Daktronics Inc (DAKT) 2005 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Daktronics first-quarter fiscal 2005 earnings conference call.

As a reminder, this conference is being recorded, Wednesday, August 18, 2004.

Before we begin, I would like to caution investors and participants that, in addition to statements of historical fact, this conference call and our quarterly earnings news release contains forward-looking statements reflecting the Company's expectations and beliefs concerning future events, which could materially affect the Company's performance in the future.

The company cautions that these and similar statements involve risks and uncertainties, including changes in economic and market conditions; the management of growth, finding, and magnitude of future contracts; and other risks noted in the Company's SEC filings and in our most recent annual report on Form 10-K, which may cause actual results to differ materially.

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

The Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they would occur in the future.

During the presentation, all 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 1 followed by the 4 on your telephone.

I would now like to turn the conference over to Mr. James Morgan, Chief Executive Officer of Daktronics.

Please go ahead, sir.

Thank you, operator.

Good morning everyone and thank you for joining us this morning.

We are pleased to be able to report a great first quarter with earnings being near the top of our projected range, due to stronger-than-expected gross margins.

Order bookings also were very strong in the first quarter, and we started our second quarter with a solid backlog and our plant is very busy at the moment.

I'm going to let Bill Retterath give some insight into the numbers here, and then I will be back with some more general comments.

Thank you, Jim, and good morning to everybody.

Sales for the quarter were up over 20 percent quarter-over-quarter and 58.7 million, within the range of 57 to 62 million, which we previously announced.

Earnings per share at 25 cents on a fully diluted basis compares to $0.22 a year ago, a 14 percent increase.

Earnings were at the higher end of our estimated range for the quarter, which was 19 to 26 cents per share.

The combination of sales in the middle of the range and earnings at the higher end of the range is primarily attributable to better gross margin percentages, which we will discuss later.

This is the ninth consecutive quarter of growth in net sales and net income quarter-over-quarter.

And the net sales level, again, establishes a new quarterly record.

As evidenced by our backlog, we also had a good quarter for order bookings, growing the backlog from 54 million to 58 million.

As we will discuss later, although we did not announce as many large orders as people may have expected, we continued to excel on the foundation of our business -- the transactions under a couple of million.

In fact, our average transaction size was down, and to achieve this level of order bookings in the absence of a number of larger projects, we think is strong evidence of our foundation of growth.

We would like to remind people of the inherent lumpiness of large contracts, but the consistency of our small and midsize order flow, which is really a key strength of ours.

In terms of sales, our commercial market continued to show the most dominant percentage growth for the quarter, driven by growth in net sales through national accounts and gains in product acceptance of our Galaxy line and displays that Jim will add more color on later in the call.

If you remember last quarter, we discussed how our national account business was down over the previous two quarter sequentially.

In there, we stated we expected it to rise again.

Although it did rise over the fourth quarter, the increase was not as high as we had expected, but this represents a delay and does not change our expectations for the fiscal year.

We expect very positive things out of our efforts with national accounts.

Orders also outpaced sales in the commercial market, building the backlog again to a new high since 2001 when we booked the Morgan Stanley order in Times Square.

We also have some very promising orders in our pipeline, including the recently-announced second phase of an order in the Middle East.

In terms of the sports market, sales were up over last year led by a growth in the small high school type facilities and the mid-sized facilities, such as colleges and universities.

As expected, professional sports business was down and we expect it to continue to be down for the year.

The growth in smaller facilities was exciting, as we not only continued our growth in sales of video systems; we also booked a couple of larger standard orders for our Galaxy products for installation at schools.

Our backlog in the sports market grew from the beginning of the quarter, as orders there also exceeded sales.

We expect that the sports business, as a whole, will be up for fiscal year 2005, led by growth in the small and mid-sized facilities, international opportunities, and sports marketing transactions.

Finally, in our transportation market we had a very good quarter for order bookings; however, sales were down over the first quarter of last year as a result of delivery schedules.

So we saw a nice increase in backlog for transportation projects.

This reinforces our optimism on the market as a whole.

Also I should add that not much has happened since last quarter with regarding to the spending bill in Congress.

If you remember, the Senate version of the transportation spending bill was at 319 billion, and the House version was lower.

The latest proposal out of conference committee is at 299 billion, which is still up from the previous levels, which was under 230 billion.

If and when the law gets passed, we still need to wait for the money to flow to our customers.

Looking at our mix of standard orders to custom projects, we benefited quarter-over-quarter with the growth in the percentage mix, due to the strong performance in small sports facilities and the commercial market.

Last quarter, this mix went down slightly, but we announced an expected rebound, which did occur.

For the quarter, our standard orders were approximately 30 percent of net sales as compared to 23 percent a year ago.

For the trailing 12 months, it's approximately 28 percent, so we are showing growth.

On the mix between our markets, the commercial market, which has seen the highest growth rates over the past year, it's approaching 24 percent of total revenues over the trailing 12 months.

Gross margin for the quarter was 34.3 percent, which was down from the 35.7 percent level one year ago, but up from 31.8 percent one quarter ago.

At the beginning of the quarter, we estimated margin to be in the 32 percent range.

The positive results for the quarter over our expectation was primarily due to results on a couple of large projects where we performed much better than expected.

The better performance resulted from a number of things, including changes in product configurations; engineering and manufacturing costs coming in less than expected, due, to some degree, to raw materials pricing, but also more efficient labor costs; some on-site savings; costs that we incurred in various other factors.

As compared to the first quarter of last year, our gross margin percentage declined due to the lessening contribution of raw materials price declines, changes in the competitive environment, and higher freight costs during the quarter, as orders with quicker turns were encountered, requiring us to expedite parts more.

These factors were offset by a better mix of standard orders to custom projects, the performance on contracts previously mentioned, and execution by engineering and manufacturing and designing and building orders.

In light of these factors, and based on our outlook for the next quarter, we expect that gross margin will still be in the 32 percent range.

In short, we are repeating our guidance coming into this last quarter, but that we think we can grow margins slowly over the long term.

Operating expenses were 12.2 million or 21 percent of sales, compared to 10.8 million or 22 percent of sales last year.

Selling expenses at 7.4 million or 12.6 percent of sales compare to 6.4 million and 13.1 percent of net sales in the first quarter last year.

The increase in spending in the quarter was primarily due to higher personnel costs and related infrastructure, greater travel and entertainment costs, due to the increased sales level, and slightly higher bad data (ph) costs.

As we announced last quarter, our expectation was that selling costs would go down sequentially in the first quarter, and they did slightly.

However, our expectation is that they will rise in the coming quarters, but we should be able to gain leverage to the extent we perform well at to the top line.

G&A costs were at 2.6 million or 4.5 percent of net sales, compared to 2.1 million and 4.3 percent of net sales last year.

On the positive side, we decreased G&A in absolute dollars from the fourth quarter and we expect that next quarter it could come in less again.

The increase over the first quarter of last year was due to increased cost of personnel, due to growth of the Company, higher costs of IS (ph) infrastructure, and higher training costs due to higher levels of personnel throughout the Company.

These increases were offset by lower professional fees and lower costs of shareholder relations.

We are facing some issues and opportunities that could, however, cause G&A to rise slightly, including further effects of our Sarbanes-Oxley work, primarily work related to our internal controls over financial reporting, cost incurred to more fully integrate from a systems perspective on our Canadian operations, and to build more international-related infrastructure.

Our product development investment for the quarter of 2.2 million was 3.8 percent of net sales, compared to the same amount dollar-wise of 4.5 percent of sales last year.

As usual, Jim will be making more comments on product development later in the call.

The results of the above was a 13.4 percent operating margin, as compared to 13.7 percent one year ago, in spite of the lower gross profit margin.

On a non-operating item, as most of you know, interest expense is declining due to reduced debt levels.

Interest income is increasing due to investments in long-term receivables and income on cash investments.

On comparison of other income net, I should point out that in the first quarter of last year, we realized a large gain on the sale of equipment by our video rental business, which we did not have in the quarter, causing a decline quarter-over-quarter.

Our effective income tax rate for the quarter was 38.8 percent, which was consistent with what we forecasted at the beginning of the year.

Cash provided by operations was approximately 4.1 million, compared to 6.6 million in the first quarter of last year.

This quarter, we consume more cash in receivables, including costs and profits in excess of billings and in inventory, than we expected, which we expect to reverse all or partially in the next quarter or two.

Inventory increase was resulted from higher sales level, but also from parts ordered in anticipation of higher volumes in the standard business products area.

On the receivables side, the increase resulted from higher sales, obviously, but also the timing of payments on some larger transactions, and in general, a greater level of DSO with receivables aging somewhat.

During the quarter, we continued investing in capital expenditures, including additions to manufacturing and IS infrastructure.

At the beginning of the quarter, we projected that capital spending would increase in the first quarter due to expansions to our current facility.

We did not incur much of this cost in the quarter, so more of the spending will occur in the second and third quarter.

As mentioned previously in the press release, we are expecting revenues in the 60 to 66 million in the second quarter and earnings to be in the range of 22 to $0.30 per share.

We are staying with our annual guidance of 25 to -- 235 million to 250 million.

Obviously, these expectations can vary due to a number of factors, including the timing of order bookings.

With that, I'll turn it back over to Jim for additional comments.

Thanks, Bill.

Probably the highlight for us for Q1, from a project perspective, was the completion of the design and manufacturing of a totally custom display for Coca-Cola in Times Square.

This display is truly unique -- actually, the concept came from an artist.

It's a three-dimensional video display and consists of 24 separate and unique sections.

And it was very complex both to design and manufacture.

We had a very aggressive delivery schedule.

Just to give you an idea, there were 4,000 engineering drawings generated for this project.

And Coke launched the display, had a grand unveiling event on July 1st.

A number of us were out there, we hosted some clients there and some potential clients.

It sets a new reference point in the world of spectacular advertising displays.

It's just a real statement of Daktronics engineering and manufacturing and project management capabilities.

(indiscernible) the capstone project for our commercial market in Q1.

As Bill mentioned, our commercial market had a very strong quarter last quarter.

We also pursue other opportunities for video products in the commercial market.

A number of mentions -- we did recently announce two orders in the financial niche, totaling approximately 4.5 million.

One of these goes to New York City and one goes to the Middle East.

Our high resolution ProStar technology, particularly our 6 millimeter pixel space in technology, in this case, proves an excellent fit for these types of applications.

We do expect this will lead directly to more business booked yet this fiscal year.

We also booked another order for a ProStar display for a digital billboard in Q1.

In our commercial market in addition, pursuing opportunities for video products.

We continue to pursue our strategy of introducing lower cost improved Galaxy displays.

Galaxy is our trade name for products that are designed especially for use in the retail outdoor market.

They are a smaller, easy-to-use, lower-cost product.

And I new full color Galaxy display is just being very well received and it is becoming an increasingly larger portion of our booked orders.

The appeal of color is very apparent over our monochrome display, and we do still sell many monochrome displays.

We continue to improve and reduce the cost of our monochrome displays as well, and we see both of those efforts as helping expand the market.

Order bookings were very strong through our commercial market resellers this quarter.

The majority of these, again, are for on-premise retail outdoor advertising.

We also continue to be proactive in the national account business, as Bill had mentioned, selling both to franchise owners and corporate store owners, and we expect continued growth in our national account business.

The sports business -- and again, just as an overview, our sports business is about two-thirds of our business.

Our commercial business about on the order of 20 percent and our transportation is the remainder of our business.

The two largest projects going through the plant this quarter were the display system for the new FedEx forum in Nashville -- I'm sorry, in Memphis, home of the Memphis Grizzlies.

And the football, basketball systems for the University of Wisconsin.

These are both excellent examples of our ability to work with a construction management company on a large project and apply our project management and project design capabilities to the mutual benefit of the customer and to the success of the project from Daktronic's perspective as well.

We also are just finishing up the installation for the Jacksonville Jaguars, which was held up a few days due to the effects of Hurricane Charley.

We are back on track.

Their first preseason game actually is this Friday.

So our crews are down there and working long hours to get things online for this Friday.

Just as a side note, Jacksonville is also the venue for this year's Super Bowl.

I'll mention just a few orders we booked this quarter in the college sports market -- these were orders that exceeded $1 million.

These include Purdue's Mackey (ph) Arena, a basketball center-hung system.

The University of Illinois Arena and the University of South Dakota football.

The universe in South Dakota is notable in that it was facilitated through our Daktronics sports marketing division, or we refer to it as our DSM.

Our DSM division assists clients in structuring their sponsorship programs and selling the advertising to fund these equipment purchases.

And this is -- part of our strategy is to develop opportunities that otherwise might not even exist in the marketplace.

I might mention on the development side, we introduced a new line of scores tables, including those with -- some with either a scoreboard or with a ProAd Digital advertising display.

And these are targeted to the college market, and also the high school market.

We began shipping this product in Q1, and we have been very pleased with its reception.

In the professional sports market, in addition to the Jaguar, we booked orders for ProAd displays for the Atlanta Braves, and that also is being installed as we speak.

The Detroit Pistons, also ProAd displays, which will be installed in early September.

Both of these are indicative of the desire of existing venues to enhance their fan entertainment experience and increase advertising revenue with digital advertising displays.

As I mentioned, both of these projects were in the range of $2 million.

We also installed our first digital signage system, using our 40-inch LCD displays in Houston's George R. Brown Convention Center.

This included 17 LCD displays controlled by our new V-net (ph) controller.

That was actually installed in time for the All-Star game that was held in Houston, and they had some activities over at the convention center, so that was what drove the deadline in that particular project.

Our strategy for growth in the high school market continues to be better coverage of the geography of the U.S. and promoting more capable scoreboards and display systems, which is in conjunction with our ongoing product development efforts.

And then also assisting high schools through our Daktronics Sports Marketing division, providing marketing services.

High school orders were very strong during first quarter, and we continue to see interest from high schools in going to larger displays.

Just as an example, we booked one order on the order of $500,000 for a new high school in South Dakota in a town of approximately 30,000 people.

And that order also was facilitated by our Daktronics Sports Marketing division.

We also had an order for Galaxy displays for marquis for a school district in Houston that exceeded a half million dollars.

This order is an example of where our ability to act as a general contractor was beneficial in our winning this business.

We are actually responsible for all of the installation of these marquis as well.

Daktronics often acts as a general contractor on our general display systems.

We are essentially licensed as a contractor in most of the states in the U.S. -- that is an important adjunct to be able to provide the full service to our customers.

We do see high schools as a growing market, an opportunity for all of our products, including sports, commercial and video products.

In the transportation market, our strategy for growth there in the ITS portion, which is Intelligent Transportation Systems -- that involves expanding the standardization and the breadth of our product line from our Vanguard displays and control systems.

And again, these are specified in more DOT jurisdiction -- that is Department of Transportation jurisdictions.

And serving our customers well to earn their repeat business.

In the ITS area, we booked one order in excess of $1 million with a South Dakota DOT, and we also booked an order with the Illinois State Tollway in excess of half a million, and booked actually three other orders over $100,000 a piece with three other DOTs.

And all of these were repeat customers, and that's the part we like about this business -- once we have gone through the approval process, the engineering approval process on our specifications of our product, then repeat business is very attractive for us.

Also we received an order from the city of Burbank, California, which is a new customer.

This was in excess of one-half million, and that's for their arterial roadway in Burbank.

We are continuing to invest in the expansion of our sales and service staff.

That's an essential part of our strategy to better cover the geography in the U.S., by adding offices and also adding sales and service staff at existing offices where we see untapped opportunity.

And we believe that this is important for us to capitalize on those opportunities to grow our marketshare.

This does put some upward pressure on the selling expenses, as Bill had mention.

Just as a side note there, we just opened an office in St. Louis.

That's our most recent opening -- just opened that in August.

That brings our total number of offices to 37.

And we also are continuing to evaluate how to most effectively expand our international presence.

Along with this expansion of our sales and service, in particular, our service force around the country -- one of our strategies is to be more proactive in selling maintenance agreements to our customers, which we see as having benefits of both increased revenue as well as better customer relations and just staying closer to our customers.

Maintenance agreements revenue is, at this point, only a few percent of annual revenue, but we see it as an opportunity for growth.

Product development continues to be a very important part of our approach here at Daktronics.

As Bill mentioned, we invested about 3.8 percent of sales in product development this past quarter, which is in line with our target of 4 percent annually.

And a very diverse product line that Daktronics has is really one of our strengths and our advantages in the industry, and it allows us to be a one-stop shop where our competitors cannot be.

We see that as a real strategic advantage.

And this broad product base, coupled with the broad base of the customers and the markets that we support, from sports to the retail, the financials, the transportation, provide the broad foundation that we believe positions us well for continued growth.

So with that, I'll turn it back to the operator and open up and take your questions.

(OPERATOR INSTRUCTIONS).

Andrew Meister from Stifel.

I just had a question for you regarding -- I think it's the Memphis Grizzlies -- somehow you're partnered down there with them, FedEx, and the high schools in the state?

I was wondering if you could shed a little bit more light on what you are doing there with the sports marketing piece of your business.

It is an interesting transaction, Andrew -- this is Bill talking.

As I understand it, I don't have all the details on this, but we are working on selling some scoreboards in different high schools around Memphis that are getting purchased or sponsored by FedEx down there.

So it's kind of -- it is consistent with how we sell many scoreboards, for example, through major bottling companies and things like that.

It does bring up some unique things for us to think about.

It is definitely an exciting small, standard order type transaction.

But one that is interesting.

So, the check comes from FedEx at the end of the day?

I am not sure, Andrew, what the specifics are.

I believe the money originates there.

Okay.

Fair enough.

Thanks a lot, guys.

That does it.

Gerry Brockman, Credit Suisse First Boston.

Question -- higher level.

If I'm looking today the breakup of your sales -- sports, commercial, transportation -- how would you give that? 66 percent, 20, 12, right?

As I mentioned a little bit earlier, commercial is growing a little bit higher.

It's approaching 24 percent for the trailing 12 months.

That has been the fastest-growing part of our business over the last 12 months.

Now, my next question is going to be -- if those numbers are approximately right, where would you see this in five years?

Those different end markets?

Well, that's a very good question.

I wish I could tell you our crystal ball is 100 percent clear here on that one.

Well I'm not looking for -- just directionally.

Yes, we certainly see the commercial market having a lot of opportunity for growth.

We see opportunity for growth in all areas.

The transportation -- this is the smallest, less than 10 percent of our business right now -- we see opportunities for growth there.

Our approach, of course, is to work hard to grow them all as fast as we can.

Certainly the commercial has a very broad base to it, and it's just very diverse.

It's possible that could outstrip the others going forward.

That's certainly -- again, we see opportunities in all three areas.

Right.

So five years from now, would you expect sports to still be two-thirds of your sales?

Yes, it is conceivable that commercial would take a little higher percentage position.

Within sports, it looks like the more standard, smaller-type product is growing nicely in the last quarter.

What do you attribute that to?

Is that lower prices make it more feasible?

Or is it just availability and awareness of your product out there?

Is it the advertisers ready to step up to pay a bit more?

What is driving that growth?

First of all, just in general, we have brought the cost of our products down and increased the capability.

In terms of addressing the high schools, as I mentioned, we have continued to increase our presence around the country.

We are more effective in covering the geography.

Of course, this is the time of the year when -- this is the peak time of the year for buying for schools, because the fall sports season here is upon us.

So this quarter always is a very strong quarter for us in that regard.

Did that answer your questions?

Yes, but it seems that you're saying you're seeing strength there, right?

Is it because it is more feasible?

Or is it because they are more aware of your customers, of the functionality.

Is it the cost side of the equation?

Is it a combination of both?

What is driving that, what is going to drive that going forward?

I want to make sure, which customers are you asking about here?

More of the standard, smaller sports-type projects, as opposed to the large custom projects.

One thing we're seeing, just as a trend, is that smaller venues are having higher expectations for what type of displays they want to have on their facilities.

You now, I mentioned that we just sold an electric video display system to a high school in South Dakota.

So there is this kind of an underlying increase in expectations that we are seeing, and what is sort of the standard, I guess you might say, of -- the bar kind of continues to be raised for the standard of displays and scoreboards at school venues.

And last question, and I will turn it over.

How's the European and international expansion going as far as sales efforts internally?

Again, we continue to -- we opened our office at Frankfurt.

Of course, that was just a year ago we actually opened the doors over there.

We are very pleased with how that is going.

Of course, right now we are supporting the Olympics.

We're kind of tied up -- that is where the crew is right now.

It's very convenient to work those guys from Frankfurt over there.

We have many people from the U.S. over there as well, as a matter of fact.

You know, in the other parts of the world, we still work through resellers.

We are looking for -- I guess evaluating opportunities of where we might want to open our next office.

Certainly, we would expect to be opening some more offices over the next year or two in strategic locations.

Okay.

That works for me.

Thanks, guys.

Kyle Stults, Wm Smith & Co.

My first question -- could you just clarify for us a little bit, looking ahead to Q2 of this year, how does that differ relative to last year.

I think you had a pretty big quarter last year.

What are the different dynamics there?

Well, in terms of the financial model, we had a gross profit margin on 37 percent for Q2 last year.

You know, we've got to wait and see how sales turn out and how much leverage we have.

And the operating expenses, too, is yet to be seen.

But the biggest difference is going to be in the gross profit margin.

Were there big projects in Q2 of last year that you're not seeing this year?

Were there a couple of aberrations last year?

Basically last year -- and I think at that time we had mentioned that we had some kind of unusual -- a number of several positive things that kind of came together there that gave us a little higher-than-expected gross margin, and that we didn't really expect that we would be able to maintain quite at that level.

So we did expect it would go down somewhat.

I have one more question.

Can you talk a little bit about the 40-inch LCD screen installation you had in the quarter?

And what is your outlook for that product?

And where does it fit into your product mix going forward?

Yes, the 40-inch LCD screen -- we basically package that and have a special -- put our own custom interface -- I should say custom proprietary interface -- into that, that ties into our control system.

So, we can tie a number of video-type displays, it could be a ProStar, which is our LED product; an outdoor marquis could be tied into a system that also has LCD displays in the interior; we could tie onto a plasma display if we want.

Any video display can be tied into the system.

And so, this is what we refer to as a digital signage system, or a digital signage network.

The particular application we had here was in a convention center, so that it was just for information and some promotion within the convention center.

There are many other potential applications, market applications for that type of system, in retail in particular, say shopping malls possibly, could be at convenience stores for example.

We could have a network of those.

So, it's a new market and still there is development going on in the marketing side in terms of developing the business models that will work with us.

And we are involved in that at this time and investigating different approaches there.

So it is primarily a commercial market segment product?

That is correct, primarily.

But, certainly it could be appropriate in an arena or a stadium, say on the concourse, for example.

They have a network tied together with advertising.

So it is typically for advertising, but it certainly could be at a sports venue as well.

And it would just -- it is basically an alternative offering in an indoor setting where maybe you are not getting the resolution you would get with an LED product?

Yes, for closer-up viewing with only a 40-inch display, that is correct.

So, an LED would not be the appropriate solution.

Thank you for taking my questions.

Amin Benali (ph), John Hancock Advisors.

I have a question on raw materials.

Is it possibly you could give us a sense of where you expect those prices to be directionally in the next year or in the next couple of quarters?

Do you expect them to help you with your margins, or do you not expect that?

We're always working to, of course, reduce the cost of our product and work with vendors to find less price to reduce the cost of the parts they're providing to us.

So certainly that is the positive portion on margins, and the other side, of course, always is the competitive factors that are out there.

To the extent our competitors are successful in doing the same things, that tends to offset that to some degree.

Certainly, it is our goal to find more cost savings than we have to give way on the pricing side.

But given everything that you know right now, you don't expect raw material to move against you in the next quarter, at least?

Overall, that is true.

The majority of our product, our materials we see going in a favorable direction.

There could be some exceptions, for example, the aluminum market.

Looks like that could be -- some cost could be going up there.

Again, all of our competitors would be exposed to that same factor.

Is LED your primary raw material?

Certainly, LED is a big part of the cost of our displays.

Other items are the power supplies that convert the AC voltage coming into the displays to the DC current that drives the LEDs.

That is a significant item in the displays.

And I have just two more questions, and I will ask the two at the same time.

First, on the competitive landscape, the last time at your call you talked about Barco (ph) teaming up with a U.S. company.

I wanted to say if you are seeing them more active in the market and how much pressure are they putting on either your products or your prices?

Number two, your guidance for the year for sales, 235 to 250 million, how much of that is international?

Okay, we will start with the first one.

Barco purchased a portion of Translux's (ph) business related to their large sports venues.

So in a sense, we have not gained a competitor, just changed competitors there.

Barco has been, I would say, quite aggressive.

Aggressive in pricing, and they have been successful in landing some orders.

So we certainly have to stay on our toes.

Barco is a public company; they are actually a larger company than we are.

They are involved in a number of different industries and markets that we're not involved in, outside of the large screen LED-type business.

So their concentration in our market area is actually -- their participation overall in our market area is smaller than ours, at least that is our reading on it.

Regarding the percent of international in our total -- last year international was a little more than 10 percent of our business, and we expect percentage-wise to be still in that same range.

It's been an exceptionally good year in international, last year at 28 million.

Somewhere in that same range is what we're looking at for this year.

Okay.

Ty Yeilya (ph), Fieldstone Research.

I have a two-part question.

I was curious -- for a high school to purchase one of these half-million dollar displays, what's the key factor?

Is it a corporate sponsor?

Is it a really good high school football team?

Is it the community?

For these big high school orders, what determines their ability to pay for something like that?

I think you've identified some of the factors there.

Certainly, the first point to make is that these do not come out of the school budgets.

That's an important point to make.

These come from sponsorships.

They are typically in communities where there is a lot of enthusiasm for the sports teams, a lot of community spirit.

We go in there and help them structure this.

It's not something that the high schools typically know how to go about on our own.

So our ability to go in and help them structure these to make it attractive to the sponsors is an important part of making that work.

Do you need to have a specific large company located in the town?

Is that so important?

Well, not particularly one large company.

Typically there will be several key sponsors on a large project like that.

The other question I had -- (indiscernible)UW, Madison ordered a ProStar display last quarter, and I was just curious, have you seen any inclination from other Division 1 schools to kind of follow that lead or maybe upgrade their systems?

Just in general, what we have seen is that once one school in a conference upgrades and sets the new level, it's just a matter of time before others decide they want to step up too.

For one thing, these display systems become somewhat of a recruiting tool when they are recruiting talent.

It's more pizzazz, they have an impressive facility, so that is one factor.

And of course, they do raise revenue with these systems as well.

So, in generally, we do expect that that's a follow-on.

Thank you.

Michael Friedman, Sidoti.

Question for you on the gross profit margin.

The second quarter fiscal '04, we touched upon that.

I think it was in excess of 37 percent.

Was that a record for the company?

I believe so, Michael.

So you are really anniversarying against a very tough quarter, and that's probably the main reason for the year-over-year down projection or estimate that you guys are throwing out there?

Absolutely.

Looking at the balance sheet, you have about 17 million cash on hand at the end of the first quarter, very little debt.

Would you guys consider paying a dividend or stock repurchases?

What are the plans for the cash?

We are evaluating those possibilities.

At this point, we have not made a determination, but all the standard possibilities exist there to, I guess, what we might do in the future.

And then we talked a little bit about different market segments throughout the call, but what about looking at a different way -- in the quarter and in the past twelve months, what's the breakout, percentage of sales, for new venues versus refurbishments of existing venues, whether it be Daktronic's product or someone else's?

Did you guys track that at all?

We don't have that number on hand here.

A significant amount of it really is upgrading existing facilities.

For example, for the professional baseball (indiscernible) this spring, we upgraded the Cleveland Indians and the Anaheim Angels.

Those are both approximately $7 million projects.

Right now, we are doing the Jaguars; we are installing right now the Atlanta Braves.

Those are both upgrades of existing facilities.

Madison, Wisconsin is an upgraded existing.

The Memphis Grizzlies is a new one.

So, it is very heavily slanted toward the upgrade of existing facilities at the moment.

I know you mentioned professional accounts, sport accounts might be down year-over-year, but you are not necessarily concerned about new bills.

It seems that new bills are slowing down, but there may be opportunities to do refurbishments of existing or add-ons to existing projects.

Exactly.

You mentioned national accounts -- I think you gave us a percentage of the revenue for the first quarter of national accounts.

What about standard orders?

Or are those two combined?

What is the breakdown on that for the first quarter?

Michael, we did not give a breakdown of national accounts.

That was standard orders overall, which was about 30 percent for the first quarter.

And do you ever say what the national account make-up was?

No.

And then lastly, how much in revenue for the quarter, second quarter, do you expect to come from the existing backlog?

In your guidance, you gave us a revenue number.

Is there a certain percentage, or a certain number that you expect to come out of the existing backlog and then the rest is going to come from new projects?

You know, that's a good question because, for us, that does vary a lot.

We've got in our backlog one order we announced previously with the Arizona Cardinals.

I don't recall off the top of my head the dollar amount of that, but it was significant.

What I would say is that the backlog, in terms of what I'll call "the aging effect," it does vary a lot for us.

And I think, generally, right now our backlog is quicker turned type items as opposed to larger contract that would sit out there for a long time.

That's an overall statement.

In the markets, it various differently, obviously.

I don't have the percentage, but a good portion of it probably rolls out in the second quarter.

Great.

Thanks, guys.

I just want to add something to that -- every quarter, we book orders after the beginning of the quarter that we shipped before the end of the quarter.

That's always the case, so again, that percentage of orders can vary.

To the extent there are some (indiscernible) in the backlog at that beginning of the quarter and doesn't ship that quarter, the other side of that is there's some that does ship that was not in the backlog at the beginning of the quarter.

Again, that's all factored into our projection for the top line for the quarter.

Lee Schaefer, Fieldstone Research.

Just a really quick question.

The maintenance contract -- it sounds a little bit like it's a new initiative, and I'm just curious if that's an area of emphasis currently at the company that was not there previously.

And secondly, what is the nature of these maintenance contracts?

Are they annual contracts?

Multiyear contracts?

What are we talking about there?

First of all, yes, we have put a renewed emphasis on selling and supporting maintenance contracts.

More so than we have in the past.

We've actually put some staff on them to help keep the focus on that and support our salespeople in that process as well.

In terms of the contracts, it varies widely.

Some are annual; some are multiyear; some may be, in some cases, a parts-only; some may be a full service; some may include event support.

So there is a wide range.

Our approach on that is that we work with the customer and provide a service arrangement, a maintenance agreement that fits their capabilities and their needs.

In some cases, the customer may have a technical person on staff that does some level of maintenance.

We will support them.

Again, we accommodate the customer, but we see a lot of opportunity to do more than we have in the past.

To conclude, it's going to end up being a higher percentage of your overall revenue base.

You said it is going to grow.

I just want to make sure it is going to grow with the overall top line, or that it's going to grow to be a higher percentage.

So it sounds like it is going to grow to be a higher percentage of your overall revenue.

Lee, just as a matter of background, in each of the last two years, our maintenance portfolio has close to doubled.

Overall, over the last two years, it is growing a little bit faster than the top line as a whole.

But when you've got such as small base, it takes a lot to get it up there to the material level.

Does that answer it?

Yes, Bill.

Thank you very much.

Del Warmington (ph), DelWar (ph) Capital Management.

My question is about margins on your direct sales, vis-à-vis indirect channels.

What is the difference there?

I'm sorry, I'm going to repeat the question here because I don't think we all caught it.

I think what you are asking about is what is the difference in gross profit margin between sales, direct sales and indirect sales through resellers.

And it's probably a long answer to the question, because it varies across the markets.

And even within the markets, it can vary a lot.

Do you want to add color?

I don't know that there is a consistent answer there --

First of all, just maybe to provide a perspective there -- most of our large projects are sold direct.

The primary sales through sellers is we have some resellers in the standard scoreboard product area, some in the high schools.

Again, we have 37 offices around the country that sell direct in the high schools as well.

Actually the majority of our high school businesses is sold directly.

The other area we sell through resellers is primarily sign companies in the commercial business.

And those are typically the Galaxy products.

It's a fairly straightforward product to sell, to understand and to install.

And in fact, we will provide service support to them against our offices if the sign company is not geared to do service.

So, you know, it is a good arrangement for us to work through these sign companies.

There's a lot of -- there's a tremendous number of potential users for our product out there, many more than we can reach.

So, that would be the primary -- the bulk of our product that is sold through resellers would be in the commercial market.

We end up with good margins on those.

And one last question, could you review your long-term business model in terms of gross margins and operating margins?

What is the target there?

We have not announced any specific items in terms of how the gross margin and operating margins will be over the long-term.

If you look at our history, for example, on gross profit margins, you will see that we have a history of slowly growing the gross profit margin.

Now factoring out the last two years, that's still our goal, to continue to grow gross margins.

The rate year-to-year could vary.

We think we've got strategies that can help us do that.

I can't give you specific guidance, because we don't say anything specific, but our goal is to slowly increase gross profit margin over time.

And then the leverage, operating expenses, to help us drive operating margins.

Mike Burke, Basics (ph) Capital.

I was wondering -- just going back to the margin question -- what is your margin in Europe backlogs?

Is it down because you said it is going back down to 32 percent?

That's a good question.

I can answer it in an indirect way.

Margin in our backlog -- if you put a couple of comments together previously -- what I would suggest intuitively is it probably is somewhere around the 32 percent range.

Based on the fact I said a lot of it will roll out.

And our estimate says it will be approximately 32 percent.

At the same time, I'll tell you that on projects where we do experience swings in margin, as evidenced, say, by this last quarter, some things can come up that cause margin to change.

And typically we do a good job at that, so we factor that in to the extent we can.

Since the standard orders -- are there more standard orders now in your backlogs than there were last year?

I suspect there is.

I don't know that for sure, but I have not looked at backlogs specifically there.

But I suspect that to be true.

I would have to check last year's numbers to make sure.

Your standard orders in general have a higher margin than your other products, correct?

Yes, that is true.

Back to you previous question -- I do recall now, I am sorry -- standard orders in backlog was up, very nicely, actually, over a year ago.

And they have a higher margin?

Yes.

Does that mean there is more competition in other areas?

One of the factors that affects the margin tends to be the size of the order.

Many standard orders tend to be the smaller orders, under $100,000, for example.

Very good business, but there tends to be less margin pressure on those.

Now, the other side of that is that the selling expenses, as a percent of the order, is probably a little higher on a standard order because of the lower dollar volume on that order.

So, there's a little bit of an offset there, but certainly there's a different competitive environment on a million-dollar-type order than, say, a $50,000 order.

Andrew Meister, Stifel.

Gentlemen, just a question on what you discussed as sort of a digital signage program or system for the convention center and it's usage of the new controller, the V-net controller.

I am wondering, in terms of how you go to market selling something like that -- if that's direct?

If you use a value-added reseller?

And lastly, who you would bump into in terms of a competitor on bidding on such a project?

That's a good question.

I think the first thing I'd like to point out is that is a new market area, and I really think the business models for that application are still being studied and analyzed and formulated at this point.

And so, to say this is the way that's going to happen -- we don't know what's going to be the norm, let's say, 3, 4 years down the At this point, we are exploring a number of different approaches; we're flexible.

We might even partner with somebody on a project or something.

We are very flexible to work with clients in whatever way makes sense for them and for us.

So, pretty much a new market area.

And then just another question -- how long has the V-net controller been out in the marketplace so far?

We announced it like in February or March, I think.

I'd have to look at our press release to get the actual timing.

We did do a release on that, I think it was February or March.

I remember that.

My thought is, is that this is the kind of system that could allow, let's just say, a multi-site -- I don't know -- company to distribute a message across -- I don't even know how you link up or how you move the data around.

But if you can do this in multiple locations in one site, can you do it if the site -- let's just say for like a 7-11 or something like that, which has some 1400 stores nationwide.

That's certainly a possibility.

And that's just a matter of structuring your communication system.

And we would have very much work with clients in implementing design and implementing communication system to do that.

Well, maybe I am goofy, but is any of the national accounts people looking at that kind of application, our is that just too far out?

We don't have any that I guess we're in a position to talk about.

I think, certainly, national accounts are candidates for that type of application.

I might add too, some of our national accounts used in Galaxy displays, which have not incorporated the interior displays yet, which this would imply.

And there we typically -- we offer our Venus 1500, what we call our enterprise software.

And that is a different product that is geared toward distributing the content, the advertising messages, and controlling that from a central point on our Galaxy display.

So, we're out for both of those products, depending on whether it's a Galaxy or a text/traffic application, or the V-Net, in the case where it is a video application.

(OPERATOR INSTRUCTIONS).

Amin Benali, John Hancock Advisors.

A question related to a contractor.

I think you announced somewhere in the Middle East for a stock exchange.

I was curious if you guys were seeking out that opportunity?

Or whether they came looking for your technology?

It just seemed to be sort of far off from your geography.

We are very proactive in the Middle East.

We've sold displays recently into Qatar, Egypt, and people out of Frankfurt are actually watching out for that market.

So that would fall under your European umbrella?

We are very proactive in going after those kinds of opportunities.

Is there any way you could put a size, a number, on the size of that opportunity?

Not just the Middle East, but other remote areas that you have not historically been a player in?

I'm sorry, what is the question?

I was wondering if you could give -- if you have a rough idea of the size of the opportunity available in those markets?

Not just in the Middle East, but in other remote areas where you have not been traditional players?

Again, there are a couple different types of opportunities.

In the world of sports, what tends to drive the opportunity is the country games that are the precursor to the Olympics.

For example, in Doha, Qatar, they are having the 2006 Asian games there.

So we've sold displays to them for that.

The financial market -- of course, that's another -- there are many financial institutions around the world, and all of them are potential candidates.

So we feel our new 6-millimeter product is a very good fit for that.

So we think there could be many opportunities in that regard.

And perhaps finally, is the build-out of your European operations complete right now?

Or do you expect to increase the number of personnel and resources you have in that office?

We would expect that that will grow over time.

As I said, we've obviously just been open one year at this point.

We have five people based in Europe at the moment, and we support them additionally from the U.S. as needed.

But we would expect that to grow over time.

Mr. Morgan, there are no further questions at this time.

I will now turn the call back to you.

Please continue with your presentation or closing remarks.

Well, thank you.

I did mention that we have our crew over in Athens supporting the Olympics.

We actually have 32 people there supporting our systems, making sure everything is operating smoothly for the Olympics.

We'll also have a crew there for the Paralympics, which take place a couple of weeks after the regular Olympics.

And it is our eighth Olympics involvement, so it's just always fun to be involved with such a high-profile event.

Also, just a note, tonight is our annual shareholders meeting at Daktronics headquarters here in Brookings at 7 PM.

We look forward to seeing any of you who could attend.

Our second-quarter earnings conference call is set for Wednesday, November 17th at 10 AM.

Information on the access and replay of this conference call is contained in our news release.

And that wraps it up for today.

Thank you all for being with us this morning and for your questions.

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

We thank you for your participation and ask that you please disconnect your lines.