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  • Operator

  • Welcome to the Daktronics fiscal 2004 year-end earnings results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today Wednesday, May 26, 2004. I would now like to turn the conference over to Bill Retterath. Please go ahead, sir.

  • Bill Retterath - CFO

  • Good morning, everyone. Welcome to our fourth quarter and fiscal year-end conference call. As usual this call is being recorded and will be available on our Internet site in by dial-in. With me today is Jim Morgan, our Chief Executive Officer. Before we start, I would like to give our standard forward-looking statement disclosures.

  • I would like to caution investors and participants that in addition to statements of historical fact, this conference call and our earnings news release contain forward-looking statements reflecting our expectations and beliefs concerning future events which could materially affect our performance in the future. These and similar statements involve risks and uncertainties including changes in economic and market conditions, the management of growth, timing and magnitude of future contracts, and other risks, which may cause actual results to differ materially.

  • These statements are made in the context of information available to us as of this date of this conference call. We undertake no obligation to update or revise our statements to reflect new circumstances or unanticipated events as they occur. With that, I will turn it over to Jim Morgan for some introductory statements.

  • Jim Morgan - President and CEO

  • Thanks, Bill. Good morning, everyone. Thank you for joining us this morning. We are pleased to announce another solid quarter at Daktronics and another record year. Not only did net sales hit the top end of our estimated range, but order bookings and our pipeline development were also very strong and position us for a good first quarter, which of course we are already in for this year.

  • I would like to thank particularly all the Daktronics employees who really stepped up, and we had some very hard deadlines and a lot of work this fourth quarter. And also our suppliers, who came through for us to help meet the deadlines and make it a very successful quarter for us. I'm going to turn it back to Bill first of all here, and let Bill give some more insight into the numbers, and then I'll come back and make a few more comments.

  • Bill Retterath - CFO

  • Thanks, Jim. Sales for the quarter were up 22 percent over the same quarter last year. For the fiscal year sales were up over 18 percent to 210 million, which is consistent with our long-term goal to grow net sales in excess of 15 percent. Net sales were above our previously announced estimates of 51 to 57 million.

  • Earnings per share at 21 cents compares to 17 cents a year ago. Fiscal year earnings per share of 89 cents compares to 64 cents one year ago, an increase of over 37 percent. Earnings for the quarter were within our estimates of 17 to 24 cents. Both net sales and net income were records for the fiscal year and the fourth quarter.

  • As evidenced by our backlog, we also had a great quarter for order bookings. This quarter was an example of a quarter where we started it with a lower backlog number, but as a result of what we saw in the pipeline at the beginning of the quarter, we are able to estimate a more sizable quarter in spite of the lower backlog. In short, it is the effect of timing on bookings of larger contracts.

  • Our commercial market continued to show the most dominant percentage growth both for the quarter and for the year. Although national account standard order sales were down for the quarter as compared to the last two quarters, it can be expected to expand in the next two quarters. Orders also outpaced sales, building the backlog in the commercial market to its highest level since 2001, when we booked that $14 million Morgan Stanley order in Times Square. We also have some very promising orders in our pipeline.

  • Sales in the sports market were up double-digit percents for the year and were up slightly less than 10 percent for the quarter over last year, due to the timing of when some larger orders fell. The growth for the year was led by major league sports transactions and smaller venues, with the mid level facilities up only slightly. We also had a significant rise in the backlog in the sports markets from the beginning of the quarter as orders exceeded sales by more than 15 percent. Offsetting the slowing of growth in the standard scoreboard business is an increase in the larger video projects for small schools, including high schools, which Jim will speak about later.

  • If you recall, we started fiscal-year 2004 expecting that our major league sports business was going to be down for the year. As you know now it is actually up nicely for the year, as opportunities came up that were not predicted at the beginning of the year. Going into fiscal year 2005, we expect major league facilities business to be down and the mid level facilities will grow, fuelled partially by marketing opportunities present.

  • In the transportation market, we ended the year on a positive note with sales up over last year. As you may recall, at the end of the third quarter net sales were flat year-to-date. Orders also exceeded sales in this market by more than 15 percent, which also added to the higher backlog. For the future, we are optimistic that the current spending bill being worked on in Congress that calls for substantial increases in intelligent transportation systems to positively affect us. If and when the law gets passed, we still need to wait for the money to flow to our customers.

  • Looking at our sales on an international basis, we continue to see much higher rates of growth of sales as compared to domestic sales, although for the quarter, order bookings were actually down as compared to a year ago, where we had an exceptionally high fourth quarter.

  • In terms of mix, we finished the year at roughly the same percentage of mix of business with sports at two-thirds, commercial at approximately 20, transportation at 10 percent, and the rest split between our other lines of service. In the mix of orders between standard product orders and large contracts, our mix also weakened for the fourth quarter as compared to the third quarter due to what we believe is a normal volatility within our standard order business product sales and the concentration, again, of a number of large projects. Standard order sales as a percent of total sales for the year ended at slightly higher than 27 percent as compared to 25 percent a year ago, with the increase attributable to the business products area.

  • Gross margin for the quarter was 31.8 percent, which was down from the 33.1 percent level one year ago, and down from last quarter's level of 33 percent. At the beginning of the quarter, we estimated margin to be in the 33 percent range, plus or minus a percentage point. There were a number of dynamics occurring during the quarter as compared to the third quarter that caused the decline in gross margin.

  • First was our product mix of standard orders to custom projects. The effect of this mix from the third quarter affects gross margin percentage by 1 percent. It should be noted that the mix in the third quarter was, however, extremely favorable. Second, we did not realize any significant favorable variances on projects like we had in previous quarters; and in fact we did experience some minor cost overruns on one project that caused the margin percentage to decline a little less than a half a percentage point. Third, it appears though the competitive environment is getting back to levels we saw more than a year ago, before we started to see the declines in raw materials pricing, which has now stabilized.

  • Our products remain the most desirable in the industry. However, that does not always eliminate the competitive factors. Jim will talk about competition a little bit later in the call. In light of these factors and based on our outlook for next quarter, we expect gross margins to be in the 32 percent range. We have recently booked or are in the process of booking some rather large orders where there was significant margin pressure, but we think that the mix will offset that. In short, I think margins are back to more normal levels that we think we can grow slowly over time the way we have demonstrated in the past.

  • Operating expenses were 12.2 million or 21 percent of sales compared to 10.4 and 22 percent of sales last year. For the year, operating expenses were 21 percent of sales which was a target we set earlier in the year. We're working to leverage that into fiscal year 2005.

  • Selling expenses at 7.6 million or 13.1 percent of sales compare to 6.3 million and 13.3 percent of sales one year ago. Fiscal year selling expenses are 13 percent compared to 14 percent one year ago. The increase in spending in the fourth quarter was due primarily to higher personnel costs and related infrastructure, greater travel and entertainment cost due to the increased sales level, the costs of trade shows and the higher selling expenses we are experiencing with sales efforts internationally.

  • G&A costs were 2.6 million or 4.6 percent of net sales compared to 2.3 million or 4.8 percent of net sales last year. For the fiscal year they're 4.5 percent compared to 4.2 percent over fiscal '03. We had a couple of factors leading to the increase in G&A for the quarter.

  • First, we continued to invest in the international market development. As we position ourselves in foreign countries we have a great deal of start-up cost. This includes travel, personnel, and professional fees primarily. As we develop the presence also, we incur costs in developing our transaction structures and our methods of doing business there. Secondly, we experienced higher costs related to professional fees, primarily patent work, and affects professional fees related to implementation of Sarbanes-Oxley Act provisions. For example, we spent 3.25 or 130,000 or so on the section 404 work related to Sarbanes-Oxley. Finally G&A continues to be affected the most by higher costs of information systems and infrastructures.

  • Although we had expected G&A to go down for the quarter, some of these costs mentioned were higher than we expected them to be. We expect that G&A cost will go down as a percent of sales in the future.

  • Our product development expense investment for the quarter of 1.9 million was 3.4 percent of net sales compared to 3.9 percent last year. For fiscal year 2004 and '03 it is at 3.9 percent of sales, which approximates our long-term goal of 4 percent. Jim will mention some additional comments on specific initiatives during the quarter later in the call.

  • The results of the above was a 10.7 percent operating margin as compared to 11.1 percent a year ago. Year-to-date operating margin was 13.1 percent compared to 11.2 in fiscal '03.

  • On non-operating items as most of you know interest expense is declining due to the reduced debt levels. Interest income is increasing due to investments in long-term receivables and income on cash investments.

  • Our income tax provision for the quarter warrants some mention, as you'll see that the effective rate for the quarter is down on year-to-date and approximates 38 percent. During the quarter, we realized greater benefits for the year related to our foreign extraterritorial tax provision. This amount varies depending on foreign sales and is now the subject of debate in Congress; so for planning purposes we are likely to conclude that the historical rate of 38.5 to 39 percent where we were at the end of Q3 is more reasonable for futures assumptions.

  • Cash provided by operations was approximately 9 million for the quarter; and for the year it was approximately 21 million. This compares to 1.8 and 14.1 million for the fourth quarter and last fiscal year. During the quarter, we continue to invest in capital assets including additions to manufacturing, information systems infrastructure, and demonstration equipment. We are projecting that capital spending will increase in the first quarter due to expansions to our current facility, which is expected to be slightly more than 1.2 million and spread over the next couple of quarters.

  • As mentioned previously, we're expecting revenues in the 56 to $62 million range for the first quarter, and our earnings to be in the range of 19 to 26 cents per share. Our annual revenue guidance is expected to be 235 to $250 million. These expectations could vary due to a number of factors including the timing of order bookings and the timing of revenue recognition on the contracts. With that, I'll turn it back over to Jim for more comments.

  • Jim Morgan - President and CEO

  • Thanks, Bill. Our fourth quarter of course brings the opening of baseball season, and opening day was big for Daktronics. We had new display systems unveiled at the two new ballparks, namely the San Diego Padres and the Philadelphia Phillies. Also the Cleveland Indians and Anaheim Angels both had brand new display systems in their existing facilities. We had talked about those last time.

  • Again the Cleveland Indians project sets a new bar for the size of video displays at sports facilities. I think this is notable. Their main video display is about 36 feet high by 150 feet long. Of course that is in addition to other displays on the outfield fence and also on the fascia of the second deck. It is a very impressive system.

  • The Anaheim Angels project was also -- that was an extensive new display system for an existing stadium and again provided an exciting addition to their presentation there. Both of these again, major new what we call supersystems installed in existing facilities. By supersystem we mean a system with multiple displays, video displays, all controlled off a common control system, where all the presentation, all of the displays is a coordinated show, so to speak.

  • These Cleveland and Anaheim projects exemplify the fact that these displays are recognized as an important part of both the fan experience and as a way to raise additional advertising and sponsorship revenue for these facilities.

  • Another interesting project this past quarter was the installation of ProAd digital advertising displays for the Calgary Flames. We got those installed just prior to the playoffs. You may have seen these on TV last night in the opening game of the Stanley Cup. They are mounted lower than typical; just the way their arena is built they're a little lower than typical. So they are frequently in view of the camera. Of course they have also been visible in the playoff games that have preceded last night. We had very positive comments back from the Calgary ownership, even prior to them getting to the Stanley Cup, on the effect of these displays for their facility.

  • We announced this quarter the University of Wisconsin project. This is a large project. We are providing our ProStar digit video and ProAd digital advertising displays both for the football and basketball facilities at the University of Wisconsin. This is significant that this - again the fact it includes ProAd displays and is one of the first for the university market. We expect that Wisconsin will set a new standard in displays for Division I universities. They have been a longtime customer of Daktronics and we're pleased to be involved in this exciting project with them. Most of this order will be taking revenue in the first quarter.

  • Also we announced the FedExForum, the new arena for the Memphis Grizzlies. That is about a $5.7 million project. That will also be essentially completed this quarter.

  • We announced the order for the Arizona Cardinals; that is a new construction project. And just to comment on that, that is actually -- most of the work on that for us will be about a year out, so that will be in our backlog for a while. We are working with them through the design process, so we will have primarily at this time engineering effort going into that project. Wisconsin and FedExForum will be the largest two largest projects for the first quarter in terms of revenue.

  • We also booked a nice order for Stanford University basketball. That is a four-sided with 12-mm video displays. Stanford has been a longtime customer of Daktronics.

  • In high school, Bill mentioned that, as we have talked about before as well, that we are seeing some of the high schools are purchasing video displays for their facilities. We have had a couple of high school video projects going through, the largest being for Owasso, Oklahoma. That actually exceeds $1.5 million. Again, these are paid for through sponsorships not through school budget dollars. One of the things we're doing to further enhance that part of our businesses, especially with the high schools, is working to increase our ability to help them with their efforts in structuring these sponsorship programs. That is being well received.

  • The commercial market booked nice video display orders in Las Vegas, overall totaling about 2.5 million in a last quarter. We see ongoing opportunity in Vegas. It is also worth noting and speaking of the gaming market that this past quarter we delivered and turned on a large indoor video display for the new Venetian Casino that is in Macao, which is over near Hong Kong.

  • Also we had a couple orders for ProStar displays for auto dealers. We continue to see the higher level auto dealers are appreciating the advertising benefit they get from these full-color displays out in front of their facilities. Horseracing, we delivered a display for Churchill Downs in time for the Kentucky Derby. Churchill Downs again is a long-term customer of Daktronics and we're pleased to continue to serve them as well.

  • Just a side note on that, we're continuing to open new offices around the country, and our next one actually will be in Lexington, Kentucky. We will have that open in June, so that is in our plan of continuing to expand our ability to deliver service around the U.S.

  • As Bill mentioned, we're down slightly in our national accounts this quarter but we're expecting that to pick up in the next few months; and we do expect a nice contribution from national accounts in the first quarter.

  • The ITS market -- that is our transportation, intelligent transportation systems business -- saw nice order bookings for the fourth quarter. Here again we see many repeat orders from existing customers. Just for example in the fourth quarter, we booked orders with 11 different transportation authorities, most of them being existing customers. In the aviation market, we booked orders for the Orlando airport and the Seattle airport; these two together combined was about three-quarters of a million in addition to other orders in that area.

  • Product development for the year we were at 3.9 percent of our revenue was invested back into product development. This is the same as last year and on line with our goal. Just a few highlights of the product development area.

  • Our video products area, we introduced a 3-mm video display at two of the major trade shows that we attend each year, the International Sign Association show which was in Orlando, and the National Association of Broadcasters which was in Las Vegas. These are both held in April. This 3-mm display just looked fantastic. It was very much -- it got a lot of attention at the show, and certainly made a statement that Daktronics is truly on the leading edge of the technology.

  • We also introduced our V-Net controller. This is a controller that is capable of controlling a network of displays for what is called the digital signage application. Digital signage is kind of a new area that we're positioning ourselves to work into. It's kind of an area where we think some of the business models are still to be worked out and explored. But we are exploring that application. Digital signage, that implies a combination of different types of electronic displays. It can be ProStar video displays; it could be LCD displays or plasma or other types of video display in a network. Potentially in say a retail application for example.

  • The business products area, we introduced our 3200 series Galaxy line. This is a line of display developed with a lower cost, with emphasis on ease of installation, ease of assembly and ease of installation. Particularly geared toward national accounts but certainly applicable elsewhere as well.

  • We are working to develop more displays that have the large character format. These would be characters that would be four or five or six foot high for applications along freeways where the viewing distance -- for example, a truck stop where the viewing distance is a significant distance down the freeway.

  • We would also continue to see the low-cost full-color displays being very well received in the marketplace and we continue to provide enhancements of that product area.

  • In the Vanguard productline, which is applicable to the ITS transportation market, we are working there to continue to enhance the ability to control various displays; and add features to the software; and ongoing developments to simplify the product, take costs out, and improve the capability of the product at the same time.

  • The fourth area, our sport products area, in our sports product area we truly offer the broadest productline in the industry, with scoreboards for all sports, in addition to the message centers that we can offer all along with our scoreboards. There are product development efforts there, our continued refining and our product offering, again, taking costs out and offering different models. Our radio control capability we believe is the best in the industry. We can control multiple scoreboards in the same facility with radio and not have interference; that sort of thing. That continues to be very well received and is a very good selling point.

  • I just want to comment on the competition. The competitive environment in our industry is certainly very dynamic. As we have discussed in previous calls, Barco is the largest of our competitors that has really a focus in our industry, and they are out of Belgium, a public company. They have teamed up with Trans-Lux, a U.S. company, on the larger sports systems, at least for the U.S. We feel Daktronics' integrated system gives large sports customers a significant advantage with our products, although price is always an important factor in these system decisions. Another company, AMC, has teamed up with SACO. SACO is out of Montreal. We see them bidding occasionally on projects. Mitsubishi also bids occasionally; they seem to be a little less prevalent than they once were.

  • In the commercial market we run into another set of competitors including Hi-Tech and Multimedia. (ph) They're both U.S.-based companies. Also, we see some Far East companies occasionally in certain areas of the U.S. So certainly price competition in all market areas is quite keen, especially on the large projects. In order to remain competitive we continuously work to reduce the cost of our products while either maintaining or improving the product capability. That is an ongoing challenge that we work toward.

  • In the area of the market development, again we currently have 36 offices around the U.S. We plan to continue opening new offices in the strategic locations and are continuing to add sales and service people to existing offices as well. We believe there is much more opportunity for Daktronics around the U.S., and certainly there's areas we do not have well covered at this time.

  • It is important to stress the fact that we are investing quite heavily in development of our sales force. This is reflected in our selling expense and G&A as well in the next couple of quarters at least, as Bill has pointed out. Because there is a little bit of a front-end load as you employ new people and get them mobilized. We do feel this is strategically important for us. We feel there is opportunity for us, and it's important for us to continue with this investment strategy and growing our regional sales force.

  • So, again with that, we do expect that in the next quarter our operating margins will be down slightly. But over the long term, certainly our goal is to have those increasing.

  • We also continue to see opportunities internationally. Again, as we have announced before, we have our Frankfurt office open in Germany. This is to serve the European and the Middle East markets. That is up and running very well. We have invested to get that up and running, but that is there now. We have our Canadian subsidiary which we're now 100 percent ownership, or have 100 percent ownership of. Latin America and Asia we work primarily through resellers, although we have a joint venture in Malaysia serving the ASEAN countries. Overall we had a very good year in international. We anticipate another good year there as well.

  • At this time, I would like to turn it back to the operator and take your questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) Lee Schafer from Fieldstone Research.

  • Lee Schafer - Analyst

  • I apologize for the background noise; my suite is being renovated and we have got drywall guys next door. A couple questions. With regard to sales expense, is the quarter that is just completed, just reported, is that more indicative of sort of a run rate, based on Jim's comments on investing in that sales efforts? That is sort of my sense.

  • Bill Retterath - CFO

  • I think we had some concentration of trade shows and some other things, but generally speaking, yes; that is true.

  • Lee Schafer - Analyst

  • Okay. The other question I had with regard to Barco, they are quite dominant in Europe. Are you guys in their pitching in European markets? The purpose I guess would be in part to keep them honest; that they don't grab market share on price in the United States and sort of subsidize those operations by fatter margins in Europe. Do you think you're getting involved in all the opportunities you see in Europe? Are you in there bidding?

  • Jim Morgan - President and CEO

  • We're certainly -- to say we're bidding on all of them I think would certainly be a little bit of a stretch at this point. But we are certainly aware of a lot of the major projects over there, and we are in there bidding. Certainly that is one of our goals, to make sure that nobody is just walking off with the business over there.

  • Lee Schafer - Analyst

  • Are the people who are putting together the projects, the consultants, the engineers, the building construction guys, are they aware of you? Are they finding you to solicit bids on some of the more visible projects in Europe?

  • Jim Morgan - President and CEO

  • It is interesting. There are some of the U.S. consulting firms that have operations in Europe, so that is a nice tie-in for us, particularly in the UK. But in other areas, we have to be more proactive and go out and seek them because we haven't been on the ground there for near as many years as we have in the U.S. of course. So, we have to be proactive over there.

  • Lee Schafer - Analyst

  • One final question, with respect your 235 to 250 sort of general sense of what the top line might be next fiscal year, how much of that would come from international markets?

  • Jim Morgan - President and CEO

  • Do you have the exact number on that, Bill?

  • Bill Retterath - CFO

  • Just one second here. This last year, we finished the year at roughly 12 percent of our revenues were international, and we think that that percentage can grow as a percent of our total business. It doesn't give you a firm percentage, but we think it will be a greater mix.

  • Lee Schafer - Analyst

  • Okay. Thanks, Bill.

  • Operator

  • Kyle Stults from Wm Smith & Co.

  • Kyle Stults - Analyst

  • What were your international sales for the quarter in terms of dollars?

  • Bill Retterath - CFO

  • For the quarter, they were roughly just under 7 million.

  • Kyle Stults - Analyst

  • Okay. With your sales force development, what are some of the major areas that you're not in right now that you would like to be this year? Can you give any sense for the number of headcount you're looking to add to the overall sales force this year?

  • Jim Morgan - President and CEO

  • Well, we have added -- probably the last quarter we have added approaching 10, I suppose. Something on that order. (multiple speakers) The question was what we are adding to the sales force. Bill didn't get your question; I'm sorry.

  • Just in the commercial market in particular, we see an opportunity there to have more people out there focused. We see that by showing our product to people so they understand what the capability of -- that that has a great effect on their propensity to buy the product. So that means we need people out there doing that. So that is one of the areas that we are investing in, is getting more people out there in the commercial area.

  • Also, our Daktronics sports marketing areas; that is the group that facilitates the facilitates -- that helps the venues facilitate their sponsorship programs. We are growing that business as well, so we have added some people there. So, those are a couple of areas. Of course we have invested in the development over in Europe, and that has in the past few quarters taken some kind of additional extra cost.

  • Kyle Stults - Analyst

  • Are there major metro markets in the U.S. that you're not in that you would like to be in this year?

  • Jim Morgan - President and CEO

  • Yes. There are. For example, we don't have an office in the St. Louis area. Just an example. It's a big country, that is just one example. There are other areas where maybe we are not covering as thoroughly as we could, even though we may have some presence there. We may be getting there occasionally, but not as well as we could.

  • Kyle Stults - Analyst

  • Okay. One more question. What is your capacity right now? What is your CAPEX outlook for the year? Do you guys need to get to capacity any time soon?

  • Jim Morgan - President and CEO

  • That's a good question. On the operations side we actually are going to be making a small addition to our building. It is going to be just a little over a million dollars, primarily to increase our capability in what we call our business product area, where we are seeing good growth in that area, for the final assembly and shipping of that product.

  • Then, probably within the next year or two, thereafter, we probably will have to add a little more space based on what we are seeing. I would also add to that that strategically we do outsource some metalwork and also some electronic assembly. It is our plan to continue to do that. Because it is important to help us handle the variability of the business and the demands on our operations in terms of meeting deadlines.

  • Bill Retterath - CFO

  • If I could add some more color to that. I think you might be wondering about -- for the year we're at 9.8 million on CAPEX. Then keep taking into account the plant expansion for next year. It might be slightly higher, but definitely less than 10.5 million is our expectation now.

  • One of the big things that causes that to vary are product development initiatives. For example, in the fourth quarter, when we introduced our 3-mm display, we spent a fair amount of money developing our first unit that we took to the trade shows and things like that. To the extent some new product technologies come up, it could cause that to fluctuate.

  • The rest of the stuff -- I should mention the rental equipment too. That could cause some fluctuation. But the rest of it is pretty stable at this point.

  • Kyle Stults - Analyst

  • Okay. Thanks, Jim; thanks, Bill.

  • Operator

  • Andrew Meister from Stifel, Nicolaus.

  • Andrew Meister - Analyst

  • I am looking forward to seeing the new Badgers upgrades.

  • Jim Morgan - President and CEO

  • So are we.

  • Andrew Meister - Analyst

  • Hopefully you guys can bring a Rose Bowl title this year.

  • Jim Morgan - President and CEO

  • We got Calgary to the Stanley Cup; I don't know if we can take credit for it, but at least that is what happened. So who knows?

  • Andrew Meister - Analyst

  • We will give you a little bit of credit. My question had to do with, A, I'm wondering if you can quantify some of the things that you say happened in the quarter. There was a cost overrun; my sense is it was minimal. But if there is a ballpark figure.

  • And then number two is the expansion or continued expansion in Europe, if there is a figure that would go with that. Just to try to get my arms around what would be sort of a standardized run rate. I know there's going to be some blips and bumps in a quarter as just normal operations, but if I could try to get my arms around what that was in total.

  • Bill Retterath - CFO

  • I will take the first part on the cost overrun. That was a couple few $100,000 on one large project.

  • Andrew Meister - Analyst

  • Basically just to try to get it out the door?

  • Jim Morgan - President and CEO

  • There were some things on-site that were -- sometimes you plan for everything to go smoothly, and occasionally they don't go quite the way they're planned. That is what happened on this one. So it was some additional cost on-site that we did anticipate and typically don't incur.

  • Andrew Meister - Analyst

  • Okay. Then in international?

  • Jim Morgan - President and CEO

  • The mobilizing cost for Europe, we have pretty much hit the bulk of that here. That is behind us. Certainly, as time passes here, we will be -- may be adding a person or doing some additional things in Europe. Nothing huge that is going to stand out as far as the European development (multiple speakers) in terms of cost.

  • Bill Retterath - CFO

  • Let me give you some flavor of what happens. During this last quarter, for example, we booked an extremely nice transaction in Hong Kong with the Sands Macao Casino. What happens is in these foreign countries, the customers are looking to do business directly with Daktronics because of our reputation and our product. And they want the security of Daktronics.

  • That puts us in a position where we have to investigate then the tax laws, the duties, all of the legalities of doing business in that country. So as Jim is saying, as it relates to Europe, we have done a lot of that investment already. We are currently involved, for example, in this quarter, on some things in the Middle East, on developing that intellectual knowledge. So, we incur some tax and legal fees to develop our knowledge in some of these countries; and for the most part, Europe is behind us.

  • Andrew Meister - Analyst

  • Okay. But in some of these other areas it is going to be a little bit of expense on a go-forward basis?

  • Bill Retterath - CFO

  • Yes.

  • Jim Morgan - President and CEO

  • That is correct.

  • Andrew Meister - Analyst

  • Another question, towards the end of the press release, you present a summary of some of the major projects, A, either that you have worked on, completed, or booked. And you have talked about the commercial, one of the customers that was mentioned was Lamar. I was wondering what that was. And where do you stand with the other two outdoor ad companies, Clear Channel and Viacom?

  • Jim Morgan - President and CEO

  • I can tell you, we did just install a display from for Lamar down in Birmingham, Alabama. That was what that was speaking of. Regarding your other question, we don't speak about pending things and where we are. Certainly we are aware of those two entities, and plan to certainly stay in touch with them.

  • Andrew Meister - Analyst

  • For how long have you been working with someone like Lamar? I think, Jim, you hinted at this in your comments. You said there are some opportunities in commercial that are relatively untapped. Maybe this is where you were going, and maybe I am just reading your cards wrong.

  • Jim Morgan - President and CEO

  • Well, on Lamar, we have actually worked with Lamar for several years. We installed -- this might be our tenth. (inaudible) we have installed a number of full video displays, something on the order of a half a dozen. I can't tell you the exact number. But we have also shipped some other electronic displays that they put on in conjunction with a static billboard. So, we have been working with them for some time.

  • The national accounts area in the commercial area, the other area that we are seeing opportunity is what we call national accounts. That is again a couple of these that have multiple stores around either in a region or around the country, and that then make electronic displays part of their signage and identification program and really their advertising program. So, that is the other opportunity.

  • These are typically smaller displays, just monochrome, red, or they certainly could be color. Up till now the tendency just because of the cost sensitivity has tended to be monochrome. But I am sure they will be -- sometime in the future they will be color displays because of the cost effectiveness of the color. That is just a matter of when, not if. So we see that also as a huge opportunity.

  • Andrew Meister - Analyst

  • Okay. Just two more and I will let somebody else have a turn here. One question, again, sort of in the sales top line area. Where do you see, -- I guess I'm trying to get a better sense of how the backlog and then the announcements that you make after you report this backlog in the quarter, -- my sense is --

  • I'm trying to get my arms around when this current backlog, when this ships, is it the three to six month type of a backlog? What is the blend there between quick-ship and longer-term projects? Then to the extent that there is pipeline development, what does that look like?

  • Bill Retterath - CFO

  • I will like Jim talk maybe on pipeline development. I will just mention the mix of the backlog, because it is a good question that people do not always understand. What I would say, at the beginning of the quarter we had a much greater concentration of business that had a shorter average life to it, for example.

  • Now, our backlog probably has a little bit longer life on average. I don't study and keep statistics on it precisely, but for example we booked the Arizona Cardinals transaction. That is like 5 million that is a year out, that we will incur very little. So 5 million right off the top of the backlog is something that we won't see for a year.

  • We didn't have anything like that flowing into this quarter. I don't think, as I recall the mix of the backlog, whether there are any other material transactions that would have extended beyond six months (multiple speakers).

  • Jim Morgan - President and CEO

  • I can tell you that it's very common for us to have even our larger projects turn within 90 days, especially in the sports area. That is very common. But of course there is always some of the outliers.

  • And there is always business that we do within a quarter that is not in the backlog at the beginning of the quarter. That is always the case. In some cases they can be significant projects that are kind of hanging fire there, and they pop, and have a short fuse on, and we turn them around, and they never really show up in end of quarter backlog.

  • Andrew Meister - Analyst

  • Do you characterize Jacksonville as a short fuse?

  • Jim Morgan - President and CEO

  • Yes. That is pretty short.

  • Andrew Meister - Analyst

  • And the pipeline, guys?

  • Jim Morgan - President and CEO

  • The pipeline, what we were just saying there is that there is a strong pipeline. That is taken into account when we make our projections for the coming quarter. Of course we don't talk about any projects that we haven't firmly contracted at this point. But we use that as a basis when we make our estimates.

  • Andrew Meister - Analyst

  • One last one, and I apologize for the length here. On the LED/raw material price declines which happened last year, that is going to make the upcoming couple of quarters kind of tough in terms of the year-over-year gross margins comparison. Can you give me an idea of what is typical for the LED price reduction cycle? Should we expect one in the next fiscal year? Could we expect one possibly later on this year? Is it a 12-month thing, is it a 36-month thing? How does that work?

  • Jim Morgan - President and CEO

  • Just in a general sense I think it would tend to be more ramping down rather than -- although certainly it is a step function. It is incremental. It has been probably more on the year basis rather than longer than that. It has been I would say at least within every 12 months there has been some kind of a price change historically. I think as this whole area matures, that is going to change a little. That could extent that time frame. That may not be at the same going forward.

  • Andrew Meister - Analyst

  • Okay. Thanks guys.

  • Operator

  • Dennis Nielsen from (indiscernible) and Company.

  • Dennis Nielsen - Analyst

  • I just have other questions, most of mine have been asked already. I think you have addressed in the past what the relative profitability of your standard projects are versus the large projects. Is there a range of gross margin that you care to quantify there?

  • Bill Retterath - CFO

  • Generally speaking, our standard product business, factoring out of that the big national accounts -- but our standard product businesses that we sell direct has margins in excess of 40 percent typically. Then, the big projects, that has wide variability to it, somewhere around the 30 percent, but that varies significantly.

  • Dennis Nielsen - Analyst

  • Okay. Your expectation, I know, I believe in the last year the proportion of standard products had increased as a percentage of the total. Would you expect that to continue this year?

  • Jim Morgan - President and CEO

  • We think that that could continue to increase. Of course it's a good thing to sell the big projects too, so we certainly will keep working hard on both ends of that.

  • Dennis Nielsen - Analyst

  • Okay. The relative growth of each of your three major areas this year? You don't need to quantify them, but I think you indicated that you expect the major sports area to decline this year. But if you're looking at growth for the year of 12 to 19 percent, which of those would be the fastest growing and which would be the slowest growing?

  • Bill Retterath - CFO

  • I will take that. The fastest growing, what were looking at now is definitely in the commercial market as a percentage basis. I should clarify; in terms of major league sports, I mentioned that that should be down. Alternatively, we think the mid level institutions, college and universities, and the small ones, high schools, both those will be up. That historically happens to us because of the relative small number of major league sports facilities, that that does tend to go up and down.

  • Dennis Nielsen - Analyst

  • Okay. Transportation; is that new funding proposal going to impact you this year do you expect?

  • Jim Morgan - President and CEO

  • On that, one thing to point out is that the funding never really was cut off. What happened was they didn't have the bill passed and so they kind of extended the old bill, which is at reduced level of funding compared to the new bill. So, it wasn't like things stopped or anything.

  • When this new increased level would actually percolate down, that is kind of hard to predict exactly. But there certainly will be a little bit of a lag time there.

  • Dennis Nielsen - Analyst

  • Okay. Thank you very much.

  • Operator

  • Michael Friedman from Sidoti.

  • Michael Friedman - Analyst

  • I had a question regarding the guidance for the first quarter of fiscal '05. If you calculate it through, the high end of your range would be I guess somewhere in the 25 percent year-over-year revenue growth range, yet EPS is maybe 15 percent at the higher end of the range. Is that related mostly to the gross profit comparison that you have? Or is there more there? Is there like overhead expenses that are going to balloon as well?

  • Bill Retterath - CFO

  • I think it is mostly in the gross profit, but there is some effect on the investments of selling and things like that that we're talking about. But more of it is in the gross profit margin.

  • Michael Friedman - Analyst

  • In other words there was a tough comparison year-over-year. If you look at in a more normalized rate, from the previous year obviously the growth would probably be better as far as the bottom line.

  • Bill Retterath - CFO

  • For example we were almost at 36 percent gross margin Q1 of last year.

  • Michael Friedman - Analyst

  • Was that an all-time record?

  • Bill Retterath - CFO

  • Q2 of last year I think was, at 37.

  • Michael Friedman - Analyst

  • So it is then historically the higher end of the range. Okay. When you look at your balance sheet relatively unleveraged, not much debt, you should be able to probably pay it all off. You are also generating free cash flow. Where do you plan to invest that cash?

  • Jim Morgan - President and CEO

  • That is a good question. We have that discussion. At this point, we don't have -- have not identified specific plans for that. I guess there's a number of options that one can consider. We're always -- at the moment certainly it positions us well to be opportunistic. In the short term that is kind of where we're at. That is a discussion we have to have yet here, and we will have to make some decisions going down the road on that.

  • Michael Friedman - Analyst

  • Okay. Lastly, obviously it looks as though international is going to offer some good growth for you. Do you have any plans to open up new international offices in the first half of the year? Is opening up a production plant perhaps in Europe or Asia part of the plan to utilize the cash?

  • Jim Morgan - President and CEO

  • We may. In the next couple of quarters, I don't know that we will open an office. But certainly it is a possibility we would open another office within the next year. During this fiscal year. That is certainly a possibility. What was the second part of the question?

  • Michael Friedman - Analyst

  • As far as looking out to Europe and utilizing the cash, is there a possibility of one of the options to open a production plant in Europe or Asian?

  • Jim Morgan - President and CEO

  • At this point, we don't have any particular plans to open another production facility. I will mention in terms of manufacturing, we do have some manufacturing capability up in Montreal. Just as a comment. They primarily work in the transportation market. They are capable of manufacturing the Vanguard productline, just as we are capable up here. They can do exactly the same things with those. So that is kind of a nice parallel capability we have.

  • Other than that, to make a manufacturing operation viable, you really need to have quite a bit of volume through it. Because there is a lot of overhead involved in just having an operation in existence. So at this time, we don't have any plans in the near term to do that.

  • Michael Friedman - Analyst

  • Would potentially an acquisition of an existing operation, a smaller one, be a possibility? In the European market?

  • Jim Morgan - President and CEO

  • It's a possibility, but not necessarily.

  • Michael Friedman - Analyst

  • Great. Thanks, guys.

  • Operator

  • David Reader (ph) from CSFB.

  • David Reader - Analyst

  • I had a quick question regarding your gross margins. Essentially you mentioned in the press release that they are coming down due to the lower cost of materials. I guess is that because your sales prices are a little bit lower than -- or are coming down faster than your prices are?

  • I guess along the same lines, are your customers pretty much in tune with the cost of these raw materials? If you could kind of help me get an understanding of that.

  • Jim Morgan - President and CEO

  • Going back a few quarters, we talked just a bit ago here that a few quarters ago we had really exceptionally good margins; and at that time we said we probably would not be able to maintain margins quite at that level. At some point the competitive pressures of the marketplace catch up. So that is what we anticipated, and that is what we have seen here.

  • The way we look at it there was just kind of a little bit of an unusual uptick in the margins there for a couple of quarters. Now we're back to a more normal situation.

  • David Reader - Analyst

  • But with those costs, are your sales prices coming down a little bit more than the margin costs are coming down?

  • Bill Retterath - CFO

  • We are able to maintain selling prices ahead of our competitors maybe to some degree. Our competitors, their prices have gone down. So the industry as a whole, selling prices have gone down.

  • Jim Morgan - President and CEO

  • Just to add a comment on that. It is generally true that whatever you want to use for a sort of unit of measure on our products, for example on the video products you want to talk about a cost per square foot or per square meter or per pixel. The selling price to our customers has been coming down steadily since that product was introduced back in the mid-90s. It's been an ongoing thing and it's somewhat -- it is a technology driven business, somewhat analogous maybe to the PC industry, where the customer really is able to get more product for the same dollar.

  • So we are in that type of an industry. So that is why we need to continually be able to offer more for less cost. We are helped of course by the cost of the raw materials that we're buying in that regard.

  • Bill Retterath - CFO

  • If I could add something too. If you look at our gross margin chart, historically, our goal has always been and it will continue to be to keep that gross margin going up year after year. Factoring out this significant benefit we have been experiencing, we're still expecting margins to be higher than they were prior to this bump. And we still will work and believe we can still expand margin into the future, after factoring out these unusual events.

  • David Reader - Analyst

  • Great. That helps. Another quick question regarding the national accounts. I know you generally don't give a whole lot of detail. I guess you could maybe give a little bit more color as to why the decline and maybe what you see going forward?

  • Jim Morgan - President and CEO

  • These national accounts, they have their programs and it will do certain rollouts; and then there will be a program to roll some out; and then there will be a lull; and then maybe another rollout program. So they somewhat come a little bit in phases, and so it is not an absolute steady stream. So there will be just a little bit of ups and downs in that business, just like any business. But we do see a lot of potential going forward.

  • Bill Retterath - CFO

  • I will mention one other thing. The other thing that did happen in the third quarter too is some of these -- I mentioned that third quarter was extremely strong. Some of our national account business arose as people spent budget dollars I think at the end of the fiscal year.

  • David Reader - Analyst

  • Okay. All right. Thank you very much.

  • Operator

  • Cliff Greenberg, from Baron Capital.

  • Cliff Greenberg - Analyst

  • You talked a lot about gross margin, but you should have some leverage in selling expenses over time when you get over this little hump and/or (inaudible) G&A. As you look into this fiscal year, are you suggesting that the 13 percent operating margin that you had for the year that just ended is too high? Or can you meet that or exceed that?

  • And long term, what would you think is the appropriate -- or where are you marching as far as trying to get overall operating margins not just gross margins?

  • Bill Retterath - CFO

  • I think on the operating expenses we can leverage those continually into the future. When you factor in the decline in the gross profit margin, to improve the operating income margin for this fiscal year will probably be a difficult thing to achieve.

  • Cliff Greenberg - Analyst

  • Are you hopeful you could maintain the 13 percent margin?

  • Bill Retterath - CFO

  • Yes. There still is a possibility we could achieve that.

  • Cliff Greenberg - Analyst

  • Long term, is a 15 percent margin possible? Or where would you think long term you can -- as the company continues to grow?

  • Bill Retterath - CFO

  • That is kind of a tough question. Long term, can it expand? A lot of it depends on where the commercial market goes and what our mix is of the business. Could it get to 15 percent? Yes it could. When it will, or if it does when that will happen -- that is a little bit tougher to project. I think some of it depends on what happens to our commercial business.

  • Cliff Greenberg - Analyst

  • Okay. Thank you very much.

  • Operator

  • (OPERATOR INSTRUCTIONS) Kyle Stults from Wm Smith & Co.

  • Kyle Stults - Analyst

  • My question was just answered. Thank you.

  • Operator

  • There are no further questions at this time. I would now like to turn the call back over to you to please continue your presentation and closing remarks.

  • Jim Morgan - President and CEO

  • Thank you everyone for joining us today. Just an announcement; our first-quarter earnings conference call is set for Wednesday, August 18, at 10 AM. Also at 7 PM that evening is our annual shareholders meeting, preceded by an open house at 5 P.M. Information on the access and replay of this conference call is contained in our news release. That wraps it up for today, and thank you all for your questions and for your time and for being with us this morning.

  • Operator

  • Ladies and gentlemen, that does include the conference call for today. We thank you for your participation and ask that you please disconnect your lines.