Daktronics Inc (DAKT) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Daktronics second quarter fiscal 2004 earnings conference call.

Participants will be in a listen only mode.

Afterwards, we will conduct a question and answer session.

At that time, if you have a question please press the one followed by the four on your telephone.

At this time, I would like to turn the conference over to Mark Steinkamp, Investor Relations Manager for Daktronics.

And as a reminder, this conference is being recorded Wednesday November 19th, 2003.

Welcome to the Daktronics fiscal 2004 second quarter conference call.

Again, this call is being recorded and that recording will be accessible either by internet or telephone call.

To access the webcast replay or the telephone recording, you can go to our website at Daktronics.com and click on the investors button and you'll get to those links.

Today with me, Jim Morgan, our President and CEO and Bill Retterath, our Chief Financial Officer.

Before we begin, I need to caution investors and participants that in addition to statements of historical fact, this conference call and our quarterly earnings news release contain forward looking statements reflecting the company’s expectations or beliefs concerning future events which could materially affect company performance in the future.

The company cautions that these and similar statements involve risk and uncertainties including changes in economic and market conditions, management of growth, timing and magnitude of future contracts and other risks noted in our S.E.C. filings which may cause actual results to differ materially.

Forward looking statements are made in the context of information available us to as of the day of this conference call.

The company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

That said, I will turn it over now to Jim Morgan, our CEO.

Thanks, Mark.

Good morning, everyone.

Welcome to our conference call.

We have a beautiful day here in South Dakota.

It’s a bright sunny day.

It's supposed to get in the high 60s.

Very nice day.

We had a very bright quarter as well.

This is a -- our Daktronics team did an absolutely super job this last quarter.

We had the opportunity, we responded to the opportunity.

Really two salient points of the story, one is that we exceeded the top line by about 3.5 million over what we anticipated.

The second point is our margins were also above what we anticipated.

The cumulative effect of those two is a very significant up side on our bottom line, earnings per share.

I'll let Bill Retterath go through the details of the numbers and kind of give you the background on the quarter and then I'll come back with more overview comments.

Thank you, Jim.

Good morning to everybody.

As usual, most of the growth comparisons I mentioned will be to the comparable quarter of last year.

Let me start with the top line.

As Jim mentioned sales were up 21% at 58.3 million.

Year-to-date sales were up 16 plus% at 107.2 million.

The level for the quarter exceeded our previous guidance to 50 to 55 million.

The primary reasons for exceeding the estimate was due to the timing of project completions, the incremental revenue recognized due to improvement in the margins, the level of orders booked for the quarter that shipped in the quarter or in the case of projects that had work completed during the quarter.

Earnings per share were 34 cents on a fully diluted basis compared to 21 cents last year.

Year-to-date earnings per share, 55 cents on a fully diluted basis, compared to 37 cents per share one year ago.

The earnings per share exceeded our estimates of 15 to 22 cents per share announced at the beginning of the quarter, primarily as a result of the sales and gross margins, which I will go into a little bit later in the call.

Both net sales and net income were records for the company, the second quarter in a row of record performance.

For the quarter let me first review some metrics on our net sales figures.

First, our standard product business performance performed well.

Slightly under 30% of net sales, compared though an historical level of approximately 25%.

As most of you know, these types of orders typically carry higher margins than custom projects.

Secondly, our net sales mix between the various projects was consistent with previous quarters and years.

Our sports business was slightly less than 70%, commercial business, slightly less than 20%, and transportation was in the 10% range.

Finally, our international business, which contains transactions across all markets was up significantly, and year to date, is approximately 14% of net sales.

For the quarter, net sales compared to last year was strong, as I said, in all three of our primary markets, all of which had double-digit percentage increases, led by the commercial and transportation markets on a percentage basis.

Also, within each market, we experienced nice growth in both equipment and services.

On a side note, our services business, as a matter of reference, includes equipment maintenance, contracts equipment repair services and professional fees for things like content development and advertising sales for our customers, typically represents approximately 5% of total net sales and has been expanding.

Within the sports market, net sales in the large professional facilities was higher and our growth in the smaller sports facilities that typically order standard product equipment was strong.

That portion of the sports market continues to benefit from the growth of our sports marketing business, which provides the funding to high schools to purchase the same video technology used by major league facilities.

Also, the standard product offerings to smaller sports facilities continues to expand into products we typically refer as commercial products.

That sales in the mid-size sports facilities was relatively flat quarter over quarter.

Within the commercial market we experienced solid growth in our national account business, which is typically standard products but at lower gross margins due to the volume and greater competition than the typical standard product orders.

After experiencing a lull in our national account business for a couple of quarters, it's especially pleasing to see the dedication of our sales and engineering staff in developing these accounts and see them begin to pay off.

We now do business with a number of national accounts.

I expect to see that portion of our business continue to grow.

Finally, within the transportation market we experienced growth in both the aviation and the transportation systems portion of that business.

Moving now into backlog and order performance, as we reported, our backlog at the end of the quarter was $39 million.

We also announced we expected revenues in the third quarter to be in the range of 40 to 46 million.

Then we reaffirmed our annual guidance of 195 to 210 million, based on our estimates on projects currently in backlog, plus projects we expect to book during the quarter and finally expectations of standard product order business that typically have quick delivery times.

In short, we do not see the current backlog as a negative factor due to our knowledge of the current pipeline.

Keep in mind much of our business involves large projects that can cause significant swings in order volume and backlog at any particular point in time.

In terms of orders, as evidenced by the decline in the backlog, orders for the quarter were not quite as strong as they were for the second quarter of last fiscal year.

Orders were down in the large professional sports facilities.

However, we are optimistic we can close additional sizable orders in the third quarter, currently one under a non-binding letter of intent.

But for the year, orders and sales for those large facilities should be down from last fiscal year.

Remember that these orders are what tend to make our backlog the most volatile.

We [haven’t had an especially] good performance in a small sports facilities and our commercial market in terms of order bookings while transportation was relatively flat quarter over quarter.

On international basis our order bookings substantially exceeded last year's levels, a trend we'd like to continue.

I'd like to highlight a few of the projects that contributed significant dollars in terms of net sales for the quarter.

The Arena Monterrey project, the Glendale arena project, home of the Phoenix coyotes, the Hubert H. Humphrey Metrodome in Minneapolis, the transaction with the Southern California racing, horse racing facilities, University of Arkansas, the basketball arena, the World Arena in Colorado springs.

In addition to another nice international order that we completed a lot of work on related to the Athens Olympics.

Then, finally, some nice transportation orders.

Want to highlight the Minnesota Department of Transportation.

Moving on to gross margin.

The gross margin percent for the quarter was 37.3%, up over last year’s second quarter of 32.8 percent percent%.

For the year gross margin percent is 36.7, as compared to 33.7 at this time last year.

This margin percent, coupled with the growth and sales is the primary reason for the bottom line performance and why we exceeded our estimates.

The gross margin was higher for the quarter in all three of our markets and generally experienced the most significant increase on those projects quoted further in advance of performing the work and ordering the raw materials.

The main drivers for the improvement included additional declines in raw materials pricing including those items that have declined in the past, such as LEDs and printed circuit boards, the efforts of our engineering and manufacturing staff to make the same or better products that reduce costs, improvements by our project management staff and on-site work and the mix of products between standard products and projects.

We expect that for the third quarter, our margins will be higher than they were in the third quarter of last fiscal year, which was 32.4%.

But not quite as high as the current quarter.

This estimate is subject to variability as a result of a number of factors, especially the actual margins on the large projects in the mix of business.

For the long-term, we believe that reductions in raw materials pricing, and some of the other factors that are affecting us, in a positive way, will be reflected in lower selling prices.

Operating expenses were 10.7 million or 18.4% of net sales as compared to 9.4 million in and 19.5% last year.

We believe that we can keep overall operating expenses at reasonable levels, such that for the year, we should be able to achieve a 21% range, plus or minus a percentage point, depending on the ultimate sales level.

On a year-to-date basis, also keep in mind that, in terms of a comparison, that the first quarter fiscal year 2003 included an additional week.

Selling expenses were $6.4 million or 11% of net sales compared to $6 million dollars and 12.4% of sales last year.

Year-to-date selling expenses were 12%, as compared to 13.9% one year ago.

The increase from the second quarter of last year resulted from an increase in personnel costs and related infrastructure and higher travel entertainment and convention expenses, all consistent with the growth in sales, in which we're partially offset by lower costs of demonstration equipment.

We expect that selling expenses will increase slightly on a dollar basis each quarter through the end of the fiscal year.

General administrative expenses were 2.2 million or 3.8% of net sales, as compared to 1.7 million or 3.5% sales last year.

Year-to-date, G&A expenses were 4% this year compared to 3.6% last year.

The increase in dollars was primarily the result of software and infrastructure cost, insurance costs and higher professional fees related to the expansion of the company's business in the Euro, including the legal costs associated with negotiating more transactions outside of the United States.

Our product development investment for the quarter was 2.1 million or 3.6% of sales compared to 1.7%, and 3.6% of net sales last year.

Year-to-date, it's at the 4% level that we generally target.

As usual, Jim will make some additional comments on product development, investments later in the call.

The net result of the above was an operating margin of 18.9%, compared to the 13.3% one year ago.

Just a few comments on the non-operating items.

Interest income continued to increase due to the growth and interest bearing long-term receivables during the quarter which result from the efforts of our sports marketing business and the result of some selected financings for customers.

It is expected this will increase slightly over time, due to our sports marketing business.

Interest expense was down significantly as a result of the reduction and average debt outstanding.

Obviously, we expect this to continue, this decline to continue as debt is paid down further.

The overall effective income tax rate for the quarter was just under 40% year-to-date, it’s at 39.6%.

We expect this level to continue also into the foreseeable future.

Moving on to cash, cash provided from operations for the quarter was 4.4 million, in year-to-date approximately 11 million.

Compares to 7.6 million and 10.5 million for the quarter in six months one year ago.

As I mentioned previously, we are using more cash in the growth of long-term receivables, which can be expected to continue into the future, however, we will continue -- though we continue to think we can make him improvements in our balance sheet, generating more cash through lowering relative operating assets by becoming more efficient.

For the quarter, our cash balances grew by approximately $1 million.

After making higher investments on fixed assets and paying down debt.

For the quarter we invested throughout the company including additions an manufacturing which is expect to add to capacity.

We also began the process of moving part of our manufacturing operations to the building we acquired in the middle of calendar year 2001, which to date has been used primarily for storage and to house our rental business.

In terms of our expectations for backlog at the end of the third quarter, as usual, we target that to meet our internal goals equal to three months of sales.

However, as you know, the actual backlog can vary significantly depending on the timing of orders.

In terms of estimates going forward, we expect revenues and earnings per share in the third quarter to be in the range of 40 to 46 million, and earnings in the 9 to 16 cents per share.

As I mentioned, we reaffirmed our annual guidance.

These expectations could vary due to a number of factors, including again the timing of order bookings and the timing of revenue recognition on the large contracts.

We would refer you to our risk factors contained in our S.E.C. filings, on the items that could impair our ability to achieve these numbers.

I'll now turn it back to Jim to comment on other areas of the business.

Thanks, Bill.

I'd like to make a few comments relative to the various market areas that we participate in and some of the key factors that we see there.

As Bill mentioned, our sports market area is about 70% of our business.

Really, we kind of look at that internally as the large sports venues, which would be those candidates for typically for video products, ProStar products and smaller sports venues, which would be opportunities for standard score boards and sports products.

The large sports venues primarily include the professional sports, then the college, university, and arena areas.

One of the factors in the professional sports level we have been aware of for some time, that is that the -- there was a little boom of building a few years ago and that that has slowed down somewhat, building of new arenas and stadiums.

The offset to that, is we are seeing an opportunity for retrofitting of existing facilities, where even facilities that are maybe only ten years old, the technology for the displays is now outdated and they're looking to get the new technology in.

So we've had nice business there.

I guess kind of example of that, if you look at the top three projects that we took revenue in on this quarter, the first two were new arena projects, Arena Monterray in Mexico and Glendale arena.

The third largest project in terms of revenue for the quarter was Metrodome in Minneapolis, which was a retrofit, where we put in new Pro Ad displays a round the facia (ph).

We put new ProStar's video displays in for them about two years ago.

There is a nice business in the retrofit market in professional sports.

The college and university markets, we continue to have a dominant position there, as we do in the professional sports area.

One of the new efforts at Daktronics, relatively new within the last few years, we've been giving an emphasis to is what we call our Daktronics sports marketing.

Daktronics sports marketing, we actually work with the client to help structure their sponsorship program, advertising and other sponsorships aspects there to raise the funds to basically update their technology or buy the display technology.

That's a relatively small part of our business, probably less than 10% of our sports market revenue at the moment, but it’s an area we see as very good business, and area we are growing.

The smaller sports venues, primarily high schools, their main emphasis, in terms of how we selling in that market is our regional offices.

We now have 35 offices around the country.

We continue to expand the capability within each of those offices.

We have been adding new offices.

We're adding offices about one a quarter, more-or-less.

That's not an absolute number.

In that range, kind of the rate we've been moving ahead, as of late.

We're pleased with how that's going.

That's working out very well for us.

I might add we're also adding sales people for our other markets in those offices as well as we go forward historically, initially, our offices were primarily high school sales oriented.

We are getting the other markets addressed out in there the region as well -- regions.

Another -- Bill mentioned briefly the Olympics.

The Olympics are always a fun project to be involved in.

The Athens Olympics actually takes place next summer.

In the meantime, we're involved with them in test events.

We have some test events coming up here in a few weeks.

And then, really, through the spring, there's various test events, as we get ready for the Olympics.

I think the Olympics is a good example of Daktronics’ ability to perform well internationally.

This is actually our eighth Olympics we'll be the major scoreboard display provider.

Along that line, we actually just opened and office in Frankfurt, Germany.

This our first European office, we’re just incorporating a subsidiary of GMBH over there.

At this point, we just have one person on the ground over there.

We're getting that office built up and supporting that from Brookings here at the moment.

We see that as a growth opportunity for Daktronics.

As Bill mentioned, our international business was about 14% of revenue, which is higher than it's been for some time.

Since we do tend to work the large projects primarily internationally, that is a little bit lumpy, not a number that will be steady.

But I think that points out how well-positioned we are to perform on international projects and take advantage of those opportunities.

Commercial market has been doing extremely well for us.

The national accounts area, as Bill mentioned, coming on real strong.

We've geared, in our engineering capability is very important to supporting that market, because these large customers typically want some slight little tweak or adjustment to our standard product, which we do for them, to make it fit their needs, and taylor to their budget and performance requirements, so that's come along very well.

I might add that we actually are -- I think Bill actually mentioned we're moving a part of our metal shop operation to another building, expanding our manufacturing floor space, and really, what's prompting this is the need to have more final assembly space for both our commercial market business, business products as well as our vanguard transportation products.

Both of those, both commercial and transportation markets, we're seeing nice growth there, good reception of our products in those markets.

In addition to national accounts, we sell through sign companies in then commercial market, and products there, we've introduced some very cost-effective color products, in addition to our monochrome LED products, that are very good price points and we’re seeing very good reception for those products and very pleased with how that's going.

On the transportation side, we've continued to get a presence in new states and get -- I think affirming better our position in states we've been working.

In the second quarter, we booked orders in six different states.

Some of whom are repeat customers.

And that's just -- that's working out very well for us.

That's a growth point, stretching our manufacturing a bit at this point.

We were excited about the future in that area.

I mentioned, we have some folks on from the Twin Cities, just a point of information, the new Hiawatha line, I understand we're opening up fairly soon, the displays on that line are Daktronics displays, so you can check those out, ride the new light rail there.

As far as product development, our product development and ability to bring new products to the market is an area we consider that a strategy capability for Daktronics.

We target about 4% of our annual revenues to product development.

Then, we're right on that number so far year-to-date, that will vary quarter to quarter, by certainly a few tenth's of a percent up or down as a mix in our product development effort varies slightly, but that is certainly a key, a key for us to go forward and stay at the forefront of technology.

That's my comments for the moment.

At this point, we'll open it up for questions and come back with a few closing comments.

Thank you.

Ladies and gentlemen, if you'd like to register a question, please press a 1 followed by a 4 on your telephone.

You'll hear a three tone prompt to acknowledge your request.

Should you wish to withdraw, please press the 1 followed by a 3.

If you're using a speaker phone, please lift your hand set before entering your request.

Our first question comes from the line of Patrick Donahue at North Land Securities.

Please proceed with your question.

Good morning.

Congratulations on a great quarter.

Thank you.

Very impressive.

I wanted to get a feel for how much of the Athens contract has been shipped and installed.

What is the timelines for shipments and installations?

Actually, a good share of that has been shipped, but we are just in the process now of shipping big -- there's a number of modular video displays.

This actually a new area for us.

I can maybe expound on that just a little bit.

Daktronics, when we first got into the large video screen business, we were very much oriented to the permanent installations, such as large stadiums, we geared our designs to really optimize for that type of installation.

There's another application of video products, which is what we call the modular or mobile and modular.

And the concept for the modular is you have modulars that are on the order of three foot by four foot, plus or minus.

That are -- you can manhandle.

And you -- the concept is you take these modulars, you put them on a truck and take them to a concert, and then you can stack them up and you have a little structure that supports them.

You stack them up, and for a few days or week event, whatever, then you dismantle them and put them back in the truck and take them down the road.

We are investing in our video products area, one of our new areas of development is in this modular concept.

It does have some very unique requirements again, to have it both very rugged and very easy to somewhat foolproof to set up.

For the Athens, Olympics, there is actually a requirement for three different pixel sizes with this modular design.

So, we -- that's a 16 millimeter which is a finer pitch, 23 millimeter, our mainstream outdoor pixel pitch, and then a 34 millimeter.

We have shipped now, in the third quarter, the 16 and 24 millimeter.

I think we shipped -- if we haven't shipped the 23 millimeter, all of it, we're just about to ship the last of that.

Then there's some of the 34 millimeter left to go.

So, in third quarter, we'll be finalizing the bulk of the Athens -- or taking the bulk of the Athens revenue.

Then, there's some left to take, as we actually do the support part of the project.

I don't know if Bill has any comments on that.

In terms of the revenue side, the revenues will be recognized, we're about half complete.

When you look at the whole project, that's because of the future equipment and professional services.

Left to deliver.

The end of the third quarter, though, we'll be taking another big step.

With the video products.

Does that answer your question?

Yes, it did.

Thank you.

One follow up question.

There's a decent number of international projects that are popping up.

Are you planning on building more of the sales presence in Europe with an office, or can you give us any color there?

yes, we are.

As I mentioned, we have opened and office in Frankfurt.

We just have finalized your GMBH paperwork to get the subsidiary set up.

Bill will be going over there in a few weeks to make sure things are coming up to speed in the new office there.

It's very small.

At this point we just have one Daktronics Brookings person that's like moved over there.

We will be building up our sales and service capability there.

Of course, the plan is to still work with resalers in Europe, people on the ground and know the market there.

For us to -- we feel it's important for us to have our own people there to support them more closely, have people in the same time zones there, so we can get linked in better to that market.

We’ve been able to, as I mentioned, have success in Europe even when we didn’t have our office there working through the resalers.

We feel to capitalize on that market we have to have a presence there.

Thank you.

Our next question comes from the line of Mark Matheson at Raymond James.

Please proceed with your question.

Great quarter.

Appreciate that.

Could you give us the general flavor of LED pricing over the last few years, and whether you anticipate a continuing trend going forward?

Sure.

The LED prices generally have declined, and the -- especially the blue and green, which tend to be the higher cost LEDs, of the three colors, red, green and blue.

So we have seen the ongoing declines.

You know, since that product was first introduced five or six years ago.

It's actually been rather steady.

We did that, certainly, the LED price decline has been one of the contributors to our margin pick-up.

We expect there would be some price decline going forward.

We would expect the rate of decline at some point would slow somewhat, because we're just at a lower price point now than we were when we started.

We'd expect some decline in the future, just not quite as fast.

Can you expand on what you do for some of your commercial contracts you're working on?

For example Continental Airlines how they're using your signs and the M-key (ph) auto group in Ohio, how they're using them.

Continental, just in general, talk about the application is in the aviation market, we have a product that's applicable at the gate agents, behind the gate agent.

We have a product also used on the exterior, what's called the air side of the terminal, where -- that's visible to the crew of the plane, and those who are loading up the baggage and that sort of thing.

And what we're offering on the exterior there, is the amber LED product has been very well received.

You'll sheet, some of that in Minneapolis airport.

I forget what other airports we have that in, right off the top of my head.

Houston.

Phoenix.

Some in Phoenix, yeah.

So a number of airports, actually.

So, and Continental has been a good customer of ours, in that realm.

How about the auto group?

I do not have -- the ProStar display used for advertising primarily.

A full color video display. (multiple speakers) Where is that located?

That's the one in Dublin, Ohio.

Do you see more companies being able to afford those large screens?

We certainly have seen some large auto dealers that find they're very effective.

Of course, now with the ability to put color on the displays as opposed to ten years ago, typically the large lamp incandescent display systems.

And now they can do the full color.

It's just very effective.

They can put a full rendition of the automobile up on there, they can put their special price and feedback we're getting from some auto dealers that are using these displays, is they'll have people drive in and say, I want what's on that display up there, that's what I want.

That gives them first hand-feedback the display is effective.

We have, over the last year, done some nice transactions with automobilers in general.

One we announced was the Peugot transaction in Paris, which was a nice transaction.

Auto dealers have been a good market for us, clearly.

Thank you.

Our next question comes from one Joanne Henry at Fieldstone research.

Please proceed with your question.

Good morning, I'm calling for Lee Schafer.

On the international front, could you talk us to about international pricing, the competitive environment either on Athens installation or some of the others, just a little bit about what the pricing is now and what your expectations are, in terms of the competitive situation, going forward.

Sure.

The situation with Athens, a little bit unique, in that there's a component, I guess one of the things Daktronics offers there is extensive experience.

As I mentioned, this would be our eighth Olympics.

We have -- we're able to support -- our customer, I should mention is Swatch or Swiss timing, the official timing sponsors for the Olympics.

They're actually our customer.

So one of our roles is to make sure they look good, because they're doing this as a promotional thing.

Uh-huh.

So our engineering and support capability is a factor in that -- in that project, I think a very important factor.

But, of course, there's always competition.

Even in that case, there was competition.

They make sure they keep us honest.

In straight video projects, video board projects over there, there are competitors in Europe that of course, some who work both in North America and Europe.

One competitor based in Europe, Barco.

They're based in Belgium, they’re actually a public company.

That's B-a-r-c-o.

They’re actually a larger company in terms of revenue than Daktronics.

Although they're involved in some other industries in addition to our industry.

I think in our industry, I'd consider ourself, at least as strong as they are.

But they're a competitor.

We run in -that's their home -- Europe's their home territory.

We're the visitor there, so to speak.

They have the home team -- or home ground advantage, I guess you could say.

But we feel we can compete effectively with them and we can get our share of business there.

I think you mentioned, or one of you mentioned, that with the -- excuse me, better prices that you're getting on materials that you expect to see some reduction in prices.

Overall expect competitors to be able to reduce their prices?

Excuse me.

Certainly.

Our competitors have -- they're seeing reduced prices as well, because that's an industry factor.

So, certainly over time, that's reflected in having to reduce prices to stay competitive.

That's the down side, we have to reduce prices.

The positive aspect of that is as the price of our product comes down, the applications for it, you know, increase.

Those who can afford, as I mentioned, we have very cost-effective smaller displays now that are full color.

These are displays that may be, say, three foot by 15 foot, just for example.

They can be any size, as opposed to the large video screens.

But these are full color.

They're very effective.

Color is just-has a lot more impact than a monochrome display.

With the price point coming down we just see there'll be a lot of application for that.

Will that primarily be moving into the new year, we expect to see pricing changes or is that going to effect even next quarter?

It's kind of a steady thing, it's an ongoing thing.

It's a not something that just happens in one quarter.

We're constantly working with our vendors very closely.

I see it more as a steady [state] trend situation overall.

My last question, on the timing of orders, sounds like you're comfortable with the backlog.

You had a really big increase.

In part, was that from timing of things you had expected to ship a little later or could you tell a little bit more of timing Q2, Q3 on orders?

Well, as Bill mentioned, our -- we've -- the smaller orders tend to be fairly, I guess a little more predictable, steady stream.

The really large orders, the multi-million dollar orders tend to be a little more lumpy.

Our backlog right now is down, but we have some business that we again actually have commitments on, just don't have the contract signed.

We're very conservative as far as putting business in the backlog.

We only put business in backlog when we have a firm 100% signed contract, all the I's dotted, all the T's crossed.

We at some times actually start work on projects before get to that point.

It's not inconceivable we would start working a project before we actually booked it into backlog, because we're confident that the order is going to firm up.

We do that in a way we are not exposing ourself.

We may start just getting parts on, qued up on it so to speak.

If something did turn around on the order, we're not at risk.

It allows us to get a head start on things.

You mentioned you had one large, I think you said was non-binding letter of intent.

Right.

How would that be characterized on your backlog?

You would start something on that project?

As a matter of fact, we started to do work on that project, design work, cuing up the parts pipeline.

Would that go on backlog then?

Pardon.

Would that be in backlog?

We'll book it on backlog on the day that the contract becomes firm, and then wale start recognizing revenue on it, as we do the work. -- then we'll start recognizing.

Right now, it's not in backlog.

To the extent we firm up that, a large project, we typically do some sort of a press release on it.

Yep.

So the backlog might be somewhat conservative, given order activity that you've got going on?

What backlog is, is objective factual number.

Pipeline, there's a trade-off between what's in backlog versus pipeline.

We put the two together to get our estimates.

And right now, our backlog is low and short but our pipeline is strong.

Okay.

Good.

That's what I was trying to get at.

Thanks very much.

Our next question comes from the line of Dennis Nielsen at Voutsal (ph) and Company.

Please proceed with your question.

Mr. Nielsen, your line is now open.

Please proceed with your question.

Can hear me now?

Yes, we can hear you.

I have a question about the sports marketing program.

If you could just give us an example of what a typical structure looks like there, in terms of how much of the project might be put into a long-term receivable and over what period of time you might recognize revenues off of that, or is there a typical structure?

Yeah.

There are basically two typical structures.

One is -- which is more common, one is the more common one is our sales people will go out and sale the advertising on behalf of the school.

Once all theadvertising -- once a sufficient level of advertising is sold, the customer will give us a purchase order for the equipment, and we will sell that equipment, just like any other transaction.

We will also in some cases charge -- most cases charge a commission to sell that advertising.

In that case, it's just like any other equipment sale.

That's the majority of our sports marketing transactions.

In some cases, we will negotiate with the customer, if they're high quality advertisers from a credit risk standpoint.

We'll, in essence, finance them, and sell the advertising and assign that revenue stream from the advertiser to us.

We'll discount that revenue stream and recognize revenue based on the discounted value that revenue stream, from the advertisers.

In that case, that causes the growth and long-term receivables.

It does post credit risks to the company.

What is the average life or how you measure the length of your long-term receivables in that program now?

We book them, based on the actual term of the advertising agreements.

Typically, I suppose a weighted average life is probably somewhere around five years.

Okay.

But they can vary from three to ten years.

And we typically, when we're taking the risk on the receivables, we'll have a present value of receivables, sufficient to offset the cost of the equipment, plus generate a margin on it.

Okay?

And then, there's upside on these transactions in some cases that there's sufficient advertising contracts that get us an extremely nice margin.

There's what we call open inventory, maybe down the road, say contracts expire three years down the road, we go back in three years from now, sell more advertising, and typically share that revenue.

There is nothing booked related to that on what I call open inventory now.

That's just an opportunity down the road for us.

At this point, do you have any collection experience that you can refer to, collectability on these long-term receivables, has been excellent, or good?

Absolutely.

We have experience.

We've been working on this sports marketing business for a number of years.

We've got receivables that go back, gosh, a number of years.

We have not experienced any credit losses on these, off the top of my head, that I can recall, in the two years that I've been here.

To the extent, remember -- let's assume that some advertiser does default, we have the right to go in and resell that advertising and recoup it.

It costs us a little to do that, to go find a new advertiser, but we've got some ability to protect us, if an advertiser does default.

Thank you very much.

Appreciate it.

That helps me understand it.

Our next question comes from the line of Robin Krasney (ph) at Oppenheimer.

Please proceed with your question.

Congratulations on a great quarter.

I noticed a transaction that troubles me.

I noticed Mr. Morgan seemed to have exercised some options, and bought shares two days before this announcement.

That timing is a little bit strange and I wonder what you could tell me about that?

This is Jim Morgan.

The first thing is that option -- the price of an option is predetermined.

Of course.

It has no bearing on whether that's exercised a month ago or today or a month in the future.

The price is set.

So that is not subject to any kind of constraint.

It's not being sold, so there's no -- it's not -- it's just not subject to any restraints, I guess.

I should add, there are options, too, there, nearing expiration date.

It comes down to personal finance thing, quite frankly of finance.

The exercise of the option.

Well, that all is true, and of course, -- but normally most companies and most boards of directors, in line with governance institute blackout dates for transactions one way or another in usually roughly two week period before any kind of corporate announcement.

It's not like you didn't know on the 17th, you were going to announce your earnings on the 18th.

We do have a blackout period.

To the extent this type of -- we would not have -- this is Bill talking -- we clearly would not have allowed any top management.

We have policies to go into the open market and do any sort of buy or sell transaction.

That would be strictly prohibited.

We do have policies on that.

And what are they?

They -- we have a blackout window that's approximately a month prior to the end of the quarter.

The window opens up again on the third business day -- third trading day after release.

So, in this case, officers could go out and trade, provided they were not in possession of material non-public information on Monday.

Officers and directors and other top management and other people we classify, we have a specific list of those that are clearly subject to the blackout.

They could not go and do a transaction unless there were differing circumstances that would typically involve numbers by outside counsel.

A blackout period is a company policy it’s not an S.E.C. or NASDAQ regulated policy.

I'm not aware that anyone has ever done a market transaction during a -- during when the trading window is closed.

Our next question would be follow-up question from line of Mark Matheson at Raymond James.

Please proceed with your question.

Thank you.

You do have anything to add about the four stadiums in Qatar?

Are those standard equipment?

Large size?

Can you give us a flavor for that?

Yeah, Mark, this is Mark Steinkamp.

Those stadiums in Qatar, four different stadiums purchasing the same size large ProStar video screen.

We're manufacturing four of those large video screens.

Those are equivalent to national training centers here in the United States, like in Colorado springs has facilities like that for our Olympic teams.

This is a multi-million dollar contract or what's its rough size?

In excess of a million.

It's greater than a million.

I don't have the exact number here.

I think between one and two is I think where it is

In the past we talked about drugstore and convenience store initiatives.

Anything to report on those two areas

That's part of our national accounts.

We don't speak about specific national accounts.

We decided that's not a good thing to do.

But we should have -- all those areas are opportunities for national accounts.

The pharmacy, convenience stores, petroleum convenience stores, fast-food, all those convenience places, I guess you could say, are all in particular, good opportunities for national accounts.

Are there some fast food chains that we can regularly see your equipment on, that you can share the names of, so we can point out to people that this is Daktronics equipment?

In the past, we have shipped to a couple of the big ones.

You know, not necessarily in all parts of the country.

Again, we've kind of gotten away from talking about specifics there, but I guess we had talked previously, you know, a while back, we had mentioned McDonald's, that we had worked with them.

That's you know, not necessarily meaning that’s an ongoing steady stream, but we have worked with them.

You said year-to-date, international revenues were 14% of total revenues.

And you didn't have a specific number for last year's comparable.

Do you have a rough feel for what it was comparable to last year?

Yeah.

We do disclose that in our 10-Q-Q's.

I would refer you back to that.

As I recall, it was approximately 3 to 4%.

It was substantially less.

That also goes back to one of the things Jim mentioned, too.

As we're developing that business, because it's comprised of large projects, it can be lumpy.

I would not take that as a suggestion our business in general has gone from 3 to 14%.

But it has definitely increased and we're definitely making progress.

I think you'll see it's less than 3 to 4% last year.

As a goal for year or two from now, what would you like to see your international percentage be?

We haven't set a number on that yet.

Actually, the 14% we have now, it's a very strong number.

I would say, in the short term, if we could maintain that, that would be positive.

And maintain the growth rates too, domestically.

Looking back over the last five quarters, you have shown yourself to be wonderful operators, but pretty lousy prognosticators of EPS.

We knew we were going hear that before this was over.

You have built in an expect facings over five quarters in a row now that you largely exceed what you have estimated.

Do you think you'll try to sharpen up on your accuracy in future quarters or do we always have that built-in expectation these guys are going to low ball us.

Certainly, it's our goal to have our prediction -- the window encompass the result.

Our business is very dynamic.

We're not going to hold back just to make sure it fits in the window we projected, that's for sure.

It's not our intent to low ball, I assure you that.

It's just obviously, as you say, we didn't do the best job of predicting.

We're always working on that, to see if how we can, you know, maybe get a better way of forecasting how all the mix of the things we're working on, how that will all play out, the mix of orders, and the changes that come across on the parts cost and that sort of thing, to get that all factored in.

Again, if you exceed on the top line, which, you know, percentage-wise, we went over the top line, the amount wasn't so great.

Based on a predictions, if you exceed the top line, essentially all your gross profit from that point on above your window goes down to the bottom line.

That's a big add.

There's a big swing in the bottom line, based on exceeding both top line and margin a few points.

If I could add to that, too, I think on the top line, I'd have to look back and research this.

I think on the top line, prior to this quarter, we've been pretty much within the range.

Again, I’d like to verify that to make sure, over the last five plus quarters.

One of the tough things on estimating, that we face is in the gross margin percent.

When you take a -- let's just take for example, 5 to $6 million project, you don't always know at the beginning of the quarter prior to the time when you order the parts, what you're going to be able to get for pricing.

And lately, we've had some price reductions come into play sooner than what we would have expected them to come into play.

That can add substantially to it.

In addition, wave been -- it's been compounded by some real nice things.

The work of our project managers out in the field.

Then our engineering staff seems to have done a great job on making, as I said earlier, better product or new product at lower cost.

A lot of things have really come together.

I agree with your intention as to sharpen the pencil and get the gross margin percent nailed down better, because that is the area that has caused the earnings to consistently exceed.

Keep up the good work.

As a reminder, ladies and gentlemen, to register for a question, please press the one followed by the four.

We have a question from the line of Michael Friedman at Sidoti and Company.

Please proceed with your question.

The question about the national accounts, I realize for competitive reasons you don't want to name names.

Can give us a number as to how many national accounts you have today?

In terms of those that are really, I guess, we're working at a fairly high rate, there's really a couple that are kind of mainstreaming through the plant right now.

Then, others are working at a little, you know, more of -- I'd say more of an intermittent rate.

Can you tell us about -- you haven't said too much about outdoor advertising?

Has that picked up?

I know that one of the issues was the price.

It seems that may come down and might be one of the benefits of maybe getting some more work from them?

Can you comment at all on that?

Are you referring to the billboard applications?

Yes.

Like lomar (ph) or something like that.

Yeah.

As we said before, I think the price is still a factor there.

The other thing we’ve pointed out, the other constraint is the ability for them to get permits to pit this type of display up on a billboard.

Both of those are constraints on that business.

We don't -- I don't know that -- I don't think we have an order for a billboard display in our backlog right now.

Not for the full video type.

Maybe we do have.

It's not really a national account.

We do have one we just are booking.

It's a -- it's not a big component of our business.

Put it that way.

Great.

Thank you.

Thank you.

Gentlemen, there are no further questions.

At this time, I'll turn the conference back to you.

Thank you.

Again, we're pleased with the results for the quarter.

We appreciate the efforts all the Daktronics folks make -- commitment they show to deliver.

We met a lot of tough deadlines.

Second quarter, we delivered all the football systems and getting those up and running.

Of course, we have also some arena business we're working on, with new construction, there's very hard deadlines there as well.

Our people just really step up and really understand the importance of meeting the customer's needs and expectations.

We appreciate that.

Just one little item here, that we are celebrating our 35th anniversary in December.

And Daktronics will actually be out at the NASDAQ, opening the NASDAQ on the morning of December 9th, in conjunction with our 35th year celebration.

I just wanted to share that with you.

Our third quarter earnings announcement is scheduled for Wednesday, February 18th.

And we're going into the holiday season here, we wish everyone a happy holiday season, and thank you for joining us this morning.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation.

And ask you please disconnect your line.