AstroNova, Inc. (ALOT) Q2 2018 Earnings Report, Transcript and Summary

Good day and welcome to AstroNova’s Q2 Fiscal Year 2018 Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. At this time, I would like to turn the conference over to Scott Solomon of Sharon Merrill Associates. Please go ahead, sir.

Thank you, Audra. Good morning, everyone and thank you for joining us. Hosting this morning’s call are Greg Woods, AstroNova President and CEO and Joe O'Connell, Interim CFO. Greg will begin the call by reviewing the company’s operating highlights and business outlook. Joe 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 earlier 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 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. Such forward-looking statements speak only as of the date made, except as required by law. 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 the AstroNova annual report on Form 10-K and other filings the company makes with the Securities and Exchange Commission. Now, I will hand the call over to Greg Woods.

Thank you, Scott. Good morning, everyone. Q2 marked the quarter of strong revenue growth for AstroNova as we posted record top line results and executed on our near-term strategic goals. Our integration of TrojanLabel is nearly complete and we have made quick progress in transitioning them to the AstroNova operating system our business model for product development and operations excellence. During the quarter, we also introduced new products, broadened our international revenue opportunities, made strategic investments to expand our addressable markets, and we added both management and technical bench strength. These initiatives help drive record revenue of $27.5 million for the quarter, which was 8.5% ahead of last year. Bookings, which is an important indicator for our business, increased 15.5% in the quarter to $27.8 million. Margins however fell short of our expectations this past quarter primarily related to business mix, cost associated with the TrojanLabel integration, accelerated investments in marketing and personnel around the world and higher charges related to equity-based compensation. From a segment perspective, revenue from our Product Identification segment reached a record $20.8 million in the quarter, up 18% year-over-year. The increase reflected positive momentum early from the TrojanLabel acquisition, which we acquired in February as well as growth in our QuickLabel products and associated supplies. As we speak with current and prospective Product Identification customers, one of the consistent themes we are hearing is how AstroNova stands out from the crowd with the breadth and uniqueness of our product offerings. The combination of the many QuickLabel tabletop products that we have introduced over the past few years combined with the newly acquired TrojanLabel line of mini press and specialty printers gives us the broadest range in our marketplace. We are now seeing the benefits of this range being reflected in our expanding customer base that now ranges from very small firms with only a few employees to multibillion dollar global enterprises. In the coming quarters, we have a number of programs both in terms of product development and marketing that was very excited about the future of this business. As a matter of fact, some of these new products will be introduced as early as next month at Pack Expo in Las Vegas and LabelExpo in Brussels. We invite you to visit us in our new expanded boost at both of these shows to learn more about these exciting new offerings. A couple of additional points on the Product Identification business. We recently launched our first e-commerce site giving QuickLabel customers the ability to quickly and conveniently order labels, ink and other supplies online at shop.quicklabel.com. We have also expanded our international reach by including additional foreign language options on our websites, all focused on making it easier for our customers to print the labels they want when and where they need them. In the Test & Measurement segment our Q2 performance was mixed. Overall segment revenue of $6.6 million was down $1.1 million from the same period last year. This was attributable in part to the often uneven and somewhat hard to forecast pattern of aerospace orders. In addition, segment revenue in last year’s second quarter had unusually high orders related to our RITEC acquisition. Orders had increased because of the transition of manufacturing from RITEC’s operations in California to our facility here in Rhode Island. Moving forward the outlook for the aerospace business unit remains strong as evidenced by the many design-in wins for our narrow and wide-format flight deck printers. In calendar 2017 alone we have secured ToughWriter 640 commitments on the Boeing 737 from leading Nordic and Latin American carriers. We also received multiple comments for the ToughWriter 640 on this year’s Paris Air Show and signed an exclusive contract with China Electronics Technology Avionics to supply the ToughWriter 5 for the new COMAC C919 aircraft. Our Test & Measurement data acquisition business unit is gradually gaining momentum on the strength of several new products, including this Daxus and the portable DDX100 SmartCorder. During the quarter we saw a nice increase in the placement of these products. They were also featured at a number of shows including the Sensor and Test Show, a leading form for sensors measuring and testing technologies. Our team generated a high volume of leads at the show and the feedback we received from current and prospective customers has been very favorable. Recent addition of a new general manager of Test & Measurement products along with new inside sales personnel has helped to galvanize the team. They have already implemented several sales and marketing improvements and they are working closely with our R&D team to further accelerate the pace of new product introductions in the coming quarters. Both our Test & Measurement and Product Identification segments achieved solid growth internationally again in this quarter resulting in a 34% year-on-year increase in revenue. As you know overseas expansion has been a key focus for us and we continue to gain our foothold in new markets as we build our global footprint. In recent months, we opened a new office in Chennai, India and hired an experienced country manager based in that region, added sales personnel in Latin America and Asia and setup a wholly-owned foreign enterprise in the Shanghai free trade zone area. This entity not only lowers the cost of importing and exporting products to and from China, it also enables us to transact business without intermediaries. In fact having this entity in place has already proved instrumental in winning a large QuickLabel contract with a large Asian customer. We are also in the process of moving to a new much larger facility in Germany that will serve as the manufacturing and logistics hub for all of our European operations. Sticking with the updates on our new and expanded facilities for a minute, our new innovation technology centers that I mentioned in last quarter’s call are now coming online. These customer focused centers allow our sales teams to demonstrate the full range of our products in locations that are convenient for our customers all around the world. Currently we have centers open in Rhode Island, Denmark and China. The plan is to open additional locations this year in Chicago, Germany and Mexico. Before concluding my prepared remarks, I want to thank John Jordan for his work as interim CFO over the past year. As we announced this month, John is resigning from the company to pursue another career opportunity. But he has agreed to stay on through a transition period that will include the filing of our 10-Q for this quarter. I am pleased that Joe O'Connell, our VP of Business Development and former CFO has been elected by the Board as interim CFO and Treasurer until the permanent replacement is appointed. The company has retained a leading executive recruiting firm to identify potential candidates and we will keep you updated on that progress as developments warrant. In closing, we are continuing to execute on our growth strategy. As we move into the second half of our year, we will continue to focus on accelerating product launches, expanding our distribution channel, automating key processes and building our bench strength. Now let me turn the call over to Joe for the financial review.

Thank you, Greg. Good morning everyone. I am pleased to be back and certainly pleased to report AstroNova’s second quarter financials for the fiscal year 2018. As you heard from – during Greg’s presentation, the company’s revenue in the second quarter was a record $27.5 million reporting a growth rate of 8.5% over the prior year. The increase was traceable to our Product Identification segment, where revenues of $20.8 million increased 18.2% from the prior year. The prime contributors to the Product Identification growth were hardware revenues being up 40%, while the supplies revenues were up 13.8% over the prior year. Specifically, our success with the hardware growth is really centered on the QuickLabel line of digital inkjet printers as well as the contributions from the TrojanLabel line of digital label presses. Supplies revenues growth was shared among ink toners and print head products as well as growth from the QuickLabel line of label products. Our Test & Measurement segment reported revenues in the quarter of $6.6 million, a result that is lower by 13.9% from the prior year’s second quarter revenue. The lower revenue was traceable to the aerospace line of avionic printers, where deferrals on certain avionic printer contracts adversely impacted the second quarter revenues. However, we are pleased with the growth of the T&M recorder line of products in this segment that achieved year-over-year increases. Revenues from the company’s technical services, parts, freight and repairs were $2.6 million in the quarter, a 25.5% increase over the prior year. In profiling the second quarter’s revenues by channel, we are pleased to see the continued growth in revenue from our international channels. International revenue in the second quarter was $10.3 million, that’s an increase of 34.2% from the prior year and represents 37.5% of our total revenues in the quarter. Revenues through AstroNova’s domestic channels were $17.2 million in the second quarter, that’s lower by 2.7% from the prior year as the aerospace revenues tempered the overall growth from the other product lines in the domestic channels. Second quarter of 2018 revenues generated gross profits of $10.3 million, that’s flat with the prior year. The gross margin in the quarter was 37.3% compared to 40.7% in the second quarter of fiscal 2017. The decrease was partly as a result of cost associated with integrating the TrojanLabel and the traditional AstroNova businesses as well as changes in product mix and under absorption of the factory. Turning to our operating expenses, selling, R&D and general and admin expenses were $9.3 million in the second quarter or approximately 34% of total revenues. This compares to operating expenses of $8.6 million or 33.8% of revenues in the year ago quarter and reflects the addition of the TrojanLabel acquisition in February of this year. Operating income in the second quarter was $943,000 or an operating margin of 3.4% compared with $1.7 million or a margin of 6.9% in the comparable period in 2017 as well as a 2.9% margin reported in the first quarter of this fiscal year. Looking at the segment operating profit for the quarter, Product Identification earned $2.6 million in segment operating profit, with a margin of 12.5%, while the Test & Measurement segment had operating income of approximately $700,000 with a corresponding margin of 9.9%. Our federal, state and foreign tax provision in the quarter was $231,000 representing an effective tax rate of 24%. Our second quarter net income was $727,000, that’s $0.11 per diluted share and compares with $1.3 million or $0.17 per diluted share in the second quarter of fiscal 2017. On the balance sheet, our cash position at the end of the quarter was $14 million, that’s down from the year end cash position of $24.8 million lower value reflecting the repurchase of a lot shares made in the quarter. Our accounts receivable balances were $17 million at the end of the quarter. That reflects some 50 days sales outstanding and our inventory value was at $20.3 million, that’s up 3.9% from the year end and represents 106 days of inventory on hand. Our revenue per employee was $307,000 in the quarter, up slightly from previous $301,000. Our capital expenditures for the first six months were $983,000 and that were distributed among building improvements, machinery and equipment and information technology. The company paid $471,000 in cash dividends during the quarter at $0.07 per share. That completes a review of AstroNova’s second quarter financial results. Now, let me hand the call back to Greg for closing comments.

Thank you, Joe. We expect the strong second half of the year for AstroNova as we introduced new products, expand our presence internationally and build on the positive momentum we experienced in the second quarter. For the year we are expecting revenue in the range of $100 million to $105 million with top line growth in both segments and improving margins. EPS for the fiscal year 2018 is expected to be within the range of $0.60 to $0.65 per diluted share. With that Joe and I would be happy to take your questions. Operator?

Thank you. [Operator Instructions] And we will go first to Tom Spiro at Spiro Capital.

Tom Spiro, Spiro Capital, good morning.

Good morning Tom.

Good morning Tom.

Greg, could you give us an update on QL-800 and the other tabletop printers, how they are fairing please?

Sure. As you noticed in the record revenues there for Product Identification, they are actually doing fairly well. So the – remember from the last call we had a bit of a slow start with the QL-800, but that picked up quite substantially in the second quarter. And we expect it to continue to do so. So we have got demo units all around the world. All of our sales locations have been trained on it. In the second quarter we have had a series of training sessions to help the team be up to speed on the latest improvements of QL-800. And the existing line is also faring well with the Kiaro! products as well as the both the die based and the pigment based versions.

Are the bookings for the tabletop printers increasing?

Right, they are. We don’t actually disclose this number, but yes they are going up.

I see, well, that’s great. I noticed also a mention somewhere in today’s comments that bookings in the Test & Measurement segment are going up, I was curious are those bookings being driven by increased aerospace or increased data acquisition or both?

Yes. It’s really in both areas and as I mentioned in my comments, the end of the first quarter we put a new general manager in-charge of that data acquisition business and that’s made a huge improvement. He came from one of the top firms globally in that industry and brought a lot of improvements with that group in terms of both personnel and marketing and sales techniques and even some product readjustments that have proved out to be doing very well actually.

Great. And lastly your projections for the year, it looks like we have got sales for the second half of the year that would be roughly flat with the first half of the year, but EPS is dramatically greater in the second half than the first half and I was curious what’s driving that big increase in earnings when sales would appear to be roughly flat?

Joe might want to chime in this as well, but it’s really a variety of things, I mean we had some of those items that I mentioned and I think Joe hit a few of them as well there. We don’t expect to basically recur in the second half of the year, so that’s going to help us. But also the mix of what we can see from the bookings is a more profitable mix as well as operational improvement, it’s kind of a mix there. And if you want to add to that Joe?

Yes. I think the operating system that we have put in place is continuing to improve the process. I think that you will see here a great deal of efficiencies over the next six months in terms of how the business is managed. So I think that will reflect itself in terms of improved earnings of the bottom line. Also the TrojanLabel I think we are really, I think for the most part as Greg mentioned earlier I think we are – that’s behind us at this point. I think we still got a little work to do on the supply chain just to make sure we have get that mapped out properly. But I think – we think there are some nice opportunities in terms of profit improvements, in terms of just the operating systems that we have in place.

Is there anything of a non-recurring nature in the second half EPS numbers, anything unusual going on there tax rates that kind of thing?

Nothing we have identified at this point Tom. I don’t think so. I think that we are doing some things that we are obviously we are trying to improve the profitability and I think it’s a little early if you will maybe to get into some of that detail, but certainly we continue to look for ways to enhance the operations in the earnings of AstroNova.

And what were the integration expenses in Q2, the TrojanLabel integration expenses?

We spent about $80,000 in the second quarter. Again, it’s probably I think we are over about $130,000 for the first 6 months. So, I think hopefully some of that is behind us, I think it is. I think we have got like everything else integration if you will tends to be a lot more challenging than it perhaps maybe initially thought, but I think we are fairly along though in terms of the integration into AstroNova now.

And let’s just add one thing on that is that $80,000 is not a lot of money, but that’s I think mainly professional expenses, but the other thing that impacts it from a business point of view is just the time it takes from our existing people to help with integration moving into the AstroNova operating system in the line of sales channels. So, most of that work is behind us too. So, it doesn’t – it’s not an additional cost, it’s just a diversion of people from their other activities in marketing and sales and other businesses that they normally are focused on, which we see them moving mainly back into that in Q3 now.

Well, thanks much and Joe, welcome back to the saddle.

Thanks, Tom.

[Operator Instructions] We will go next to Joe First at First Associates.

Good morning. Joe, also welcome back. I am glad to see you back. I think you were thoroughly missed. And I am glad to see that you are doing something to improve the profitability of the company, because for the last at least 3.5 years, your sales have gone up a little bit each year, but your earnings have gone down a little bit each year. And the bottom line is earnings. So, I am glad to see that you are trying to emphasize that more doing things to improve the profitability. Just a question, can you expand a little bit on the airline printer business, it seems like you are always getting more contracts and has used the backlog, but they never seem to start happening. And I wonder if you could talk about that a little bit?

Yes, I can – this is Greg, I can mention a little bit on that, Joe. So, yes, winning the contracts is key obviously, because that locks you in and it’s a function of – it was really two things, it’s the new aircraft build as well as the new airlines that adopt those aircraft. So, you get kind of two things obviously you have to buy 10 airplanes, you get 10 printers of course, but what you also get in the new airlines is you get them setting up their logistics and support hubs around the world to international carrier in that region that they find. So, the timing at which those guys come online is a little bit tough to predict. We know pretty well statistically what’s going to happen and from what announcements have been made, but the exact timing of the orders is hard to predict. So, the base kind of business of how many aircraft are going to be build, it’s pretty good handle on that. We don’t have as good of a handle on is well, how many of those are going to new airlines that have to buy, for example, 10 plane buy, they might add 8 or 10 printers initially. After that, they don’t do it very often, but there are well over – there is several 100 airlines out there in the world. So that’s the part that’s a little more hard to predict. There is a piece of our business that’s military as well and that is based on military allocations, which we don’t have a good handle on that. The commercial we have a pretty good handle on business jet tends to move up and down more than the commercial does. So that piece of it is also hard to predict. But we know in the long run, we have got the design-ins. We don’t see any jeopardy in that certainly in the next several years of that moving away. So, it’s a matter how quickly those units ramp up and how many new airlines adopt the new products.

And thank you very much. And one quick question about can you talk about China about the opportunity you have in China, is that a substantial opportunity?

Yes, it is. It does two things for us. I don’t know if you are referring to the [indiscernible], the wholly-owned foreign entity, but if I can talk about, if you have other questions, I can elaborate further, but the benefit of that and as you might guess, pun intended the red tape in China to get these things setup is quite extensive. So, it took about a 1.5 year really from start to finish to get that process done and fully approved with all the different logistics that we have to put in place. But the beauty of where we are located and it’s actually the Pudong area of Shanghai. So, it’s a duty free trade zone. So, we have very good logistics. We have quite a number of people there. Remember, a few years ago, we started there with a tech center with just a couple of guys. Now, we have got a pretty big operation there. And we can make that a hub not only for China so that helps us with actually one of the customers I mentioned briefly there. They will probably end up using several hundred printers, didn’t buy that in this quarter, but it’s a nice ramp up. But they require to almost weekly handholding and local support and extra print heads and inks and things like that. And the fact we have that logistic center set up there, it really helped us to win that big count. So we see more of those in the pipeline and you can’t just fly people over from the U.S. or even one of our other Asian or European operations not all the time. So having local people there in China and the plant [ph] is a big help building at what you do is have a website that’s based locally which as you can imagine it works similarly in China, here we make a sales presentation and the next thing they want to do is go online and read more about your company, but you can tell if it’s hosted locally or in a foreign country. So it’s also in China there is a bit of censoring that goes on there right, so it’s hosted in the foreign country, things are slower and it just helps overall operations. So that’s what the big boost is that we see coming forward with that new tech center in Shanghai with its logistics operations added to it.

Great. Thank you very much.

Sure.

Thanks Joe.

And that does conclude the question-and-answer session. I will turn the conference back over to Mr. Woods for any closing remarks.

Great. Thanks. Well, thank you all for joining us here this morning. We look forward to keeping you updated on our progress and enjoy the rest the summer. Bye now.

Bye now.

And that does conclude today’s conference. Again thank you for your participation.