AstroNova, Inc. (ALOT) Earnings Call Transcript & Summary

Greetings. Welcome to AstroNova's First Quarter Fiscal Year 2026 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Deborah Pawlowski, Investor Relations for AstroNova. Thank you. You may begin.

Thank you, and good morning, everyone. We certainly appreciate your interest in AstroNova, and thank you for sharing your time with us today. Joining me on our call are Greg Woods, our President and Chief Executive Officer; and Tom DeByle, our Chief Financial Officer. You should have the earnings release that went out this morning as well as the slides that will accompany our conversation today. If not, you can find these documents on the Investor Relations section of our website at astronovainc.com. If you would turn to Slide 2, we'll discuss the cautionary statement. As you are likely aware, during the formal presentation as well as the Q&A session, management may make some forward-looking statements about our current plans, beliefs and expectations. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks, uncertainties and other factors are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. Also, as noted on the slide, management will refer to some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. You can find reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. Now if you will please turn to Slide 3, I'll turn the call over to Greg. Greg?

Thank you, Debbie, and good morning, everyone, and thank you for joining us. Before I get into the details of the quarter, I want to reiterate our strategy to drive long-term revenue growth and improve profitability. AstroNova has a unique position in the global data visualization market with deeply embedded relationships, high-performance technology and a strong recurring revenue model. Our goal is to leverage our technologies and market position and our streamlined organization to deliver stronger growth and earnings with more predictable performance. Core to the strategy are 3 strategic drivers. First, our Aerospace segment, which has a leading market share in cockpit printers is rapidly advancing the transition of customers from our legacy models to our high-performance and high-reliability ToughWriter printers. This transaction deepens our position with leading aerospace customers, decouples us from royalty costs associated with legacy products and simplifies our product portfolio which reduces supply chain complexity and inventory levels, improving cash generation and margins. The transition also enables us to capture a larger percentage of aftermarket sales. Our ToughWriter technology enables us to better leverage the positive macro backdrop of the commercial aerospace market as both Boeing and Airbus continue to ramp up their build rates. The second strategic driver is the launch of highly disruptive next-generation product identification solutions. These commercial scale printing solutions unlock new end markets with large customers that have higher volume printing needs. They also allow us to better control the supply chain for our ink and critical print engine components, lowering costs over time. This provides more avenues for growth and we have already been gaining traction with both new and existing customers. And the third strategic driver is further streamlining operations through headcount reductions and restructuring while strengthening segment level accountability. We are working to structure incentive compensation with key performance indicators, including growth, profitability, cash generation and earnings per share to further improve alignment between management and shareholders. We are laser-focused on executing this strategy. With that if you'll turn to Slide 4, let me touch on the quarterly highlights. We believe that our first quarter of fiscal 2026 results are an early indication of the traction we are making with our strategy. We delivered double-digit growth in both segments and increased consolidated adjusted operating income by 13.5% year-over-year. This was driven by our continued ToughWriter transition, renewed defense shipments of $0.5 million, higher demand for our desktop label printers and a $1.4 million increase in product sales from last year's acquisition. We also accelerated our previously announced $3 million annualized cost reduction plan by completing $1.9 million of annualized cost saving actions in the quarter, most of which will begin to be realized in the second quarter. We plan to complete the remainder of the cost-saving actions in the second quarter. During Q1, we launched 3 next-generation product identification solutions ahead of schedule. The QL-425 and the QL-435 were launched as an extension of our flagship QuickLabel line of high-resolution color label printers, bringing a new level of speed, flexibility and cost efficiency to our professional labeling customers. We also released a new direct-to-package printer, the AJ-800 and which enables printing on sustainable packaging materials like corrugated cardboard, die-cut boxes and paper bags as well as wood. And the AJ-800 expands our product portfolio into larger print media and higher volume production. We are ahead of schedule with the rollout of 2 additional next-generation products that we have in our pipeline. These are expected to be launched in the second quarter. In Q1, we up trained and upgraded our sales team, implemented a new targeted sales strategy under our recently appointed segment leadership and restructured our go-to-market approach. We are pleased with the progress the team has made already and encouraged by the early interest and orders they have generated. In Aerospace, at the end of the quarter, we announced a renewed $10 million multiyear contract win for the delivery of our ToughWriter products over the next 5 years to a prime defense contractor and shipments on this program began late in Q1. We expect to realize $1.7 million of revenue this fiscal year from this program. The hard work and hard decisions we made over the past 6 months are improving results, but we still have more work to do. We expect our margin profile and aftermarket sales to strengthen as the rollout of our new Product ID solutions gain market acceptance and our ToughWriter transition continues to advance. For the full year, we continue to expect to deliver revenue in the range of $160 million to $165 million and adjusted EBITDA margin in the range of 8.5% to 9.5%. This is a critical juncture for AstroNova, and we are confident in our ability to deliver long-term shareholder value through the focused execution of our strategy. Looking at Slide 5. We will review orders and backlog and discuss the opportunities we are seeing in our markets. First quarter orders of $34.9 million were up 5.4% or $1.8 million compared with prior year period, driven by a combination of higher demand for new and existing product identification hardware and supplies. Product ID orders were up $3.3 million to $26.2 million. We secured a 3-year label supply contract with a multinational beauty company, which is a new account for us. We also captured a renewed upsized contract from a large private label coffee grocer in the U.K. This current customer also will be upgrading its entire fleet of QuickLabel printers. While declines of $1.5 million in aerospace orders partially offset overall order growth, we continue to have strong demand for ToughWriters, reflecting the improved bill rates of the major commercial aircraft OEMs. As we have previously pointed out, aerospace orders can vary quarter-to-quarter based on timing of customer contracts. For example, shortly after the end of Q1, we received a $1 million ToughWriter printer order from an in-flight entertainment customer. During the quarter, we did also further expand our space launch data acquisition business. We secured an order from a new customer Amazon Kuiper systems for our data acquisition systems to be used on their low earth orbit satellite program. Backlog for the quarter declined by $2.8 million year-over-year to $25.5 million, primarily driven by clearing previously delayed shipments. As we move through fiscal 2026, we expect to benefit from our new product introductions and the increasing build rates with Airbus and Boeing. Before I pass the call over to Tom, please turn to Slide 6, and I will touch on what we are seeing regarding tariffs. The headline commentary is that, so far, the impacts have been negligible for our business. Our aerospace shipments are insulated from many of the tariffs due to the contracts we have in place, which essentially hedge our exposure on the sales side. Most of our exposure comes from the component part. However, due to the expense and regulatory difficulties associated with making changes to aerospace avionics, we typically carry large inventories of the most critical components. This gives us a multi-month protection from vendor and/or tariff issues. For Product ID, our next-generation print engine allows us to source ink from across the world, providing flexibility on supply costs. Additionally, our global manufacturing presence in the United States, Europe and Canada gives us more options for rerouting our shipments. To further combat tariffs, we implemented price increases on April 1 and tariff surcharges in the first week of May. We continue to remain agile and look for ways we can partner with and source from alternative suppliers to minimize cost impacts. I'll now hand the call over to Tom for the financial review. Tom?

Thank you, Greg. Good morning, everyone. On Slide 7, you can see our first quarter revenue of $37.7 million grew 14.4% year-over-year and 0.9% sequentially. 83% of the quarter's revenue was recurring. The first quarter is a seasonally slow quarter, so we expect improvements throughout fiscal 2026. Year-over-year revenue growth was 13.8% in product identification and 16.8% in aerospace. Product Identification sales increase for the quarter was driven by $1.4 million incremental MTEX sales and higher demand for tabletop and direct-to-package printers and supplies. Importantly, we unveiled 3 new product identification solutions at the FESPA Global Print Expo in Germany. We expect these product launches to help drive Product Identification hardware sales in the second half of fiscal '26 with the continued growth of our recurring media and supply sales as we increase the installed base. For Aerospace, increased printer shipments to a major OEM and the carryover of shipments to a defense contractor under the recently renewed contract primarily drove revenue growth. The $10 million multiyear contract award began shipping in the first quarter, and we expect to ship the remaining portion of the expected $1.7 million in orders before our fiscal year-end. We also expect an increase in the ToughWriter shipments from an existing commercial aerospace customer beginning in the second quarter as we had transitioned away from the legacy cockpit printers. ToughWriter aerospace printers were 42% of the first quarter shipments and we remain on track to double the percentage by the fiscal year-end. Turning to Slide 8. Gross profit was $12.7 million, up $0.7 million increase year-over-year, representing 33.6% of sales. Adjusted gross profit was $13.1 million, a $1.1 million increase year-over-year, representing 34.6% of sales. The increase in gross profit was primarily driven by higher sales volume, but year-over-year margin was negatively impacted by dilution related to the acquisition and the legacy aerospace printer contract, which we expect to be completed by the end of the second quarter of fiscal 2026. On an adjusted basis, gross margin increased 30 basis points from the trailing period, reflecting higher volume in the quarter. Going forward, we expect gross profit and margin to improve throughout fiscal '26 as we increase the percentage of ToughWriter sales and the next-generation product ID printer sales and supply. Looking at Slide 9. Product ID operating income for the quarter was $2.8 million or 10.6% of sales compared with $3 million in the prior year period. On a non-GAAP basis, operating income was $3.1 million or 11.9% of revenue. The year-over-year and quarter-over-quarter improvement in non-GAAP operating income was driven by higher sales was partially offset by lower margins on the acquired legacy technology. Looking at Slide 10. Aerospace operating income for the quarter was $2.8 million, a 24.2% of sales, compared to $1.7 million in the prior year period. On a non-GAAP basis, operating income was $2.9 million or 25.7% of revenue. The sequential and the year-over-year growth of operating income and margin were driven by improved product mix as we transition commercial and defense customers to our higher-margin ToughWriter solutions and benefited from operating leverage gained on higher volume. Operating income was partially offset by legacy printer contract that is expected to be completed in the second quarter. Aerospace operating expense was lower year-over-year as we benefited from a $0.3 million reserve reversal related to a commercial airline. Turning to Slide 11. Net loss was $0.4 million or a negative $0.05 per share compared with net income of $1.2 million or $0.15 per share in the prior year period. Adjusted net income was $0.4 million or $0.05 per share. Adjusted EBITDA of $3.1 million increased 27.6% compared with the prior year period and grew 28% compared with the trailing fourth quarter of fiscal '25. Adjusted EBITDA margin for the first quarter added 80 basis points year-over-year and sequentially. We are expecting operating expenses to be benefit from the restructuring program for the remainder of fiscal '26. Moving to Slide 12. During the quarter, we strengthened our balance sheet by paying down $3.9 million in debt and improved liquidity. We ended the quarter with $12.6 million in total liquidity, including $5.4 million in cash and $7.2 million in revolver availability. Our leverage ratio of funded debt to EBITDA is 3.5x. Our targeted leverage ratio is approximately 2x. At the end of the quarter, we are in compliance with our covenants of our lending agreement. Cash provided by operations in the first quarter was $4.4 million, down from $6.9 million in the prior year period. The decline was primarily driven by the timing of associated with bulk replenishment of legacy Inc., printed and media supplies amounting to about $3 million. We are focused on improving our inventory turns from current levels of approximately 2x to more than 3x over the fiscal '26 and '27 years. Capital expenditures were $60,000 in the quarter, and we expect to be less than $2 million for the full fiscal year. Now please turn to Slide 13, and I'll hand the call back to Greg for closing comments.

Thanks, Tom. We are executing a clear strategy to deliver revenue growth and improve our profitability. We have implemented changes in the organization and are working diligently to deliver on our strategic plan. We believe that this quarter reflected a positive turning point in our business as we gained traction in both of our segments and controlled our costs. We have several catalysts that we are confident will propel our growth in fiscal 2026 and beyond. First, we are focused on launching our innovative product ID solutions 3 of which have already been launched and are receiving strong customer interest and orders. We expect to launch 6 more disruptive solutions before the end of fiscal 2026. Second, we continue to make rapid progress on the ToughWriter transition program with several large commercial and defense customers transitioning to ToughWriters that will ramp up shipping in Q2 and beyond. Importantly, we are looking critically at our cost structure and cash flow generation. We are on track to complete our $3 million cost reduction program by Q2 and we will continue to manage our costs prudently as we roll out next-generation and higher-margin solutions across our Product ID and Aerospace segments. We believe the actions we have taken in the past 6 to 12 months put us in a position to scale into new end markets and new geographies with high-margin solutions. Furthermore, we have additional long-term opportunities to improve margins through the roll-off of royalties from legacy cockpit printers and through our multisource ink supply program based on our new print engine technology. We are reiterating our guidance for the full year of fiscal 2026. We expect to deliver full year revenue of $160 million to $165 million, a 7% year-over-year increase at the midpoint and adjusted EBITDA margin in the range of 8.5% to 9.5% and or an 80 basis point expansion year-over-year at the midpoint. In summary, we are pleased with the progress that has been made this quarter, but we have more work to do. I want to thank our team for their hard work and position us for the future. We remain confident in our plan and believe we have the right people, infrastructure and go-to-market strategy in place to drive long-term growth and profitability. Now Tom and I will be happy to take your questions.

[Operator Instructions] There are no questions at this time. I would like to turn the conference back over to management for closing remarks.

Great. Thank you, and thank you, everyone, for joining us here today. We look forward to keeping you updated on our progress at AstroNova, and enjoy the weekend, and we'll talk to you guys soon. Have a good day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.