss and ongoing elevated costs, prompting management to reorganize MTEX under direct AstroNova control and initiate comprehensive cost and product rationalization initiatives. Management has formally withdrawn financial guidance for the next two fiscal years, citing the MTEX integration timeline, and revealed that they are seeking potential remedies from the seller due to inconsistencies identified post-acquisition. The company anticipates operational improvement as ToughWriter-branded units expand to 89% of Aerospace shipments by fiscal 2027, which is projected to substantially lower royalty expenses. Reduced liquidity, diminished gross margins, and a sharp drop in free cash flow signal continued pressure until integration and rationalization processes show results.

• Segment disclosures clarify that the delayed large inkjet order is part of the legacy Product Identification business and not related to MTEX's technology.
• Management stated, "Early progress is encouraging. We've closed some significant new orders that underscore the market's confidence in our evolving offerings," suggesting some near-term demand resilience amid restructuring.
• Test & Measurement margins benefited from top-line growth, but management confirmed that margins were negatively impacted in part by the Boeing strike’s shipment delays.
• Detailed cost breakdowns reveal $839,000 in MTEX selling expenses, $209,000 in research and development, and $273,000 in general and administrative for the quarter.
• A working capital loan of $2.7 million was required to support MTEX operations, further pressuring liquidity.

Industry glossary

• PI: Product Identification segment focused on specialty printers, consumables, and associated software.
• T&M: Test & Measurement segment specializing in ruggedized airborne printers and data acquisition systems for aerospace, defense, and industrial applications.
• ToughWriter: Proprietary AstroNova flight deck printer brand associated with higher operating margins and targeted for expansion within the Aerospace product portfolio.
• MTEX NS: Acquired digital printing business integrated into AstroNova's Product Identification segment.
• Backlog: Value of confirmed but undelivered customer orders as of the quarter-end reporting date.

Full Conference Call Transcript

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: 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 AstroNova-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 MTEX's 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 & Measurement segment. Our role is the leading supplier of flight deck 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 Boeing 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. By the end 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 streamlined 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: 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 T&M 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 attention 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, 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 in 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: 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: Sorry if I missed this in my earlier comments. Just to have some clarity here. On that inkjet order that's been delayed. Is that related to the legacy business or the MTEX's business?

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

Brandon Daniel: Yes, sorry. Is this better, Greg, can you hear me now?

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

Brandon Daniel: Yes. So I'll talk a little bit louder. On that inkjet order, is that related to the legacy PI business or MTEX? I'm sorry if I missed it earlier.

Gregory Woods: 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 Van Voorhis with Vanatoc Capital Management.

Robert Van Voorhis: Can you guys hear me now? Sorry about that.

Gregory Woods: Yes.

Robert Van Voorhis: 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: Yes. Tom, go ahead, you can grab that one.

Thomas DeByle: 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.

Robert Van Voorhis: 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: 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.

Robert Van Voorhis: 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 one of the reasons why margins would have declined sequentially? I think that would be my guess.

Gregory Woods: 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.

Robert Van Voorhis: 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 PI 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: 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: 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.

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