Daktronics Inc (DAKT) 2005 Q3 法說會逐字稿

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

As a reminder, this conference is being recorded Wednesday, February 16, 2005.

Before we begin, the Company would like to caution investors and participants in the additional to the statement of historical facts.

This conference called 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 marketing conditions, the management of growth, funding and magnitude of the future contract, 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 contract of information available to the Company as the date of the conference call.

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

(OPERATOR INSTRUCTIONS)

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

Thank you, Operator.

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

As we've announced, we came in under our estimates for the quarter, with our top line being about 2 million under our lower revenue estimate of 53 million and earnings being 4 cents under our lower earnings estimate of 16 cents.

This was due primarily to two major factors, the first being the delays in some anticipated order bookings, and the second being a lower aggregate margin.

I will try to give you a little more insight into the factors involved and also discuss our forward-looking outlook today.

For starters, Bill Retterath, our CFO, will discuss the numbers and I will be back with some additional comments before we open it up for questions.

Thank you, Jim, and good morning, everybody.

Sales for the quarter were up 13.6 percent over the third quarter last year at 50.8 million below our beginning-of-quarter estimate of 53 to 58 million.

Year-to-date net sales are up 11.2 percent at 169 million compared to 152 million last year.

Earnings per share, at 12 cents on a fully-diluted basis, compares to 13 cents one year ago, a slight decline.

Earnings were below the estimates we gave at the beginning of the quarter of 16 to 22 cents per diluted share.

Year-to-date earnings are at 63 cents per share as compared to 68 percent cents per share last year.

This, however, is the 11th consecutive quarter of growth in net sales quarter-over-quarter.

As evidenced by our backlog, and in spite of the delays in order bookings, we also had a good quarter for order bookings, growing the backlog from 43 million a year ago to 53 million at the end of the quarter.

For those of you that remember, last year in the third quarter we booked two large Major League Baseball contracts.

This year we did not look any similar contracts.

However, consistent with comments we have made in the past, we're continuing to excel at the foundation of our business of transactions under a couple of million dollars, which more than offset the effects of those large contracts one year ago.

One of the comments I made in the past was to remind investors of the inherent lumpiness of large contracts in the increasing consistency of our small and mid-size order flow, which is really a key strength of ours.

Prior to getting into some of the specifics on the numbers, I'd like to step back and talk a little bit about how we could miss the revenue estimates as it relates to the fourth quarter to help give some flavor on the third quarter.

As noted in our release, we're projecting a fourth quarter at 58 to 66 million.

These estimates are based on how we see the likelihood of various types of orders getting booked, then in converting to net sales primarily under the percentage of completion accounting rules and standard shipment orders.

So let's break down our estimates for the fourth quarter to help gain a better understanding of how our estimates can vary from reality.

First, the foundation of our business, our standard order and small project business; this is a business that we talk about that comes in a fairly consistent manner.

For Q4 we're projecting approximately 22 million for the quarter.

This includes our standard commercial products national account business, and is subject to some volatility, and includes almost 8 million that we already have booked in the backlog.

Secondly, we are projecting approximately another 22 million from our existing custom project backlog.

For those who have known us in the past, we recognize revenue in built projects primarily based on customer needs and client capacity.

For example, during the third quarter although we had the Arizona Cardinals transaction in backlog, we performed little work on it since it is not scheduled to be up and running until late in the year.

One could argue that to meet numbers we could build ahead.

We don't do that due to the inherent risks in doing that.

Third, we have a large number of custom projects that comes in each day that serve as a foundation also to our business.

As we speak, we have over $5 million of specifically-identified orders that we believe will book and have revenue during the quarter.

Fourth, we believe that we will have in excess of $3 million on service revenue for the quarter.

And finally, what we will call the riskiest area in terms of projecting estimates, we have a pipeline of orders that we make assessments on, primarily the large orders.

As a current example, we have five pending orders in our commercial market pipeline that we think we can book in the quarter totaling over 17 million.

Of this, if they were all to book timely, we estimate that we could generate over 7.5 million of revenue for the quarter.

In developing our estimates then, we need to have a wide range to address the risk of timing on a small number of orders.

So how do we summarize the above analysis?

Like I mentioned, we publish a wide range of estimates.

Secondly, the shorter term is generally harder to predict than the longer-term.

Third, the lead-time from order booking is important, although with certain levels of certainty for orders we will order raw materials in advance, but we hesitate to take real risk on inventory.

Fourth, when we order raw materials and our order comes in, we can move rather quickly, getting a spike in revenues as we can components to the project.

However, evaluating the impact of this takes time.

And last, there's a significant percentage of our work done on site by subcontractors.

It takes time to evaluate this work in terms of percentage of completion accounting and after month end to see how the numbers come out for quarterly revenues.

Now to extrapolate that into more specifics of what happened in the third quarter, number one, we didn't book a contract in excess of 5 million that we expected to that would have created in excess of 1 million in sales.

Two, a number of professional baseball transactions were delayed longer than we expected that would have added a couple of million to sales.

Three, we had a large order from a company that was essentially tied up in purchasing.

Shaking it loose has proven to be difficult.

While at the same time, we bought inventory because we did have an agreement to cover us on the inventory risk in preparation for the orders.

Fourth, we at times run into large contracts that come in that weren't forecasted to come in, and during the third quarter we did not see those types of orders coming in.

We refer to those as surprise orders that came in that we didn't seem months in advance.

Then the last area is we have the minor parts shortage that we talked about in our prior release.

So the fourth quarter, we have a large -- some of the risks we look at in the fourth quarter that I have not talked about already, getting to more specifics, we have a large transaction, for example, that we're projecting in the fourth quarter that's contingent on getting permits obtained to install the equipment.

That's a political process, and sometimes that can drag out.

We are counting this in our numbers since we believe the permits will be issued.

We don't expect parts shortages.

And finally, it's hard to predict the exact timing of those five orders I mentioned previously.

In addition, I have not talked about the dynamics of our pipeline on the sports market, but you can imagine that that has volatility in it too due to large project.

So hopefully this background helps explain how we missed our estimates on a short-term basis and how we're still optimistic for the long-term.

Now, with that I will move into the quarter's performance and specific numbers.

In terms of sales, our commercial market continued to lead the way for both the quarter and year-to-date, with the growth rate in net sales for the quarter in excess of 30 percent.

On a year-to-date basis, net sales in this portion of our business are up over 50 percent.

This growth was in spite of a decline quarter-over-quarter in sales to national accounts, although orders were up.

And the decline in national account business quarter-to-quarter is more due to the timing of orders more than anything else.

On the order side of the commercial market, our business is up over 30 percent year-to-date and 20 percent for the quarter.

The smaller rate of growth for the quarter again was due to order delays.

In terms of the sports market, sales were up slightly for the quarter over last year.

As I mentioned earlier, we booked those two large orders last year in the third quarter totaling over 12 million, which contributed over 5 million in revenue for that quarter.

From a sales and order perspective, we offset those two large orders with strong performances in the mid-sized sports facilities business, and a continued growth of the smaller sports facilities, and a number of smaller orders in professional facilities.

Domestically, sports orders are up just under 15 percent year-to-date.

The lack of more significant growth continues to be on the international front.

During last quarter's call we stated the current backlog combined with our pipeline could cause us to believe we could offset the two large contracts that I mentioned increased net sales and the sports market for the quarter, which we did accomplish in spite of the delays.

Finally, in our transportation market we had a good quarter for net sales compared to last year, attributable to the strong order bookings in previous quarters.

Orders were down for the same quarter a year ago, primarily in the aviation segment, and year-to-date are still up double-digit percentages.

In short, there was a slight decline in backlog as sales outpaced orders in the transportation market.

As a side note, there have not been any significant movements on The Transportation Bill since the last quarter.

On the mix of standard orders to custom products, our standard orders were approximately 35 percent of net sales for the quarter.

Finally, on the international front, orders gain did outpace sales for the quarter, but year-to-date they remained down slightly.

Moving onto gross profit margin at 30.2 percent, down from the 33 percent level one year ago, the year-to-date gross profit margin is at 32.8 percent compared to 35 percent the first three quarters last year.

At the beginning of this recent quarter we estimated margin to be in the 32 percent, knowing the actual range can vary from that.

The key factors causing this level being lower than original expectation included, first, the lower margins on orders booked during the quarter, which we attribute to more competitiveness on certain transactions in limited niches; two, the lack of benefits of decline in raw materials pricing; three, the effects of lower absorption of fixed and direct costs as a result of the lower sales.

Just as a side note, in the third quarter we get hit by the effects of holidays in manufacturing compounded with that historically being our lowest quarter, so fixed cost absorption is an issue for us.

And then four, higher freight costs and costs to expedite raw materials on some quick turn projects.

For the next quarter we are expecting margins to be above this quarter's level at approximately 31 percent, but keep in mind our variability.

Moving on to operating expenses at 13.2 million, or 26 percent of sales, this compares to 11.2 million, or 25 percent of sales last year.

Year-to-date selling expense of 22.9, or 13.6 percent of sales, compares to 19.7, or 13 percent of net sales, last year.

The increase in spending in the quarter was primarily due to higher personnel costs and related infrastructure, including some opportune hiring we did in the digital signage marketplace, hiring some staff that could bring some unique backgrounds to help propel us in this area; the added costs due to the acquisitions that we made during the quarter; greater travel and entertainment costs due to increased sales level; and higher depreciation costs related to new products we've been rolling out; and the investment and international business.

The two factors which caused selling expense to exceed what we thought they would have been going into the quarter were the effects of the acquisitions and the opportunities to add staff, and some new markets we're investing in.

G&A costs were at 2.5 million, or 4.8 percent of net sales, compared to 5.6 percent of net sales last year and the same dollar amount.

Year-to-date we're at 7.3 million, or 4.3 percent of net sales, compared to 6.9 and 4.5 percent of net sales.

Although we reduced G&A the prior two quarters, gaining some leverage, we grew G&A during this most recent quarter from Q2, for the most part due to higher costs and personnel and related investments we're making in our IT infrastructure, higher training costs as our personnel department invested in more training than in prior periods, and then finally, the effects of higher audit costs and professional fees associated with Sarbanes-Oxley 404 compliance.

As a side note, during the last quarter we invested significantly in Sarbanes-Oxley documentation which distracted us from other initiatives.

However, we're far along in the process.

We believe that the implementation is a significant cost to the Company.

We hope to hold G&A costs flat to down for the next quarter, not taking into account related professional fees in connection with our analysis of research and development tax credits, which I will discuss a little bit later.

Our product development investment for the quarter was 2.5 million, or 5 percent of net sales, compared to 1.9 million, or 4.2 percent of sales last year.

Jim will make further comments on that after I finish.

The results of the above was a 4.3 percent operating margin for the quarter as compared to 7.9 percent one year ago.

The biggest overall contributor causing the decline was a decline in gross profit percentage.

On the operating expenses side, had sales been in the middle of the range, operating expenses would have been approximate 23.5 percent, demonstrating leverage over the prior year and partially offsetting the gross profit percentage decline.

On non-operating items, as most of you know, interest expense is obviously declining, interest income is becoming more important due to the investments in long-term receivables and cash investments.

And in the comparison of other income (indiscernible) decrease due to a write-down of an investment we made a few years ago in another display business.

We also recognized a small loss on the sale of some long-term receivables on a non-recourse basis.

In addition, on the year-to-date business in other income net, of first quarter of fiscal year '04 we had a large gain on an equipment sale in our video rental business, which we did not have in the current year.

On our effective tax rate for the quarter, we actually realized a benefit due to R&D, which had the effect of making the year-to-date effective tax rate 32.4 percent, down from 38.6 percent last year.

As we announced, we recognize research and development tax credits related to fiscal '01 and the current year, and we're continuing examination of fiscal years 2002 to 2004.

The short story on R&D tax credits is that it's a credit for incremental expenditures over a base year computation.

However, to qualify as R&D expenses, our expenditures for R&D must relate to a new, improved product intended to improve a function and performance, fundamentally relying on principles of science and engineering, must be intended to discover information to eliminate uncertainty, and it must get into a process of experimentation.

Based on those factors, we've changed our prior year's position on this topic, bringing into play projects we have done, like the recent Coke display whereby a portion of the engineering costs incurred on that project, we believe, qualified for the credit based on that criteria.

Our guidance for the fourth quarter includes an estimated benefit of approximately 5 cents per share for the remaining years under review.

Offsetting this benefit, and included in G&A next quarter, could be professional fees associated with his work, which could be 20 to 25 percent of the benefit we estimate will prevail IRS scrutiny.

Cash provided by operations was approximately 19.4 million year-to-date compared to 12.1 last fiscal year.

Year-to-date we've done a number of things which have affected cash flow as a whole.

At the end of the third quarter we sold more than $3 million of long-term receivables on a non-recourse basis, and we anticipate selling off more in the fourth quarter.

We have managed to decrease receivables over the beginning of the fiscal year.

Our capital expenditures have been held at reasonable levels, taking in (indiscernible) expansion.

And we invested slightly over $1 million in two businesses that Jim will mention briefly later.

On a forward-looking perspective, we're currently examining investment in additional plant facilities, which over the next year could reach 4 million in spending.

Knowing the effects of this, we think we can continue to keep the rate of growth for non-facilities capital expenditures growing at a rate less than sales.

We also think in the short-term we can reduce inventory levels.

But as we stated earlier, that's dependent on order flow.

We continue to process the selling off our SportsLink rental business, which includes equipment classified as current assets held for sale on the balance sheet.

We have received a number of offers and are in the process of evaluating them.

Upon closing a sale, we expect to show a gain, which could occur in the fourth quarter.

Our estimates now do not reflect any benefit for this.

Finally, in the fourth quarter we are expecting 58 to 66 million on the top line, 20 to 30 cents on the bottom line, which slightly changed our annual guidance, which is now at 227 to 235 million.

Obviously, as I mentioned, these factors can vary due to the timing of order bookings.

With that, I will turn it back over to Jim.

Thanks, Bill, for that thorough review.

I would just like to make a few comments here.

Bill has done a very detailed overview of our miss in the numbers for the quarter.

Just a couple of comments.

Regarding revenue, as he had mentioned, some of the orders we had anticipated for baseball in particular, which we now have booked, we expected to have them come in earlier in the third quarter and would have allowed us to do some work on them and realize some revenue.

And we did in fact have soft commitments from these customers, but just were not able to firm up those contracts, and consequently not able to show sales for them in the quarter.

Likewise, there was some significant commercial business that we were expecting to firm up in the middle of the quarter, and that just started firming up at the end of the quarter, and we just really got a triple out of that in the quarter.

The point I'd like to make on this is for the most part these orders that we had estimated in for the third quarter are coming our way.

We did not lose this business; it just came in late.

So I think that's the good news part of that.

On the margin, as Bill went through quite thoroughly, to analyze the margin is certainly a bit more complex because our margin is an aggregate of all the business that we do, which spans from very small orders of less than $10,000 to multi-million dollar orders.

And in some cases those orders have some contracting mixed in part of them, and that also affects the margin.

So the volatility in our margin tends to be more on the large contract side of the business than the standard orders side.

We have discussed previously that larger contracts are typically susceptible to greater margin pressure.

Just a little historical perspective on what drives margins here might be helpful.

Those of you who have been following us for a number of years have heard us talk about the fact that the pricing for product even going back six to eight years has been continually declining in line with the corresponding reduction in our cost, which has allowed us to maintain and even improve our margins over the long term.

Last year we saw a lag in the price decline compared to the cost decline, which gave us an unusually large increase in the aggregate margin.

At that time we predicted that competitive pressures would catch up and that margins were expected to go down somewhat from there.

The aggregate margin is a function of these factors, plus the actual mix of orders that fall in any one quarter.

And these factors combine to give us this lower aggregate margin, again as Bill articulated.

So we are projecting a little lower aggregate gross margin for the next quarter as well.

But, as always, there is an inherent degree of variability in these forward-looking margin projections.

In terms of the outlook, the commercial market continues to be our star performer in terms of growth, both for the quarter and year-to-date.

Bill gave some numbers on that. (indiscernible) gives us a nice steady order flow of standard orders in addition to a mix of large contract business as well.

And we continue to see an increasing interest in the use of electronic signage as an advertising medium across a wide range of applications.

And as we have discussed before, any business that locates on a high-traffic street and values being on a high-traffic street as important to their business is a candidate for using electronic signage as an advertising media and as an alternative to television, radio or newspaper.

The demand for electronic displays continues to increase also as 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 displays as well.

Our trade name there that we're promoting is the Galaxy display.

That's the trade name for our LED display products that are designed especially for use in the retail outdoor market.

They are a smaller, simpler to use, lower-cost product that typically is compared to our larger screen ProStar video displays.

And of course color have a lot of appeal, and we're seeing an increased percentage of the business in our Galaxy line being color, although we do still sell a lot of the monochrome displays.

They're still very popular due to their lower costs.

We introduced this quarter a new combination display that includes a color section and a monochrome in the same unit.

And the color section allows the display of logos with the monochrome section then being used for text to convey a message in conjunction with that logo, a product logo.

Our pipeline for orders for the commercial market now is strong, and actual (indiscernible) continues to do well with current order bookings and the pipeline both looking strong.

And we expect commercial to be a very strong contributor for the remainder of our fiscal year and beyond.

Bill gave some numbers on the sports side of things.

I will just comment our pipeline for orders in the large sport venue is strong.

We have booked some nice orders already this quarter.

We remain optimistic about order bookings for the fourth quarter.

In third quarter we announced we booked a number of large orders, including the Rogers Centre, which is formerly the Skydome in Toronto.

That's actually the biggest project going through on the floor right now in the plant;

Dodger Stadium in Los Angeles and Coors Field in Denver, and also a number of minor league and spring training facilities.

So overall our business for the baseball season, we're very pleased with how it went.

The transportation market is only about 10 percent of our business, but we certainly see opportunity for growth there, although, as Bill mentioned, it's up only slightly year-to-date this year.

The largest niche within the transportation market is the intelligent transportation system area, which uses the industry acronym ITS.

Our strategy for growth in the ITS area is to continue to expand the standardization and the breadth of our product line for both the Vanguard displays and the control systems, and continue to work to get these specified and approved in mort DOT jurisdictions by working with the engineering staff and their consultants with those DOTs.

And we are seeing success there.

We're getting approved in jurisdictions and we're being sole-sourced in some.

And in some cases we're getting multi-year procurement contracts.

So there's nice business they're that we see we can build on.

In the transportation market we have booked a number of larger orders this past quarter, including orders with Florida, New Jersey and North Carolina Departments of Transportation, and also a number of airport transactions for new and repeat customers.

Regarding selling expenses, Bill mentioned that selling expenses are up, and I'd like to comment just a bit on that.

We are being quite aggressive in expanding our geographical presence.

We announced two small acquisitions, one a sales and service company in the UK actually located in Bristol, England, and another having expertise in sound systems, especially for sports facilities.

Both of these impacted our selling expenses somewhat the past quarter, but we feel they're both a nice base to build on.

Certainly we've been selling in the UK for a number of years, and delivered service through various entities that we work with over there.

But having our own presence there we feel is important for us to build the business.

On the sound systems side, we've actually been working with Dodge Electronics, the company we purchased, for a number of years as -- they been working with us as a subcontractor.

So we're actually very familiar with incorporating these sound systems into our overall offering, and we felt that by a tighter relationship there, i.e. bringing them on board, we can actually leverage that more and find and develop more opportunities.

Also one of our strategies is increase our effort in selling maintenance contracts using the network of offices that we have, and we're making progress on that regard.

But this again entails increasing to some degree of staffing in our office as well.

Regarding product development, certainly product development continues to be a very key part of our strategy and our capability here at Daktronics.

We invested about 5 percent in product development this past quarter, which is about a percent higher than our typical 4 percent that we tend to run at.

The new ProTour modular video display system is one of the main areas that we're really focusing hard on there and has tended to push that up a bit, the spending up a bit.

This is a product that really gets us into a whole area of video displays; that is the truly portable displays.

These are displays that they use like with music concerts, traveling road shows in effect, whereas our other typical ProStar design in the past has been for one time permanent installation and was optimized for that purpose.

So this really is a whole new design, and so it is a rather significant investment.

But we see a good opportunity there.

The other area of investment in new area is the area of digital signage.

There our investment is in both LCD display technology, as well as the controllers to control this network of various types of the display technology that would be incorporated in a network.

Digital signage refers to a system which would include a number of different types of display technologies, typically in a network, and often incorporating some advertising revenue as part of the business model.

So that is a new area for us.

We brought on some people with some expertise in that area.

And that's in the short-term impacting our selling expense on a percent basis, but we see long-term opportunity there.

One of our challenges for growth is to continue to expand our manufacturing capacity, and this is accomplished really with a combination of reducing the time required to build our products, automation, strategic outsourcing, and adding to plant space and personnel.

We are just completing a rather small addition to our plant that will primarily serve our commercial product manufacturing, but allow additional space for other functions as well.

We anticipate needing to add another more significant addition starting construction this summer.

As we're working to get our plant expanded, we continue to work to refine our selling (ph) process and to streamline them to allow us to take advantage of the market opportunities.

So again, overall, looking forward we feel that Daktronics is the key differentiator.

We're strong in many areas.

We feel the market is out there.

As Bill mentioned, we're developing more of a standard order flow.

That's a key area of strategic area for us, and we're pleased with how that's been going.

With that, I will turn it back to the operator and we will open it up for questions and address what's on your mind.

(OPERATOR INSTRUCTIONS) Michael Friedman, Sidoti & Co.

You touched upon the gross profit margin issue, and I think yew did a pretty good job.

I'm trying to narrow it down.

Is there a particular reason why you're predicting the gross profit margin is going to narrow in fourth quarter fiscal '05?

Is it due to the sales mix primarily or are there other big pieces to the puzzle there?

Your question is why we're saying 31 versus 32?

Right.

I think there's a number of factors playing into that.

I don't want to go into specific transactions, but one of the factors driving it is what we see for some orders coming in and what we expect the margins to be on some orders coming in.

That's probably the main factor in how we see our mix right now.

Is that a mix issue or is it some of the big orders are coming in, or is it a pricing issue?

I think it's more in line with some specific orders.

It is not a general across-the-board issue.

Is that what you're asking?

Yes.

Do you think that you would be able to smooth out the gross profit margin and maybe get back to the 32 percent range?

Is that an internal goal?

Oh, yes.

Absolutely.

Let me just comment on that.

This is an ongoing thing, as I mentioned.

Over the years our price of our product has continued to come down, and certainly we have to remain competitive, have to be able to find ways to take costs out of our product.

We also have to do a good job of presenting the value add that Daktronics has, and that is on the sales side, and to have customers acknowledge that what we do bring to the table in terms of our service and that sort of thing.

But absolutely, our goal is to continue to work to take costs out, Michael, and to work to increase the gross margin.

If I could just add to that too, for the last two years we've been talking about margins coming down.

At the same time we've been talking about we do have a demonstrated history of slowly growing gross margins.

We do have a strategy to do that.

Our commercial market activities is certainly helping expand it overall.

So we do have strategies to grow that for the long-term.

As far as the industry itself, there's been some reports out on the industry that seem to indicate organic growth in the domestic market in mid-teen range.

And your guidance for this year, even on the higher level, seems that it's a little below that, and so it doesn't seem as though you're keeping pace with the overall market.

Is that report maybe not accurate?

Or can you give us some more color on that issue?

Trying to estimate what the overall market growth is, that's something we're not really claiming that we have a precise handle on.

There's certain reports on there.

If you look at the various aspects of our business, certainly we know that the new construction of professional stadiums, that's probably not a growth area.

There's sort of a steady stream out there, but to say that's a growth area probably is not accurate.

We do see growth opportunities in some of the smaller sports facilities.

Certainly we see a lot of potential growth in the commercial market that would exceed that number.

So again, it's a mix of things, and it's hard to pin down an exact number and say this is the overall magic number for the industry that we're in.

But we see some areas that exceed that number and we see other areas that probably are less than that number.

When you say different areas, is that the industry in general, those segments that you play in?

Or do you think you perhaps maybe lost out to some competitors or something along those lines as far as sales?

In terms of the growth of the industry I guess overall, you know, for example in the commercial market, that's been up in the 20 percent plus -- or actually 30 percent plus range for us this year.

So that's an area that we see very good growth in, and some of the areas have been a little more flat for us is your.

You asked about -- maybe I'll let Jim answer this, but I think you were asking how -- do you think we're losing market share.

Is that --?

Yes.

No, I don't think we're losing market share at all.

One thing, in the large sport venue we have a very, I would say a dominant market share in the US.

So certainly it's not easy for us at the level we're at to gain a lot of market share because of the large market share position we have.

That's probably a true statement.

But we certainly are well-positioned to maintain the market share we have there.

In the commercial market, I think we're certainly maintaining our share there at least.

Again, it's very difficult to get quantified numbers of that.

About all we can really do is see what our growth is there.

And we're pleased with the growth we have in the commercial market.

And one of the things we're doing in terms of -- we mentioned the selling expenses.

We're putting more feet on the street out there because we feel that's key to capitalize on the opportunities we have in the commercial markets that are out there.

Great.

Thank you so much.

Jim Ricchiuti, Needham & Company.

(technical difficulty)

Are you on a cell phone?

Yes I am.

I hope that you can hear me.

I apologize guys.

I wonder if you could comment on the international market.

I know you've made some investments in this market over the past year.

Jim, how satisfied are you with the progress you've made in that market?

It sounds like it's been a little slower to develop.

Our volume in the market, again, has been primarily going working up the bigger projects, because we don't have the sales network like they do domestically.

So (technical difficulty) your cell phone is really noisy there.

I apologize.

Is this any better?

I'm sorry.

Maybe if you could give us a question maybe and then (multiple speakers)

That's fine.

That's a good idea, Bill.

And then I'll jump.

The question I had is if you could comment on within the sports market, in the education market, how would you characterize what you're seeing in that business, if you would, in the quarter and just in general in the outlook.

You have kind of laid out what I think is a pretty good outlook for this professional sports market.

Thanks again.

I think the question was the sports market and the education.

Do you want me to give some (multiple speakers) in terms of -- it's an interesting dynamic for us, and it has been over the years, where we combine colleges and universities and the professional facilities into what we call large sports venues.

And the reason we're tending to look at those together is because of the volatility and one versus the other.

We are doing extremely well in the college and university market, both for the quarter and year-to-date.

And we're keeping pace in the major league sports market.

So the college and university market continues this year to be a real bright and shining star for us, no question about that.

We can take the next question, Operator.

John Ross (ph), Kansas City Capital.

Just a few follow-up questions with regards to the margins.

You mentioned in the press release some competitive issues, competitive pressures.

Are we seeing that across the product line or is it more isolated to the sports area?

And in the grand scheme of things is it anything that's really unusual and different from what you've seen before?

The competitive pressure on margins tends to be on the large projects, which typically are video display projects.

And those can be -- we sell more of those in the sports market, so it tends to be in the sports market.

But if we're selling large video on the commercial market, we could run into the same type of a competitive situation.

But we certainly are seeing some keen pressure on the big projects, the big video projects.

Is it from new competitors or basically the guys that we know that have been there for a while?

I'd say not any really new competitors in the last couple of quarters or anything like that.

On the large video it tends to be -- Mitsubishi shows up the once a while, Barco is there.

They're probably the most consistent ones, and then others kind of from time to time.

The other question is as you remarked in your commentary, and as we have seen this year, obviously the commercial side of the business is growing more rapidly than the sports and transportation side; 30 percent I think you were saying.

If that would continue, sort of that type of number would continue into the future for let's say two or three years, how would -- after that two or three year period, how might your margins look relative to where they are today?

Can you give us a sense of how all that would fall out?

That more rapid growth in the commercial area, would it sort of impact your margins, the gross margins, the operating margins and so on, versus where you are today?

You're going to ask me to do some quick math that I don't think I can get done as quick as I probably should be able to.

But what I would say is the margin would expand.

To the extent in this commercial market continues to outpace our gross profit margin it should increase.

Are you seeing any -- given the more rapid growth in this segment, are you seeing any new competitors; anything unusual in the competitive dynamics of that sector?

In commercial?

In the commercial, yes.

There's always -- you keep running into some new players from time to time.

I think the main players, nothing has changed, I would say, at the main competitors as of late.

And then one final question.

Should there be a Highway Bill that is passed sometime over the next 90 days or 180 days or whatever, is there going to be -- could there be a release of funding that might propel your transportation segment more rapidly than it has been growing over the near-term?

A couple comments to that.

First of all, I'm not aware of at this point where a projects for displays have been held up or put off because of the funding bill situation.

I think for one thing there's quite a long gestation period.

When these funds are made available they have to get approved for projects.

There is design phases on the projects.

So there is kind of a long lead-time for the time funds are made available out there and they finally would end up getting spent.

So certainly long-term it would be a positive thing to have an a higher level of spending bill for business.

But we haven't seen at this point that it's really been an impediment, per se.

Thank you.

(OPERATOR INSTRUCTIONS) Scott Marlin (ph), CSFB.

I wanted to touch on expenses briefly; talk about the sales and marketing line.

Do you anticipate the sales and marketing expenses to be up in absolute terms in the fourth quarter?

Slightly, yes.

So you have added some headcount and some other recurring expenses.

Is that a level we should take forward as we go into fiscal '06?

Just an off-line question here for Bill on this.

Yes, one of the things that -- we hope to leverage that.

Maybe I don't know if I want to answer your question directly.

But we did take the big spike up in the quarter.

If you look at the previous quarter we were at 7.3 million, and then we're at 8.2 million.

I don't think it will take a big jump up, not like that; but a slight increase.

We made a lot of investments in this last quarter, and we've got to work on those, focus on those.

So I don't think we will see the big investments that we made in this quarter recur in the fourth or the first quarter.

You would then estimate there would be some leverage and we'd see sales and marketing drop as a percent of sales --?

Yes, that I would expect, yes.

(multiple speakers) percent of sales, that would be our objective.

And then on the R&D line, last quarter actually you were expecting this quarter to be somewhere near 4 percent.

It came in at 5.

Looks like for the year it may come in closer to 4.5.

What do you anticipate going forward?

You're making a lot of investments internationally in new product lines.

Could 4.5 to 5 be where we're thinking over the next year or two?

Longer-term at this point I would think it would tend to settle more back towards 4.

We have a couple of things we're pushing through right now that is kind of big project type developments.

But I think we would sort of be guiding it more towards 4 in the future.

But for the next few quarters we could be a little above that.

And then I want to turn to the tax credit.

In the press release that you put out a week ago you mentioned about 0.5 million in tax credit.

It looks like it may have been closer to 1 million in the quarter.

And are you expecting something very similar in dollar value for the fourth quarter?

And then how would you translate those credits into a tax rate for fiscal '06?

Let me clarify.

The 0.5 million was roughly the number related to fiscal '01 where we have filed already an amended return and have claimed that refund.

And then also in the third quarter there was another few hundred thousand based on our changing position that we took for the current fiscal year.

That's how you get near the million.

Now for Q4, we're expecting somewhere around that $1 million level also related to fiscal years '02, 3 and 4.

In terms of how I would push that into the future in terms of our effective rate, roughly we're looking at maybe on an annual basis an increased credit of 4 to 400,000 plus.

So you take our historical effective tax rate and back off those absolute dollars.

So maybe just knocking it a percent or 2 down from --?

That doesn't even acquainted 2 percent.

It's about a percent, is where it is going to shakeout.

SO maybe 37 percent next year as a starting point?

Yes, though the prior fiscal year's is a nonrecurring asset (ph).

One then final question.

LED prices historically have fallen quite a bit.

That has aided gross margins.

Are you seeing a slowdown in that, or is it occurring at the same pace?

Certainly it will tend to slowdown, because as the price for LED gets smaller, there is less room to move.

So I think we will see the rate of that decline.

That rate will in itself decrease.

And I think we're seeing some of that.

Year ago we had the pick up because of the rates of our costs decreases exceeded that of our price declines.

So we're seeing kind of a correction of that, I guess you could say.

So we do see that we're having a slower rate of decline and cost going forward.

Maybe just one quick question.

You mentioned transportation was 10 percent of sales in the quarter.

Can you break out where sports and where commercial fell out?

Commercial is a little over 25 percent and the sports would be the remainder.

Thank you.

Lee Schafer, Fieldstone Research.

I just wanted to follow up on one quick thing.

The opportunistic hire of individuals with experience and capability in digital signage; is this a group that you have hired from a competitor?

That sometimes happens in the technology industry where a group of guys becomes available.

Is that what we're talking about?

Actually, digital signage, I will say it is kind of a new venture for us in the fact there's -- it involve more contented, it involves advertising sales, and putting that business model together is what we're working on.

We've brought some people in that really were -- one guy is from -- one individual is from the sports industry, and some are more from kind of the broadcast/advertising side of the world.

So they worked for competitors that have some, I would say, complementary expertise that we feel was important to bring into the mixture to develop that opportunity.

So these are guys who are familiar with selling, advertising, and they are familiar with content.

I guess I'm not quite hitting what you're trying to do, Jim.

Basically, we're looking at opportunities both in the sports side and the commercial side for digital signage.

And again, this is a network of displays, i.e. LCD-type displays typically.

And the idea there is to have a network of these and sell advertising time on these display systems.

And to make that advertising of value you also need some interesting content along at the same time on these systems.

So that is what we're pursuing and working to develop.

Thanks, Jim.

I get it.

There are no further questions at this time, Sir.

I will turn the call back over to you.

Thank you, Operator.

I will just mention if you had a chance to watch the Super Bowl, Daktronics ProStar displays were showcased there.

We put whole new systems, display systems in for the Jaguars last summer.

That was fun.

I actually had a chance to attend the Super Bowl.

The first time I've done that.

That was interesting to see the spectacle firsthand.

Our next conference call is scheduled for Wednesday, June 1st at 10 AM.

And with that, I will just say thank you for joining us this morning, and have a good day.

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.