AstroNova, Inc.

Good day and welcome to Astronova's third quarter fiscal year 2023 financial results conference call. Today's conference is being recorded. If you would like to ask a question during today's presentation, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. 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.

Thank you, Drew. 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 this morning. If you do not 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 uncertainty. Accordingly, actual results could differ materially except as required by law. Any forward-looking statements speak only as of today, December 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 other filings that 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. It also helps investors who wish to make comparisons between Astronova and other companies on both a GAAP and a non-GAAP basis. A reconciliation of the non-GAAP financial 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.

Thank you, Scott. Good morning, everyone, and thank you for joining us. Let me begin by saying that we are pleased with our Q3 performance, particularly considering the still challenging macroeconomic environment. On the top line, we delivered record revenue of $39.4 million. The year-over-year increase of 37% was primarily driven by our August acquisition of Astra Machine. Coupled with another strong quarter in test and measurement, and mid single-digit growth in our base product identification business. Inflation, supply chain shortages, and geopolitical volatility have continued to make things tough for businesses in many industries, including ours. But I'm extremely proud of the way our team has continued to navigate those challenges to deliver for our customers. Turning to our segment results, product identification revenue grew 36% in the quarter to $29 million, largely reflecting the addition of Astra Machine. To give you some perspective, on our acquisition call in August, we noted that Astra Machine's revenue for the trailing 12 months ended June 30th was about $22 million, and we are tracking slightly ahead of that run rate. Astra Machine is a perfect fit for our product identification segment in two specific ways. First, it's a great complement to our label printer business. Label printers currently represent about a third of Astro Machines' revenue, and we can scale that portion of the business by expanding the distribution of those products through a much broader distribution channel. There are also cross-selling opportunities between our business bases as well as product development and acceleration advantages in our R&D efforts with the combined teams. AstroMachine expands our addressable market into the high-speed overprinting space, as well as mail and package printing applications. This market accounts for the other two-thirds of AstroMachine's revenue. And it is benefiting from the rapid expansion of e-commerce. While technologically similar, it has new customers and channels, as well as the opportunity to expand business with existing customers. And of course, The recurring revenue stream that runs through both the label printer and mail handling sides of the business is significant. Our engineering and product development teams are working well together, and we have already identified several exciting opportunities for product synergies. It is also advantageous to be adding a second engineering and manufacturing center based here in the US, located near Chicago's O'Hare International Airport. Of course, it's still early in the process, as we are now just four months into the acquisition. But so far, the integration is right on plan and the business synergies are exceeding our expectations. Elsewhere in our product identification segment, we continue to maintain a steady pace of new product innovation, highlighted by the launch of our entry-level QL-E100 full-color tabletop label printer, as well as several additional technology innovations. The QL-E100 which we introduced to great customer response at PacExpo International in October, is purpose-built for customers just beginning to capitalize on the benefits of in-house label printing, as well as larger organizations that need multi-unit, widespread distribution of their label printing. Turning to our test and measurement segment, the segment posted another solid quarter as revenue increased about 38% year-over-year to $9.5 million. The top line would have been even stronger, but for supply shortages, which resulted in about a $2 million of unfilled orders, most of which we expect to ship in the current fourth quarter. The aerospace component of our T&M segment posted its highest quarterly revenue since the first quarter of our fiscal 2021 year. That milestone is certainly consistent with the rebound of the commercial aviation market, which continues to ramp back up from the depths of the pandemic. Segment hardware and service revenue also grew nicely in the quarter. The growth in hardware relates chiefly to the higher production rate of key programs, such as the Boeing 737 MAX and the Airbus A320. The increase in service revenue is indicative of the greater number of planes in the sky and the increased demand for our aviation paper, as well as maintenance, repair, and overhaul services. The data acquisition portion of our T&M segment also performed well in the quarter, as we continue to see demand grow for our technology in areas such as rocket and missile telemetry and other defense-related applications. Now, let me turn the call over to David for the financial highlights.

Thanks, Greg, and good morning, everybody. I'll provide a couple of brief comments on the quarter financial results, including the impact of Astro Machine. Comparing the third quarter this year to last year's, we saw revenue growth in all areas. Reflecting both the acquisition that Greg highlighted in his remarks, as well as the ongoing business, hardware sales were up 57% for the quarter to 11.9 million. Year to date, hardware is tracking 29% ahead of fiscal 2022 at about 30 million. Supplies revenue of $23 million was 27% ahead of last year's third quarter, and through nine months of the year, revenue from supplies is up just over 9% to $57.8 million. Third quarter revenue from service and other was up 42% year-over-year to $4.5 million. Year-to-date, this category is 31% ahead of last year's pace, coming in at $12. By geography, year to date, the U.S. accounted for $65.5 million in revenue, or 63.8% of total sales, with the international side making up the remainder, 37.2% or 36.2%. Turning to expenses, we remained focused on really diligently managing those areas of the business that are under our control. Our gap results this quarter, I want to note, include $217 million in acquisition-related expenses relating, obviously, to the costs associated with getting the AstroMachine transaction completed. For a more useful comparison to 2022, I'm going to talk about operating expenses, including the acquisition, or highlighting the differences, but as always, you know, please review the tables in the earnings release for reconciliation of the gap to the non-gap results. On a total basis, operating expenses in the third quarter were $10.4 million, 3.3% higher than the comparable period last year, but they would have been slightly lower without AstroMachine. Operating expenses on a non-gap basis have been really very stable for the last several quarters. Non-GAAP operating income in the quarter grew to $2.1 million or 5.2% of revenue from $300,000 or 1% of revenue in the same period last fiscal year. The increases were driven in part by higher revenue in the 2020-2023 period, as well as an improvement from the acquisition. Astro Machines OEM business model has a lower gross margin profile. but much lower operating expenses supporting higher operating margins. Overall, the Astro performance is in line with perhaps even a little better than planned at the time of the transaction, as Greg noted. In the segments, product ID operating profit was up 63% in the third quarter to nearly $3 million, which translated to an operating margin of 9.9%, up 160 basis points year over year. Test and measurement segment operating profits more than doubled to 1.7 million in the quarter, yielding an 18.0% operating margin, up 580 basis points compared to the same period last year. Turning to the bottom line, non-GAAP net income for the quarter was 830,000 or 11 cents per diluted share compared to 103,000 or 1 cent per share in the year earlier period. Acquisition-related expenses impacted GAAP EPS by $0.07 per diluted share. Bookings in the third quarter increased more than 8% year-over-year to $35 million, the highest quarterly total since the first quarter of fiscal 2020. Backlog at the end of the quarter or backlog as of the end of the quarter increased 46.6% to $39.3 million. from $26.8 million at the same period last year. In early August, we funded the $17.1 million acquisition with debt under an amendment to our credit facility. And the terms are all explained in the filings we did at that time and are summarized in the footnotes to the third quarter 10-Q that we're going to file very shortly now. The elements of the AstroMachine balance sheet are in the consolidation disclosed in the 10-Q, along with a discussion of the items that are preliminary estimated and subject to change. While we're very cleanly in full compliance with our covenants, the inventory balance has grown this year because of our responses to supply chain challenges. and is the other reason for the growth in the debt balance. We're taking a number of careful and measured actions to reduce inventory levels and thus allow us to reduce our drawings under our revolving credit. And we believe those steps will begin to show effect beginning in the fourth quarter. With that, I'll turn the call back to Greg.

Thanks, David. In closing, We posted a strong quarter and are confident in the underlying fundamentals and secular trends shaping our business. The integration of Astra Machine is on track and we are excited about the future potential from this transaction. With a record backlog and a healthy order demand exiting Q3, we are well positioned to continue executing on our growth strategy as we move through the fourth quarter and into fiscal 2024. Now, David and I would be happy to take your questions. Operator?

Thank you. We will now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. It looks like we have no questions currently in, so I will turn you back over to Mr. Woods.

Great. Thank you. Well, thank you all for joining us here this morning. As always, we look forward to keeping you updated on our progress. Stay safe and have a wonderful holiday, everyone.