Daktronics Inc (DAKT) 2005 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Daktronics second-quarter fiscal 2005 earnings conference call. As a reminder, this conference is being recorded Wednesday, November 17, 2004. Before we begin the Company would like to caution investors and participants that in addition the statements and historical facts, this conference call and the Company's quarterly earnings news release contain forward-looking statements reflecting the Company's expectations and beliefs concerning future events which would materially affect the Company's performance in the future.

The Company cautions that these and similar statements involve risks and uncertainties and include changes in economic and market conditions. The management of growth funding and magnitude of future contracts and other risks noted in the Company's SEC filings and their most recent Form 10-Q which may cause actual results to differ materially. Forward-looking statements are made in the context of information available to the Company 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. (OPERATOR INSTRUCTIONS) I would now like to turn the conference call over to Mr. James Morgan, Chief Executive Officer of Daktronics.

Thank you, operator. Good morning, everyone, and thank you for joining us this morning. We are pleased to be able to report a good second quarter with earnings being in the middle of our projected range and revenues at 59.5 million, just below our $60 to $66 million estimate. Order bookings also were solid in the second quarter and we started our third quarter with a nice backlog. I'll turn it over to Bill Retterath to give us some insight into the numbers and then I'll be back with some additional comments.

Thanks, Jim, and good morning to everybody. Sales for the quarter were up slightly over the second quarter last year at 59.5 million, just slightly below our previous estimate of 60 to 66 million. Year-to-date net sales are up 10 percent at 118 million compared to 107 million last year. Earnings per share at 26 cents on a fully diluted basis compared to 34 cents a year ago, a 23 percent decline which, as most of you know, is due to the higher gross margin percent in fiscal 2004 which were unusually high and were not expected to be repeated.

Earnings were at the midpoint of our estimated range for the quarter which was 22 to 30 cents per share. Year-to-date earnings are at 51 cents per share as compared to 55 cents per share last year. For the quarter the combination of sales at the bottom of the range and earnings at the mid point of the range is primarily attributable to better than expected gross margin percentages and lower operating expenses which we'll discuss later. This is the tenth consecutive quarter of growth in net sales quarter over quarter and the net sales level again establishes a new quarterly record.

As evidenced by our backlog, and as Jim mentioned, we also had a good quarter for order bookings growing the backlog from $39 million 1 year ago to 50 million at the end of this quarter. For those of you that remember, last year in the third quarter we booked two large major league baseball contracts; this year we're not expecting two contracts like those. However, consistent with comments we made last quarter, we are continuing to excel at the foundation of our business transactions under a couple million which we expect to more than offset the effects of those large contracts in the third quarter.

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 lead the way both for the quarter and year-to-date. This growth was in spite of a decline quarter over quarter in sales to national accounts. The decline in national account business from the second quarter of last year is merely a reflection of the volatility of a few larger accounts.

We're pleased to announce that we've added significantly to our national account base during the quarter and we expect to see the results in both orders and sales in the third quarter and beyond. This growth is due to some degree to the introduction of a new line of Galaxy products that Jim will discuss later in the call. In short, the exciting part here is the amount of growth in standard orders and large systems at the same time that the national account business was down only due to the inherent volatility of that business. All these factors went into the order volume during the quarter which resulted in the fourth consecutive quarter of backlog growth for the commercial market as orders outpaced sales once again.

In terms of the sports market sales were down for the quarter over last year while at the same time orders were up nicely. If you remember, last year we turned out a number of new systems for NFL teams during the second quarter plus our international business was strong. As a result our net sales in the sports business as a whole was down for the quarter but order volume compared to last year was strong so that year-to-date order volume is now up slightly.

Within the sports market net sales in the smaller midsize facilities performed well, both up double-digit percentage rates for the quarter and year-to-date; the greatest growth continues to be in the smaller facilities. Domestically sports orders are also up double-digits year-to-date. The lack of significant growth here is really due to the lumpiness on the international front. In short we grew the backlog within the sports business during the quarter as orders exceeded sales. Year-to-date, however, orders are slightly below sales. The current backlog combined with our pipeline makes us believe we can offset, as I mentioned before, the two large contracts that contributed to sales in the third quarter of last year and increase net sales in the sports market for the third quarter.

Finally in our transportation market we had a good quarter for net sales as compared to last year which was attributable primarily to the strong order bookings in the first quarter of this year. Orders were actually down from the same quarter of a year ago but year-to-date they're still up double-digit percentages. In short there was a slight decline in backlog for the quarter as sales outpaced orders. However, on a year-to-date basis orders have outpaced sales contributing to the growth in backlog. During the quarter Congress passed an extension of the transportation bill which we are still optimistic about; however, this delays some of the potential growth we see in this market.

Looking at our mix of standard orders to custom products -- projects, we benefited quarter over quarter with the growth in the percentage mix due to the strong performance of small sports facilities and the commercial market. For the quarter our standard orders were approximately 30 percent of net sales as compared to 20 percent a year ago and for the trailing 12 months it's now at approximately 30 percent as evidence from previous comments and growth is strongest in the commercial market.

Finally on the international front, orders outpaced sales for the quarter for the second quarter but year-to-date they remain down compared to sales due to the lumpiness of the large orders. On the gross margins for the quarter, which was at 33.6 percent which was down from the 37.3 percent level one year ago, year-to-date gross profit margin is at 33.9 percent compared to 36.7 for the first 6 months of last year. At the beginning of the quarter we estimated margins being in the 32 percent range knowing that the actual margin can vary rather significantly from that.

The positive results for the quarter which was what I would say slightly higher from our typical range of volatility was due to better materials pricing on some projects and some cost improvements. As compared to the second quarter of last year our gross margin declined due to the dramatic effects of raw materials pricing declines last year, changes in the competitive environment which have occurred since then and the higher freight costs during the quarter -- during the current quarter. These factors were offset by a better mix of standard products to custom projects.

For the next quarter we're expecting margins to be below this current quarter's level, but keep in mind that our margin estimates are subject to variability which we typically say can be plus or minus a percentage point. Operating expenses were 12.4 million or 21 percent of sales compared to 10.8 million or 18.4 percent of sales last year. Year-to-date selling expense of 24.7 million or 20.9 percent of sales compared to 21.5 or 20 percent of sales last year. The increase in spending in the quarter was primarily due to higher personnel costs and related infrastructure, travel and entertainment costs due to the increased sales level and order level and higher convention costs as we rolled out new products all of which were offset by slightly less bad debt cost.

We are able to hold down selling expense from what our expectations were coming into the quarter; however, we expect that selling expense will go up to some extent in the third and fourth quarter from the current levels. G&A costs were at 2.2 million and 3.7 percent of net sales compared to roughly the same amounts last year. Year-to-date G&A expense of 4.8 million or 4.1 percent of sales compares to 4.3 million and 4 percent of sales last year. This is the second quarter in a row of reduced G&A expenses; however, we do expect that it will increase next quarter. The increase on a year-to-date basis over last year is due to the higher cost of personnel due to the growth of the Company, higher costs of IS (ph) infrastructure and higher training costs due to the levels of personnel throughout the Company.

These increases were offset by lower professional fees and lower cost of shareholder relations. As with most companies, we are absorbed in the compliance work related to Sarbanes-Oxley primarily section 404 which has the effect of distracting us from other initiatives. We expect we will see higher costs next quarter related to this. However, the real hidden cost is the major focuses taken from our staff who are unable to work on other things. In short we can expect G&A to go up in future quarters as we either incur costs related to the Sarbanes-Oxley initiative or we find time to focus on the other initiatives that we have been putting off.

Our product development investment for the quarter was 2.9 million or 4.8 percent of sales which is higher than our guidance that we provided of 4 percent of sales. As usual, Jim will be making more comments on product development later in the call. We certainly have a lot of exciting things going on in that area. The results of all the above was a 12.7 percent operating margin as compared to 18.9 one year ago.

Just quickly on the non-operating items, interest expenses declining due to reduced debt levels, interest income is increasing due to the investments in long-term receivables and cash investments. And on a comparison of other income, much of the increase quarter over quarter was due to the currency effect of the Canadian dollar and the intercompany transactions we have between the parent company and the Canadian subsidiary. On a year-to-date basis in the first quarter also of last year we realized a large gain on the sale of equipment by our video rental business which we didn't have this year.

Our effective income tax rate for the quarter at 36.8 and 37.8 percent year-to-date both of which are down from last year. We expect the year-to-date rate to continue on a go forward basis the rest of the year. Cash provided by operations was approximately 7.8 million compared to 11 million for the first 6 months of last year. Year-to-date we consume more cash and receivables including cost on profits and excessive billings and in inventory. The inventory increase from the beginning of the year resulted from the higher sales level, but also includes parts ordered in anticipation of higher volumes in the standard business products area which are coming in a little bit later than expected.

On the positive side, inventory levels did come down from the beginning of the current quarter. On the receivables side the increase resulted from higher sales but also the timing of payments on larger transactions. Unfortunately our DSOs did not reduce as much as we had hoped they would, but we're working hard on gaining on that. During the quarter we continued investing in CapEx including additions to manufacturing facilities and items related to the rollout of our ProTour productline. We're near the halfway point on the plant expansion we're in the middle of. So we can expect more costs in the third quarter and in the fourth quarter on that project.

Also as mentioned in our release, we intend to sell our portfolio of SportsLink equipment and therefore we've classified the equipment current assets on the balance sheet as held for sale. Our plan is to reinvest to some degree in additional equipment to continue to support the rental market. The timing and amount of this is still being evaluated, however.

As previously mentioned in the press release, we're expecting revenues in the 53 to 58 million in the third quarter and earnings to be in the range of 16 to 22 cents per share. We changed slightly our annual guidance which is now at 230 to 245 million. Obviously these expectations can vary due to a number of factors including the timing of order bookings on the large projects. With that I'll turn it back over to Jim for additional comments.

Thanks, Bill. Just kind of as an overview -- many of you who are familiar with Daktronics already may know this, but we generally categorize our business in three areas with sports being about two-thirds of our business, commercial is now at about a fourth of our business and transportation being the remainder which is about 10 percent. As Bill alluded and as we noted in our news release, the highlight for us for the second quarter was the performance of our commercial market and really year-to-date as well.

Orders for the quarter and year-to-date in the (indiscernible) market are up over 30 percent with an even greater percent increase in sales year-to-date. And the commercial market is really one of the solid underpinnings of our business that gives us a nice, steady order flow. And just to give a little insight into what goes in -- or what we include in our commercial business, there are several components. The first is sales through sign companies of our standard line of Galaxy LED displays and Galaxy is our trade name for our LED display products that are designed especially for use in the retail outdoor market. They're a smaller, easier to use, lower cost product as compared to the large screen ProStar video displays.

The second aspect of this commercial market is our national accounts business which is primarily, again, Galaxy displays. And we continue to increase, as Bill mentioned, our national account space and this is one of our strategic growth areas going forward and these really are -- there's a subheading that this is really regional accounts. Some of these accounts are not fully national but still where you would sell multiple displays to one account, multiple locations. National accounts includes quick service restaurants, pharmacies and convenience stores among others.

Just an example, on the new product introduction we recently introduced a line of electronic gas price displays as a complement to our other display products that we can offer to the Petro convenience store market. And the third aspect of the commercial market is the higher end applications which utilize our ProStar video displays such as the two large orders we previously announced for large financial institutions in which at this point we're not free to divulge the names of those. But other examples are outdoor billboards and marquis and also including casinos and other gaming applications.

One example I think that illustrates the broad range of applications for this technology is an order we received from a large church in Houston for just under $2 million and many of the ProStar's sold in the commercial market are in the $200,000 to $300,000 range. And overall we see excellent growth opportunities in the commercial market. We continue to see increasing interest in the use of electronic signage as an advertising medium really across a wide range of applications.

As we've discussed before, any business that locates on a high traffic street and considers being on a high traffic street is important to their business -- is a candidate for using electronic signage as an advertising medium as an alternative to television, radio or newspaper. And the demand for electronic displays continues to increase also the unit price for these displays continues to come down and furthermore the fact that we now offer not only cost-effective monochrome displays but also cost-effective color Galaxy displays as well. Of course, color has a lot of appeal and we're seeing an increased percentage of the business there being in color. We do though still sell a lot of the monochrome displays, they're still very popular.

Our pipeline for orders for the commercial right now really is exceptionally strong. We expect commercial to be a very strong contributor to the remainder of our fiscal year performance. In particular our pipeline, the national accounts area is again, as I mentioned, exceptionally strong both going forward and in terms of our outlook for the remainder of the year the key is here for this business to come out of our pipeline and actually into our backlogs so that we can work it and we are expecting that to happen soon. But there's always dependence on the customer to make the final commitment there. So that's what we're expecting to happen.

In the sports side, our high school business was the strongest of our sports market in terms of percent growth. Order volume for high school sports business went up nicely through the first two quarters and our strategy for growth in the high school market continues to be increased 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 and our sports products area. Like the commercial market, the high school market provides a nice, steady order flow of nominal size orders and is really another solid cover of our business.

We continue to be pleased with the performance of our Daktronics sports marketing division which assists clients with their marketing and sponsorship programs to raise revenue to purchase state-of-the-art display systems. We continue to see interest at both the high school and the college level and we're continuing to expand our sports market and salesforce to more effectively cover the geography of the U.S. And while we see growth opportunities in all areas of sports, as Bill mentioned, we see more significant growth opportunities in the smaller venues and with our broad-based sales and service force we are uniquely positioned in the industry to serve this broad base of sports customers.

Just as a footnote here, orders we booked this quarter in the college sports market that exceeded the $1 million included -- college and professional actually sports market that exceeded $1 million included orders for Northern Arizona University, the Alamodome in San Antonio, Rushmore Civics Center in Rapids City, South Dakota and Boston University.

The transportation business, as mentioned, is -- only about 10 percent of our business and we see opportunity for growth there. Our strategy for growth there poses primarily in the intelligent transportation system area which uses the acronym ITS as an industry Akron. And our strategy there is to continue to expand the standardization and the breadth of our productline for our Vanguard displays and control systems. Again, we're working to get these specified and approved in more DOT jurisdictions and the process there really is to work with the engineering staff and often there are consultants involved with working on behalf of the DOTs, so we continue to get approved in more jurisdictions there. And the nice thing we see there is once we're in there we work with them; we'd see opportunities for repeat business as we work hard to make sure that we serve them well.

Just to comment a little on selling expenses, we have an ongoing program to expand our sales and service force. In particular, and that includes people at our offices as well as here in Brookings. The center part of our strategy to better cover the geography of the U.S. is adding staff in our offices which we have approximately 40 offices around the country at this point as well as adding offices in areas we feel we have not -- don't have fully covered. This does put some upward pressure on selling expenses, as Bill mentioned, but we believe this investment is essential and there's additional opportunity out there to be capitalized on.

Also with this network of offices that we have, one of our strategies also is to increase our effort in selling maintenance contracts and we are seeing good progress actually in that regard. Product development continues to be a very important part of our strategy at Daktronics. As Bill mentioned, we invested slightly above our target of 4 percent in product development due to the emphasis on a number of products including the new ProTour modular video display systems. And this product is specifically designed to be used in conjunction with temporary or traveling events with special construction features that minimize set up and tear down time and cost to make it easily transportable.

This is a market niche that until now we have not really participated in. We have designed our product prior to this to be -- really to be optimized for permanent installations. And so this really allows us to participate in another aspect of the video display market. We recently introduced ProTour display systems at two major trade shows, the LDI show in Las Vegas and the SATIS show in Paris. These are both shows that LDI (indiscernible) the staging and lighting of traveling shows and SATIS is an audiovisual show in France. We're very excited about this productline and how the market is receiving it.

In connection with this we expect to -- as Bill mentioned, we expect to divest the portfolio of trailer mounted video rental displays owned by SportsLink which is a wholly owned subsidiary of (indiscernible), redirect our resources that we have there to supporting in a broader way the rental industry really on a much broader scope.

The area of digital signage is another new area we are just getting into. This digital signage is -- really it refers to capability to a system which might include a number of different types of display technologies that includes plasma displays, LCD display, LED displays, any video type of technology tied into a network typically incorporating some advertising revenue as part of the business model. And we've invested in enhancements in our V-Net controller which is oriented toward this digital signage market and have the best in lower end sales, marketing and other efforts to fuel revenue growth in this area.

We do expect product development in the third quarter to drop back in terms of the investment a little closer to the 4 percent level. In general our product development objectives are twofold; of course, to introduce new products like the ProTour and also to enhance our existing products by reducing cost and adding enhanced features. And we are in a technology driven business and so it's important as we go forward we need to continue to take cost out of our product and we're able to do that through reducing both material and labor cost.

One of the questions we do often get is about the trend in LED price and I'll just comment on that. Since a blue and a green super bright LEDs are first introduced in the mid-90s there has been an ongoing steady reduction of the price we see for these components and these prices may more or less on the order of maybe 10 percent a year -- that's not a precise number and it's not exactly consistent year-to-year, but more or less over time it's something in that range and they've come down in price. And this has allowed us to continue over the year to offer our product at a much reduced price to our customers and then we find out the cost savings in addition to the LED pricing as well.

So this positive thing is this helps expand the marketplace because, again, we have a more cost-effective product and we get in at a lower price point because that's become a big factor for the national accounts receptiveness to our product. A result of this is that we must -- on the operations side we must ship more product to get $1 million worth of sales out of the factory. This inherently dictates that we find ways to take labor out of the assembly process to minimize labor costs and (indiscernible) to maintain our unit throughput.

Also (indiscernible) we're adding to our plant space. This is a factor of just growth, but also the fact we see that our operational expansion actually has to happen at a greater rate than our top line growth because of our unit price decline. And we are working to get our plant expanded and we continue to work to refine our assembly processes, to streamline them to allow us to take advantage of the market opportunities.

Again, overall our very diverse productline sets Daktronics apart from our competitors and allows us to be a one stop shop for all display systems. With that I'll turn back to the operator and we'll open it up for questions.

(OPERATOR INSTRUCTIONS) Scott Barnum, CSFB.

Nice quarter. I just wanted to follow up on a couple of your different segments starting with the sports market segment. You're halfway through the year; your performance has been relatively flat in terms of revenue. Where would you expect it to be for the year? Do you expect it to be up overall in terms of revenue and in terms of orders? And could you give me is that maybe a 5 or 10 percent up or do you expect it to be flat for the year?

We expect it to beat up. I don't have a set percent on it at this point.

Our expectation is that it will be up double-digit percentages, but some of that is dependent on how much we do on the international market. As I mentioned earlier, domestically it's been strong. We're exceeding those double-digit, but we've got the lumpiness and a great performance last year on the international side. We hope to be able to overcome for the year and, as a whole, to be up double-digit percents. But we've still got some work to do in that area.

Right. So to hit double digits for the year you would have a little stronger second half than you've had in the first half?

Yes, that's possible.

Okay, great. On the commercial side I think you said you're up around 25 percent or so now total revenue. Could you just go over the numbers again for the growth rate year to date? I think I heard you say 30 percent. I wasn't sure if that was orders or revenue.

Basically what I said was that our orders are up in excess of 30 percent year-to-date and our sales are actually up at a higher level than that.

And is that area or a rate that you would expect to end the year at, or is that accelerating or is that just -- was it off to a faster than expected start?

We actually see that we're going to finish very strong with commercial through the rest of the year. Our pipeline there, as I mentioned, is exceptionally strong right now, and so we've got high expectations of how we're going to finish it in the commercial market.

Okay. Do you ever break out how much of the commercial market is from the national account business?

No, we haven't broken that out.

It’s a significant piece I can assume, though?

It's definitely a significant piece of the business, yes.

And then CapEx for the year, could you give me an idea where you expect to end the year at?

Overall we're looking at on the order of 10 million for the year.

Just to add to that 10 million, depending on what we do with our ProTour introduction, whether we invest in more of that, that could change that a little bit. But in the absence of that it is around the 10 million.

As I mentioned, we're looking at selling (indiscernible) SportsLink which of course would generate cash and then some -- and we would expect that certainly in the fiscal year we wouldn't reinvest all of that cash and maybe eventually we would reinvest all of it to get SportsLink back into this rental market business. But that wouldn't all happen in this fiscal year. So chances are we'll see a net cash gain from the SportsLink -- I would say we expect to see a net cash gain in the SportsLink business this fiscal year.

Scott, I want to follow up, too, on a couple of things in terms of the national account business in terms of national accounts on the standard product side. It's likely less than a third of the total standard product business within the commercial market. So it is important but it's not like it's over half. Then the other thing I should mention on the national account standard order business is the margins are obviously not at the same levels as your orders of one or two displays. These are larger programs which adds pressures to margins, it's more competitive, it's all those types of things.

Right, right. Just one quick follow up then to your bringing up the standard side of the business. Do you have the mix between standard and custom and where that was a year ago?

Yes, I had mentioned that earlier standard products for the quarter were above 30 percent in total business and last year for the second quarter it was about 28 percent and that is in spite of national account business Q2 versus Q2 was actually down and that was due, as I mentioned, to the lumpiness of that business.

If you had to quantify that mix shift being a little higher percentage of standard in terms of impacting your gross margin could you rank how much of an impact that had to your gross margin being a little bit ahead of what your expectations were?

Roughly we can say -- we've said this -- our standard products -- aside from the national account business -- average about 40 percent plus margin rate and in terms of our model we have obviously higher distribution costs related to that. And so you can look at it as a whole and standard products go from -- the rest of our projects let's say are 30 percent on average and are custom projects, and the standard orders grew from 25 to 30 percent. You can do the math, Scott. I'm not that quick.

No, that's very helpful. Thank you.

Andrew Meister, Stifel Nicholas.

Just a couple of questions and this relates to the comments in your prepared release and I believe in your prepared remarks. I'm wondering about the G&A and selling expense. You claim that you expected to rise in the third quarter, yet you also say that you expect the overall operating income margin to rise in the third quarter versus last year. So my sense is gross margins are going to be more or less the same and I'm just trying to figure out if selling and G&A is going to be up as a percent of revenue or is it going to be up on an absolute dollar basis versus the third quarter last year?

A couple of things. In terms of the third quarter last year, our G&A expense was 2.5 million and this most recently completed quarter was 2.2 million. In the quarter prior to that it was 2.6 million. So that was the first quarter of this year was 2.6 million. And then the operating margin in the third quarter of last year was 7.9 percent. We've got a couple of things. Again, this is one of those deals where you've got look at the math. Our sales were only 44 million and this year we're at the -- 53 to 58 million. But if you factor in a reasonable increase and right now we're not giving guidance on how big that increase in G&A is in terms of absolute numbers. But if you run the math at 53 to 58 million and assume a 32 percent margin plus the volatility of that you'll see that the operating margin percent is higher.

I think that gets us there. Then another question -- and this is related to the money that you're spending? On the office count you indicated it was at 40, I'm wondering where that was last year and maybe where it was a quarter ago if you have those numbers handy?

The dollars expended there you mean?

No, I mean just sort of the number of regional offices that you have that support your selling in the different markets.

Really our investments are probably as much adding additional people to existing offices and actually more so that than it is to adding new offices. When we open a new office, you have to understand, we only have one or two people there initially? So there's not a huge hit when we do it just because we open an office. It's more a steady expansion of our overall staff there. I'm not quite sure how to quantify that for you. We've continued to add people throughout the U.S. in all of our markets on an ongoing as needed basis is how we approach that.

Fair enough. That does it for me, thanks.

Lee Schafer, Fieldstone Research.

Good morning, guys. I just have a couple of quick questions. One, with respect to product design and development expenses for the quarter. Usually in this period, which is a seasonally busy period, that tends to go down as you charge more time to the custom jobs. And it was higher than I expected, but I understood Jim to say that it will come down again in future periods. And I'm wondering if I understand this correctly. Have you added a lot of staff or were there some non staff related expenses in the most recent period that took it to 4.8 percent of sales?

One of the things we try to do -- that was a good question -- we try to align our product development and our contract work and (indiscernible) us together. So there was some of that. The ProTour certainly was a very heavily focused area for us. That is, as opposed to a product enhancement, that is an entirely new product with a full set of mechanical, structural elements as well as the electronics and cabling systems and the whole thing. So that was a very big focus for us and that was at least a part of why we were a little higher this last quarter. And I would say we've got the basics for that productline finished, we'll have some continuing development but at a decreased rate going forward on that productline.

Lee, I should mention too that for the year our hope is that we're only slightly -- for the whole year only slightly above the 4 percent meaning 4 and a 4.2 percent, somewhere around that range. In other words, we don't see us ending up at 4.5 percent for the fiscal year.

Alright. And then, Bill, I want to come back to the rental business. I'm not sure I understand this. You've got $2.7 million in assets held for sale. Is that net realizable value or is that your historical cost?

That's the historical cost. You don't mark that up when you reclassify it.

So you're going to get a pop on that probably.

At this point we don't think we'll get a lot.

Well, that's good. With respect to going forward and addressing this market, it sounds to me as if what you're planning to do is not necessarily own the assets yourselves, but to partner with somebody who will address the rental market and go aggressively with the ProTour out into the market. Is that right or (indiscernible) correctly? Or you may own some of that equipment and rent it yourselves, but it's more likely you're going to address the market differently?

That is correct. And right now with the SportsLink we're going to essentially rent directly to the events to the end-users and we'll basically back up a step on that in the marketplace with the ProTour and we will support companies that rent directly to the events. And the idea of having some rental inventory is that in the rental business every event is different and so the requirements -- the companies that are doing the renting, renting the equipment out to the end-users, their needs vary from event to event and so they need to have -- to be able to draw from a reserve occasionally to bolster what inventory they may carry. That's why we would envision having some inventory on hand as to facilitate that and to make them comfortable with utilizing Daktronics product.

Jim, what is your sense of the potential market opportunity? Can it be significant like several million dollars a year in potential equipment sales going forward?

Absolutely, we see that it can be. And I might add to that, one of our (indiscernible) to renew efforts is being proactive in Europe. And one thing we've seen is that in Europe just the market seems to -- there's more of -- more interest in this even there relative to the (indiscernible) than there is in the U.S. So we see it as a very good complement for our development efforts in the European market as well.

One last question, kind of an itty bitty one. But the 378K of other income, that was primarily currency effects, Bill, related to the Canadian?

Yes, part of it was. Just to give you some background on that we had in long-term receivables something like $1.3 million in a long-term finance transaction that we converted to cash during the quarter and the exchange rate over the last year -- I could be off a little bit on the time -- has gone from 0.75 to 0.85 or something like that. And so a big part of it was -- it's not the full 300,000; it might have been really 100,000 in total related to foreign currency.

Okay. Because I didn't think you had that many assets that were denominated in Canadian dollars. Just on my handheld calculator I couldn't get anywhere close to that big of a number.

That's the whole thing. Thanks for asking.

Thanks.

Peter Rice (ph), Paulson Investment Co.

Following up on the currency, the weaker dollar -- just curious to how that may impact your business both on the sales and in the purchase. I believe you purchase most of your LEDs from Asia or do you purchase them domestically like from Cree? Thank you.

We purchase most of our LEDs from the Far East, and so I suppose longer-term our prices are negotiated in dollars but, of course, long-term that could have an effect on that I suppose. But we did negotiate the price in other currencies. On the sales side, of course, a weaker dollar tends to help in the export process.

Are your foreign competitors into this market -- are they able to capitalize on the weak dollar?

I think it's -- without getting into a lot of details of our competitors, with some of our competitors they've certainly tried to take steps to -- the foreign competitors to counteract the negative effects that currency has had on them selling into the U.S. market. Including things like maybe building a -- putting more facilities in China, let's say for example, whose currency is tied to the U.S. dollar. There's been some things going on there, but I don't know that in terms of the competition on those big systems it gets to be pretty competitive. I think that competition is what it is. They may be suffering more margin, but from our standpoint the market is extremely competitive. Some of these companies will compete with us just based on pride, so they'll just keep lowering price. So it's probably hurting some other companies or currency.

Thank you very much.

(OPERATOR INSTRUCTIONS) Dennis Nielsen, Feltl & Co.

Just a couple of follow-up questions on the international business. Can you give us some kind of an idea of the progress you've made in the international market over the last year? What your run rate is now or what you did in the third quarter compared to a year ago?

Overall if you recall last year we booked a number of main projects; we had a couple in Paris, we were involved in the assets (ph) deal -- various other things. We had a lot of projects that came together in a short period of time in terms of order bookings. For the second quarter actually -- I think we may have mentioned this -- our international business in terms of orders was really up nicely. Over the long-term we think it will be up but it's subject to volatility. Year-to-date, though, we're still down. And in total the international business both years I think was less than 15 percent on a year-to-date basis. Am I answering your question, Dennis?

Yes, less than 15 percent on a year-to-date basis.

I believe so.

And similar to last year?

That will be in our 10-Q that we'll file next week. So, I believe it is in both cases, both years, yes.

And one other question about the competitive environment here in the U.S. primarily, but any change in that scene? Is it still primarily Barco on the larger deals?

Yes, on the larger deals it's typically Barco or Mitsubishi. Mitsubishi is still hanging around and gets in on a few. I'd say that's accurate.

Okay. The competitive environment has stayed fairly constant or are they evidencing more aggression than you've seen in the past?

I don't know if it's more aggression. I'd say Barco (indiscernible) the matter quite aggressively I would say. And then in our other areas like our commercial market where we're looking at the Galaxy there, that is a whole different mix of competitors and actually tends to be -- there are some foreign competitors but it tends to be more domestic at this point.

Okay, thank you very much.

Mr. Morgan, there are no further questions at this time. I now turn the call back to you. Please continue with your presentation or closing remarks.

Okay. Just one comment here and that is our next conference call is set for Wednesday, February 16th at the same time, 10:00 AM. I thank everyone for spending your time with us this morning and for all the questions and have a good day.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.