Daktronics Inc (DAKT) 2005 Q4 法說會逐字稿

Ladies and gentlemen, welcome to Daktronics fiscal 2005 year-end earnings results conference call.

As a reminder, this conference call is being recorded, Wednesday, June 1, 2005, and will be made available on the Company's Internet site and via the dial in number noted in its press release.

Before we begin, the Company would like to caution investors and participants that in addition to statements of historical factors, this conference call and its quarterly earnings news release contains forward-looking statements reflecting the Company's expectations and beliefs concerning future events, which could materially affect 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, timing and magnitude of future contracts and other risks noted in the Company's SEC filings, 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 obligations to update or revise such statements to reflect these circumstances or unanticipated events as they occur.

During the call, our participants will be in a listen-only mode.

Afterwards, there will be a question-and-answer session.

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

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

Please go ahead, sir.

Thank you, operator.

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

We reported revenues for the quarter within our estimate range and for the year, also, within our latest estimate range, but net income was below our estimates.

Really due primarily to two major factors: the first being the aggregate margin for the quarter being down more than expected; the second being the higher than anticipated operating costs.

We were very pleased that our order bookings for the fourth quarter set a new record.

It was an excellent quarter for orders and that is reflected in record backlog coming into Q1.

We'll give you a little more insight into the factors involved and also discuss our forward-looking outlook today.

I'm going to let Bill Retterath, our CFO, review our numbers first and then I will be back with some additional comments before we open it up for questions.

Thanks, Jim.

Good morning.

Sales for the quarter were up 6.5 % over the same quarter last year at 61.3 million.

For the fiscal year, sales were up approximately 10 % to 230 million.

Net sales were within our previously-announced estimates of 58 to 66 million and now represent the 12th consecutive quarter of growth and net sales quarter-over-quarter.

Earnings per share at $0.15 compares to $0.21 a year ago.

Fiscal year earnings of $0.78 compares to $0.89 one year ago.

Earnings for the quarter were below our estimates of $0.20 to $0.30.

As evidenced by our backlog, we experienced a record quarter for order bookings.

Consistent with recent quarters, our commercial market continued to perform well with sales growth up over 40 % for both the quarter and year-to-date.

This includes growth of over -- of more than 25 % internationally for the quarter.

This growth is across the board in terms of standard orders and custom video projects and was achieved in spite of a delay in order bookings we expected at the national account level.

Our sports market continued to experience growth on a domestic basis for the quarter and year-to-date.

Going into the year, we had expected more growth in the sports market, primarily in our sports marketing business that did not materialize, however, and added pressure to our gross profit margins for the year.

We are, however, going into fiscal year '06 with the same optimism that we went into fiscal year '05, expecting this portion of the sports market to be one of the fastest-growing segments.

In our transportation markets, we ended up the year relatively flat year-over-year.

However, we are beginning to see a trend of increasing sales.

With the $73 million backlog, we accomplished a number of milestones, as mentioned, we set a record backlog in all three of our markets with the commercial market again seeing the greatest percentage increase in backlog.

We set a record for order bookings exceeding our previous record by 20 %.

Our international business turned around what was otherwise going to be a -- what was otherwise going to be a year-over-year decline in orders to a respectable increase in orders.

For the full fiscal year, here are some details about our mix.

Please note that these numbers are approximate.

Sales orders were over 30 % of total sales.

The commercial market now makes up approximately 28 % of total sales with sports at 61 % and transportation at 8 %.

Our services business makes up approximately 6 % of our net sales.

But keep in mind that this percent excludes all the services we provide as an integral part of our equipment contract business and so the services business, as a whole, is much more significant.

International revenues were at levels similar to fiscal '04, which approximated 27 million.

So, therefore as a percent of sales they declined, however, orders were up significantly as I stated.

Moving on to gross profit margins, I will comment on some of the key factors that led to the lower-than-expected gross profit percentage.

During the quarter, we booked contracts at much lower-than-expected gross profit margin.

For the first quarter, we're expecting that the gross profit to be below the current quarter's level of 29 %, slightly below, that is.

It is interesting to note, however, that the margin looks better for the second quarter, but as most of you know, the ultimate margin in that quarter will be based more on orders booked in the first quarter as compared to the fourth quarter of last year, the margin decline is due primarily to the competitive environment.

Operating expenses for the quarter were much higher than we expected, also.

But we expect them to decline in the first quarter of fiscal '06.

For the quarter, 15.9 million or 25.9 % of sales as compared to 12.2 million and 21.1 % of sales in the fourth quarter of last year.

Selling expenses were 9.9 million or 16.1 % of sales as compared to 7.6 or 13.1 % of net sales a year ago.

Year-to-date selling expenses were 14.2 % compared to 13 % for last fiscal year.

Selling expenses increased -- experienced the most significant increase during the quarter and were higher than anticipated heading into the quarter.

There were a number of reasons for this increase.

We invested more than expected in opportunities in China.

We have established a sales and service office in Macau to support the casino business there.

And then China are in the process of establishing a sales service and limited manufacturing operation.

This presence has already resulted in the booking of our first order there.

We spent much more on marketing and conventions than anticipated, which included a rather significant event connected with the Super Bowl in February of this year that hit the fourth quarter numbers.

We also incurred significantly higher travel and other entertainment costs which we attribute, partially, to the competitive environment as sales are requiring more sales contacts to complete, but also keep in mind that travel expenses are based more on order bookings, which were up significantly for the quarter and are more variable.

Our bad debt expense also rose during the quarter, which we do not see as a trend, but during the quarter, we put a lot of effort into receivables, as evidence by our balance sheet, and it did result in a number of write-offs during the quarter that we think will not continue on.

Finally, in looking at sales expense, one should also -- one should focus also to some degree on the order bookings, as selling expenses.

One area of operating costs that experienced the greatest mix of variable costs.

As a percent of order booking, the percentage was approximately 12.5 %.

But keep in mind also that our payroll costs are less variable in general.

In looking at selling costs for the first quarter, we have already taken steps to better control these costs and -- including terminating initiatives where we're not seeing potential for higher returns.

And selling expenses, we will continue to invest in the expansion in China at a modest pace and we should see higher costs related to that in fiscal '06.

We'll continue to invest in the digital signage and narrow casting opportunities and narrowly defined niches.

We will continue to invest in sports marketing, which, as I said previously, did not live up to expectations for the year.

We will continue to build our services business and other domestic and international offices.

Moving on to general and administrative expenses, which were 3.9 -- 3-point -- excuse me, 3.1 million or 5.1 % of sales for the quarter, as compared to 2.7 million and 4.6 % of sales for the fourth quarter of last year.

The increase year-over-year and from the third quarter is primarily the result of one-time professional fees associated with our R&D, that's research and development, tax benefits, which I will discuss a little bit later.

This amounted to over $400,000 and is not expected to reoccur.

In addition, G&A costs did increase slightly over the costs one year ago due to higher payroll costs to support the growth of the Company, SOX compliance, and higher training costs as the Company grew as a whole.

These higher costs were offset by other, lower professional fees and reduced spending in the fourth quarter as initiatives were put on hold while we focused on SOX 404 compliance.

We expect that G&A will be down significantly in the first quarter of fiscal year '06 but higher than the first quarter of fiscal '05.

Our product development investment for the quarter of 2.9 million was 4.7 % of sales compared to 3.4 % last year.

For fiscal year '05, that's 4.6 % of sales which is higher than our targeted range of 4-point -- of 4 %.

Jim will talk about -- give some additional comments on some initiatives during the quarter later in the call, but we -- but we clearly the increased results from the same factors from last quarter, the third quarter, which was our ProTour product development, which should start to trend down in the first and second quarter of fiscal '06.

The results of the above was a 4.4 % operating margin as compared to 10.7 % a year ago.

Year-to-date operating margin was 8.4 %, compared to 13.1 % for fiscal '04.

On nonoperating items, the only significant factor to point out in other income relates to recognition of earnings related to our investment in Malaysia, which seems to be generating more positive results.

The effective income tax rate for the quarter was a benefit of 11 %, this benefit results from the realization of research and development, tax benefits from fiscal years '02 to '04.

If you remember, fiscal year '01's benefit was recognized in the third quarter.

The total benefit realized for the fiscal year was in excess of 2 million.

On a forward-looking basis, we expect that our effective tax rate will be between 37 and 38 %, which can vary depending on the level of our international business and the mix of our state income taxes based on where our larger projects are based in the country.

Cash provided by operations was approximately 3 million for the quarter and for the year, approximately 22.4 million.

This compares to 8.8 million and 20.9 million for the fourth quarter and last fiscal year.

Our investments in capital assets during the quarter was approximately 5.2 million, that included the previously-announced purchase of our studios in Tampa, Florida.

The completion of our plant addition in Brookings, and tooling and other equipment from our ProTour product line.

In May, we also broke ground for a new $5.5 million plant expansion in Brookings, which Jim will mention later.

Finally, as announced in our press release, we completed, in May, so in fiscal year '06, the sale of our sports link business to Impact Video, one of the nation's leading LED video display rental companies.

In connection with this sale, we recognized -- we will realize a gain of between 1.5 and $2 million for the first quarter.

Jim will be talking more about our initiatives in this mobile and modular business later.

As we mentioned previously, we're expected revenues for the first quarter to be in the 64 to $72 million range and our earnings to be in the $0.22 to $0.32 per share range.

Our annual revenue guidance is expected to show sales growing at more than 15 %.

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

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

Thanks, Bill.

I'd like to first talk a little bit about our gross profit margins.

The in fact our overall margin was down a few points was a significant factor on our quarter and the year-end results.

As kind of an overview, our aggregate margin as a result of the mix, of course, of all of our business that we do, which spans from very small orders of less than $10,000 to multimillion dollar contracts, and in some cases, the contracts include significant amounts of subcontracting, so, the volatility in our margins tends to be more on the large contract side of the business more than the standard order side.

We discussed previously that larger contracts are typically susceptible to greater margin pressure, and we're seeing that price competition on larger products has been more keen in recent months.

These factors combine to give us a lower aggregate margin this quarter.

As Bill indicated, we are projecting a little lower aggregate gross margin for the next quarter, as well, based on the estimated margins in our backlog, but, of course, there's always some uncertainty in those forward-looking estimates.

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

And that has allowed us to maintain -- we've been able to reduce our costs so as to maintain our margins, despite those price declines.

And it is -- in terms of a year-to-year comparison, it is important to note that last year we saw -- last fiscal year we saw cost declines faster than our price declines that was in FY04, which gave us an increase in aggregate margin and those of you who were following us last year, we predicted at that time that we wouldn't be able to maintain the -- the exceptional margins we were able to experience in FY04.

I would say that the margin pressure is a little more keen than we had anticipated at that time.

I can tell you that we are committed to continue with profitable growth.

Our product development areas continue to work to take costs out of our manufacture -- manufactured product, even as we add features and add capability to the product.

We also continue to differentiate ourselves in the marketplace through our exceptional array of services we offer, including the service we can deliver through our 40 offices located around the country.

The commercial market, again, was really the -- the -- kind of the shining star for us, for both the quarter and for the year, where sales and orders for the year up about 40 %.

And just to kind of, again, shed some insight into what makes up our commercial market, there are several components to our business there.

The first is sales through sign companies of our standard line of Galaxy LED display.

This gives us a nice, steady order flow of standard product.

Second aspect is our national accounts business, which is one of our strategic growth areas.

The primary product here also is our Galaxy display line, both monochrome and color displays.

And we continue to increase our national account business and it certainly is one of our strategic growth areas.

National accounts includes quick service restaurants, pharmacies and convenience stores among other businesses.

We continue to see increased interest in the use of electronic signage overall and this driving the sales of our Galaxy product line.

We see that businesses that are located high-traffic streets and that feel being on the high-traffic street is important to their business, they are all candidates for the use of electronic displays as an alternative to other advertising mediums.

Mediums such as the 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 we offer cost effective monochrome displays and cost-effective color Galaxy displays, as well.

Might note, Galaxy is the trade name for our LED display products that are designed especially for use in the retail outdoor market.

They're a smaller, simpler to use, lower-cost product as compared to the large-screen ProStar video displays.

Of course, color has a lot of appeal and we're seeing an increased percentage of the business in our Galaxy line being color.

We do, though, still sell a lot of the monochrome displays, they're very popular due to their lower cost.

The third aspect of our commercial business is the application of our ProStar video display technology to advertising and spectacular, such as in Times Square.

It also includes sales to financial institutions such as the Kuwait Stock Exchange, which we recently announced and which we're currently working on.

And also the gaming market, including paramutual horse racing.

We recently announced the installation of seven ProStar video billboards for Clear Channel in Cleveland.

This was a positive indication of the potential for the use of this technology in the outdoor billboard market.

Just one caveat there, we do caution people not to expect an explosion of electronic billboards.

We have said this before, as there are limiting factors, including restrictive sign ordinances in some localities and the significant capital investment for the technology as compared to traditional billboards.

We also announced the sale of our sports link division to Impact Video recently.

That just completed about a week ago.

That will be reflected in Q1 numbers and this is in conjunction with our introduction of our ProTour modular video display family and our plan to serve the rental and events market through our new mobile and modular divisions.

This division will offer mobile units mounted on trucks as well as modular product, that is relatively, easily and quickly assembled and disassembled for touring shows or temporary events.

This is a market niche that, until now, we have not really participated in.

Our product prior to this was designed primarily for -- to -- to be optimized for permanent installations and so this new product and this positioning allows to us participate in another aspect of the video display market.

We're very excited about this new area of our business, and we're pleased with the interest we are seeing in the marketplace and the products and services we are offering.

We did experience a delay in the introduction of our ProTour product for this market, and this delay affected our cost in a couple of ways in the fourth quarter.

First of all, we incurred additional product development expenses as we headed to sort of do somewhat of an extra tweaking on the design to fine-tune it to what we felt was needed for the marketplace.

And secondly, several large projects that we had booked were adversely affected where the availability of a final ProTour product would have saved us cost.

So, those are nonrecurring costs that we did take in the fourth quarter that we won't see in the future.

On the sports side, our high school business was the stronger of our sports markets in terms of percent growth this year with both orders and sales exceeding 15 %.

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 in our sports products area.

Like the commercial market, the high school market provides a nice, steady order flow of nominal-size orders with the number of large ProStar orders complementing this smaller order business.

Our large sports venue business was essentially flat this year, one of the areas that did not perform up to our expectations this past year was our sports marketing division, that assists clients with their marketing and sponsorship programs to raise revenues to purchase state-of-the-art display systems.

While we had a number of outstanding projects were this group performed very well, the overall performance for FY -- for the past fiscal year was not up to our expectations.

The challenges with DSM, as -- the acronym we use for Daktronics Sports Marketing, including a long sales cycle.

It's very sales-labor intensive and it's a more complex business deal.

So, we are in the process of some restructuring of this division and that in line with the solid pipeline of opportunities cause us to be optimistic about this group's performance for FY '06.

The transportation business, as we've previously discussed, is only about 10 % of our business, though we see opportunity for growth there.

Although it is up only slightly for the year.

Owners in the aviation portion of the transportation market were down for us this past year and that offset gains we saw in the order bookings for the ITS portion, ITS stands for Intelligent Transportation Systems, an industry acronym.

Our strategy for growth in ITS is primarily to continue to expand the standardization and the breadth of our product line for our Vanguard displays and control systems and also continued to get specified and approved in more Department of Transportation jurisdictions.

The process there is to work with the engineering staff at the D.O.T.s and also with the consultants that work on behalf of the D.O.T.s.

And we had a good success in getting approved in more jurisdictions this past year and continue to work in that direction.

We see good opportunities for repeat business in this market.

That's one nice feature of the business, as we once were in the state and we served them well, we're in a jurisdiction, there is opportunities for repeat business.

It does appear that the highway funding bill, which has been discussed a lot lately, is finally getting closed to being passed by Congress.

The bill, as it currently stands, would increase the overall highway funding on the order of 30 to 35 % and it is out of this overall budget that a lot of the funding for the roadway displays comes as part of the ITS program.

So, that's a positive factor for the longer term outlook on the market.

Product development continues to be a very important part of our strategy of Daktronics as we invest to improve existing products and bring new products to the marketplace.

We have ongoing product development efforts with each of our product families in the four major product families are sports products, video products, commercial products, or our Galaxy line, and our transportation products, which we refer to as our Vanguard line.

As Bill mentioned, we invested slightly above our target of 4 % in product development this past year, with the increase due primarily to the emphasis on a number of products, including the ProTour modular video display systems which we are just now starting to book orders on.

However, there will be further investment in the ProTour as we develop additional models.

Again, this product is -- is our fundamental product to -- for our mobile to modular division, as I mentioned earlier.

The area of digital signage networks is another area we are continuing to invest development in.

These networks can include a number of different types of display technology, such as plasma displays, LCD displays, LED displays and really any other video type of technology tied into a network.

Typically they incorporate some advertising as part of their function.

We've invested on enhancements in our V-Net controller, which is designed to support these digital signage systems.

At the moment, this is a developing market for us, and again, we're seeing some good interest there, but we've invested in that and getting that off and running on the sales side.

Regarding selling expenses, as Bill commented on this, just to recap the fact that we have a number of new initiatives that are included in sell expenses at the moment, including international expansion, integrating new acquisitions and marketing development initiatives with the digital signage networks.

And of course, this is in addition to our normal sales and service expansion domestically.

I'd like to just respond a little on the new initiatives, we made two relatively small acquisitions in the third quarter, the first was a U.K. sales and service company, which, in the short-term, of course, is -- is additional cost, but we are pleased with how we've been able to get things integrated and off and running there.

They have, in the past, been involved especially in the aquatics timing, the swim timing and crickets scoreboards and continue to results interest in those areas as we evolve them into a Daktronics sales and service headquarters for the U.K.

The second acquisition was a sound systems provider, which we are integrating into a newly-formed sports sound division, we have had very minimal sales to date, which was expected.

While we have incurred expenses involving integration and product development, we are anticipating sales through the summer that will get this operation running in the black.

We also are investing in the development in the market in Asia.

As Bill mentioned, we opened an office in Macau and we're in the process of developing a presence in Mainland, China.

So, we're taking a relatively conservative approach in both cases, but the cumulative effect of all of these development initiatives adds to our selling expenses.

In addition, our travel and entertainment expenses were up for fourth quarter but as Bill mentioned, it's important keep this in perspective with our order bookings for the quarter, which were a record order bookings.

And they are not particularly out of line with that rate of orders.

Nonetheless, we are scrutinizing our selling expenses very carefully and based on the fact we had one-time costs in it the fourth quarter and with the increased scrutiny, we expect selling expenses to be down in it the first quarter.

Also just to comment, we did announce our first ever dividend.

This is a dividend that will cost us about $2 million, approximately, and the decision to do this took into account the fact that we are growing our cash flow and that we have adequate cash flow to fund our growth for the foreseeable future.

So, we are very comfortable with this and it allows us to return something to our investors while we still maintain our posture for growth.

With that, I'll turn it back to the operator and we'll open it up to questions.

Thank you. [OPERATOR INSTRUCTIONS ] And our first question comes from the line of Jim Ricchiuti at Needham & Company.

Please proceed.

Yes, good morning.

Good morning, Jim.

I wonder if you could just go into a little bit more detail on the margin pressure you saw in the quarter.

Was it across the three main market segments, transportation, sports, commercial?

It sounds like it was more in the larger product business, but how would you characterize the margins in each of the business units?

Yeah, this is Jim.

The --

Hey, Jim.

The margin really, it relates more to the large video products primarily and to the extent that we sell some large video systems in our commercial business, it's certainly affected, you know, it would affect the margins there, like it would in had the large sport venue business.

It affects those types of projects and it's to the extent that those projects are part of the makeup in each of the markets.

So, there's some large sport -- I'm sorry, some large video projects even in the high school area and there are some affected margins on that component of the high school business.

And Jim, just to add something to that, also, our standard order business actually saw a slight improvement in margins from Q3 to Q4, but it's within the range of natural volatility.

So, that business continues to do well and it's increasing as a percent of our sales.

Okay.

If we just look at the sports market and where you're seeing the competitive pressure, is that something that you guys see as just kind of an ongoing issue now, perhaps as part of our competitors try to take share?

Is there -- or do you just -- I wonder if you could just elaborate on where you see the pricing in the sports market?

That's a good question, Jim.

The -- first of all, we're not interested in taking -- we're interested and committed in profitable growth.

There is a point that we will walk from a project, just so you understand that.

And certainly there are some competitors that I think have taken a low price approach to maybe grab some market share.

This is not the first time we ever encountered that.

It's the ebb and the flow of the business to some degree.

I think there would probably be keen pressure here for the next few quarters, then we will see how things play out at that point.

Okay.

One final question, and then I will jump back in the queue.

Bill, is there any way you can give us a sense, as we look at your backlog, 73 million, what percent of that backlog would be recognized in to revenue in the current quarter?

Yeah...

And if not I can --

Yeah, roughly about -- roughly about half of it is over the current backlog.

Maybe 40 to 60 %, I might widen the range, will run off in the first quarter.

Okay, okay.

Great, that's it for now.

Thank you.

Our next question comes from the line of Michael Friedman at Noble Financial Group.

Please proceed.

Yeah, hi, guys.

Question, did I hear you guys right?

You're opening a sales office in China?

Or are you also opening a manufacturing plant there?

You know, maybe just to clarify that, we're -- our plan is to do some limited final assembly in China.

It doesn't have anything even close to what we have here -- or the scope even, not to mention the size, even the scope of functions we have here in bookings, but the China market has some unique requirements, and so we will tailor our product a little bit differently for that market and some of that final assembly work that will be most appropriately done in China.

And you mention in the release and in your prepared remarks that you're expanding Brookings, the capacity there.

Is that a -- it seems like a relatively small capacity increase.

Is that right?

Well, actually, we're adding 100,000 square foot addition.

We've just broken ground on that, it will be ready for occupancy in about a year.

That is about a 25 % increase, it's space for us here in Brookings.

So, it's significant.

We completed a small addition this past year, we just occupied it this past spring and that was about 25,000 square feet.

So, between the two of them, that's -- it's in excess of a 25 % increase, obviously.

And going back to the margin, what's your thoughts about maybe expanding capacity for manufacturing overseas, perhaps, as a way to reduce some costs, is that something you've given thought to?

Well, we have given thought to that, and we've talked to a lot of people to -- and one thing we try to do is learn from other's mistakes as much as we can.

And one of the things we find, just talking to people, we characterize our business first of all as a high-mix low-volume.

If you compare our business to cell phones, which is very high volume with a relatively few models.

We have a lot of different models of many different part numbers that we manufacture and for the most part we built to order.

And the companies that have high mix and low volume, such as we do, that have gone overseas with the idea that they're going to manufacture over there and come back and sell back in the U.S. have found that the additional cost of overhead and coordination and just the complexities are added in don't outweigh the benefits that you get from doing that.

So, but the short answer is no, it's not our intent to manufacture in China.

Now, that doesn't mean we'd manufacture some sub-components if we saw the right opportunity, but that's not our key reason for having the final assembly in China.

Okay.

And then on a related question, in -- have you seen a big increase in shipping costs or anything related to the gas price increase?

Is that something else that may have hurt you in that fourth quarter?

Well, one thing, it affects everybody the same.

So, that's -- I don't know that it's particularly a big factor.

I might mention that the gas price display market is one we're actually going after, so, to the extent that it has made the gas prices more volatile, I think it's maybe increased the market's perception of the benefit of having the ability to change the gas price displays without having to go out and use the -- the poll changer, the stick method of changing the fixed digit.

So, that's maybe a little bit of a positive in that regard.

Not that we're hoping for gas prices to go up anymore.

Our freight costs overall have gone up year-over-year, and I don't know offhand how much is attributable to fuel cost prices.

I was thinking maybe you locked in those contracts months prior and this may have eaten way at some of the assumed profit that you had baked into some of those jobs.

Just one comment, shipping is a relatively small percentage of our overall costs, certainly to the extent that it goes up an adverse factor, but it's not a huge impact on our overall bottom line.

Okay.

And then lastly I -- essentially some of these larger deals, it seems as though the Barcos are getting a little bit more aggressive, et cetera, trying to take some share.

It doesn't seem like they had a tremendous amount of success, it seems like electronics has held that off pretty well.

Did you hold that off as far as market share, you know, and give up on margin?

I mean is that something that needs to be addressed or looked at more closely when you do bids on large projects going forward?

You know, large product bid is a unique situation, and certainly we're not interested in giving up market share.

At the same time, we're interested in maintaining the margins.

That's the balancing act that you do and so we need to -- what we see we need to do is to continue to explain the benefits and the value-add that Daktronics has.

You know, certainly there are some customers that will just buy low price and there are some projects that we will walk away from.

We've had last look at some projects and we've walked on them.

So, we look at each one as a -- and what the parameters are involved in that project and to each one individually.

Okay.

And generally speaking, your gross profit margin range has been the high 20s and low 30s.

For the foreseeable future, I know it's hard to predict, but is it -- should it be, you know, somewhere at the lower end of the range?

And you talked about competition driving down the price before and it starting to level off.

How long did it take in the past to see some of the competitors no longer being able to eat away at the margins in the business?

Yeah, I don't know, you know, it's always questionable how much the past predicts the future.

But certainly it can take several quarters on these kind of cycles and beyond that, it's really hard to predict what others are going to do, of course, but we can only control what we're going to do, and we're going to continue to look to take cost out of our product and keep streamlining how we approach our business and work hard on the cost line as we work to grow the business.

Great, thanks, guys.

Our next question comes from the line of Marcelo Desio at Triato Capital.

Please proceed.

Hi, thanks for taking my call.

A couple of questions.

The numbers you put out today on our press release and this $0.15 bottom line -- bottom line diluted number, does that include the $2.5 million benefit income tax benefit you got from R&D CapEx number?

And also, does that include the $2 million gain you got from the transaction on Sports Link?

It does include the benefit of the R&D but it does not include the Sports Link transaction inQ1.

So, if you back out -- so, what's -- obviously those aren't ongoing gains.

What's the bottom line number if you back those out?

It's roughly -- it's roughly $2 million when you factor out the net, the G&A costs also.

So, $2 million divided by $20 million per share.

Did I hear $0.10 back there somewhere?

Yes.

Yes.

Okay.

So, $0.10 a share was what the actual bottom line number is.

Okay.

Can you also tell us what your bad debt expense was in the quarter?

And what that was compared to previous quarter?

It sounded like in the press release you said that bad debt expense went up in a little bit.

Yes, for the quarter it was roughly a -- half a million dollars and, you know, that's probably if you were to flatten out over the long-term, we average less than $100,000 a quarter, but it's important to note that's an area that has a great deal of volatility that's hard to predict in it because of the nature of some large projects and what can go wrong there.

Now, rarely do we have significant issues out there.

And there are a couple of issues we had in the quarter so it is hard to predict, you know, if someone will say what do you estimate it will be in the first quarter?

Based on what I know now, it should drop down in to the 100, $200,000 range.

But for the expense, it is hard to predict if it there's something out there we don't know about at this point that could change that number.

Okay.

And then lastly, your accounts payable went up about almost $4 million sequentially.

Is there anything to that?

Yes, good question.

Maybe we should have covered that earlier, and you will see our inventory was up a lot.

Typically what you'll see is when you have higher backlog numbers like that and as I mentioned, and Jim's question, Jim Ricchiuti's question earlier, on how much of the backlog rolls off, actually after, to clarify that, it's probably closer to 50 or 60 %.

We buy inventory in advance.

Our inventory levels were probably higher than you would normally expect just based on commitments we had to make based on our backlog numbers.

And so it's a direct reflection of inventory.

Okay.

Just backing up for a second, if I back out kind of these one-time gains from the tax benefit, the sale of this is -- the transaction you had, and this accounts payable increase, it looks like cash flow was -- from operations, ongoing operations, was probably negative in the quarter, because it looks like it was plus 3 without those things.

Yes, cash flow, though, in terms of the -- yes, I'd have to check what your --

We can talk about --

We can go through the details.

That's pretty -- the one thing you said, though, that I want to clarify is that Sports Link transaction did not happen in the quarter.

Okay, it was right after the quarter.

Yes.

One special thing was the tax credit.

Yes, that's the only unique thing is that tax benefit.

Okay.

And the other thing about Daktronics, too, that you will see, is our cash -- we're not a widget manufacturer.

Our cash flow can vary a lot quarter-to-quarter based on how we tie up money on specific projects.

And so if you were to look at us quarter by quarter, and try to make assumptions on cash flow, you probably wouldn't come to valid conclusions, you'd definitely have to look at cash flow over a longer period of time.

We could book a $5 million project and have or $3 million tied up in -- 2 or $3 million tied up in inventory rather quickly, that then gets converted to revenues over the preceding weeks -- yes, the following weeks.

If you go back, we had fiscal -- a year ago at this time, our inventory was unusually low.

And so timing is a big factor.

And looking at quarter-to-quarter just doesn't make sense, you have to look at it over a longer horizon.

I understand.

So, just to kind of reiterate on -- so, the bottom line number was $0.10 without the tax benefit and the guidance was for around $0.20, $0.23?

Yes, the guidance, though, that we gave included an estimate for the tax number.

So, if you want to compare apples to apples, it would be $0.15 compared to the estimates of $0.20 to $0.30.

Okay, got it.

Thanks.

Yes.

Our next question comes from the line of Dennis Nielsen with Fetl & Company.

Please proceed.

Good morning.

Just a couple of follow-up questions on the competitive environment.

Is Barco now the primary competitor on the large sports and large commercial deals that you bid on?

And who else is out there?

The two that are involved in the large products the most are Barco and Mitsubishi.

And there are others that will show up on another projects occasionally, but not as consistently.

Okay.

And which of those -- I presume Barco is the one that has gotten to be a lot more -- or less price sensitive over the last couple of years with their increased presence here in the U.S.?

More price aggressive, is that what you mean?

Yes.

Yes, I would say Barco has been quite price aggressive.

I think that's a true statement.

Thank you, my other questions were asked.

Thanks.

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

And we have a follow-up question from the line of Jim Ricchiuti at Needham & Company.

Please proceed.

Yes, as you look at your selling expense going forward, is it -- Bill, should we think about it in terms of still being in the 13 to 14 % of revenue range?

Is that still kind of a good yard stick?

Yes, our -- our goal, clearly, is to leverage that, but, you know, we definitely strive to bring it down, but alternatively, what I will say about Daktronics is we're -- we do -- in terms of investment opportunities, you know, you can go out and do larger acquisitions, we do invest more for internal growth.

So, I think your numbers are right, absent opportunities for investments that come up that run through the P&L.

And, Jim, I wonder if you can comment a little more about what you're seeing with the sports marketing division?

It sounds like it has been a little bit disappointing, and I think your comment was you're a little more optimistic about it for fiscal '06.

I don't want to put words in your mouth.

I was wondering if you can just comment on what you're seeing there; if you do see some turn there or what, perhaps, has held it back?

Well, as I mentioned, the sales cycle on this project is long and we had a number of projects that strung out a little on us and some of which came to fruition -- have come to fruition already in May.

A few of them, as an example.

And, one, we feel the opportunity is there.

We're going to restructure our efforts a little bit and our personnel focus and, you know, we that we have some great success stories.

We've been able to execute, it's just a matter of how do you scale that up and be able to execute on more of them?

So, that's a challenge we have, and it is not an easy business to scale up, because of the complexity of the deals and because of, really, the complexity of the whole sales cycle.

So, it's a challenge, but we've got the success stories to point to and we just need to work to replicate more much those.

And margins in that business are higher than in corporate or --

They are.

Of course, there's selling expenses that are involved with that, as well.

They are typically higher margins, we are able to work it a little different mode with our customers as clients and really help them develop an aspect of their own program.

So, it's very positive from that point of view.

How about on the national accounts level.

What do you see in that area over the next couple of months?

It's been a little bit soft, sounds like in the last couple of quarters.

Certainly, one of the things about national accounts, it is some cases larger -- or larger contracts and so -- it is in a steady -- for any one client, it isn't necessarily a perfectly steady stream.

So, there is some lumpiness in the national account business.

Of course, as we get more accounts, just the law of averages smooths that out a little bit, but there is a little bit of that up and down factor with the national accounts.

Certainly long-term we see good opportunities there.

We're seeing some interest, as I mentioned, in the petroleum market or the convenience store market and we're -- we have a number of ways that our product can be applied and people convenient store and looking to develop our presence in that market.

So, we see good long-term opportunities there, but quarter-to-quarter it can be a little bit up and down.

And just one final question.

I may -- let me know if I'm in the ballpark here, but it looks like you have a book-to-bill around 1.3.

Is that -- am I in the -- in the ballpark?

Yes.

Okay.

How does the pipeline look thus far in the quarter?

That's pretty strong bookings number.

You know, what -- was are you guys seeing thus far in the quarter?

How does the pipeline look out there?

It's -- you know, there's -- the pipeline is strong.

You know, we're off to a good start in May for order booking so we're -- you know, at this point we're optimistic about ongoing order bookings.

Okay, Jim, are the bookings you're seeing this is far in May, are they -- how would you characterize those margins, I guess, in those bookings, is there a better mix?

I think it's a little better.

We had a couple of projects that we're -- for whatever reasons, for different reasons in some cases, that we're more of a dragon in last quarter and we're exceptional, and I'd say, overall, we're hoping it would be up a little bit, but certainly there's -- the margins reflect the fact that it's very competitive out there.

Okay, perfect.

Thank you.

Mr. Morgan, there are no further questions, I will turn the conference back to you.

Thank you.

Well, thank you, everyone.

For your questions and for your time this morning.

We appreciate it.

You know, we're excited here to -- it's fun to see the new plant expansion going up and just as we prepare to be able to process more work through here in Brookings, and it's nice to be able to start the year with the backlog we have, it's just a great way to start off our fiscal '06.

So, again, thank you for your time this morning.

Have a good day.

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

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

Have a great day, everyone.