Daktronics Inc (DAKT) 2006 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Daktronics' Second Quarter Fiscal 2006 Earning Results Conference Call.

As a reminder, this conference is being recorded Wednesday, November 16, 2005 and is available on the Company's website at www.daktronics.com.

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

The Company cautions that these and similar statements involve risks and uncertainties, including changes in economic and market conditions, 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, all participants will be in a listen-only mode.

Afterwards, there will be a question-and-answer session, and at that time, if you have a question, please press the one, followed by the four.

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

Please go ahead.

Thank you, Operator.

Good morning, everyone.

Thank you for joining us this morning.

It's a brisk wintry morning here in South Dakota.

We're very pleased with our quarter.

We've reported revenues and earnings for the quarter within our previously announced estimates, with both revenues and earnings being at the higher end of the range.

Orders continued very strong, and we're entering the third quarter with a record backlog, and that's a nice way to start the quarter.

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

Thank you, Jim.

Good morning, everyone.

As you can see from the press release, sales for the quarter were up over 27% over the same quarter last year and are up over 25% year to date.

Orders on a year-to-date basis are up almost 40%.

Net sales represent the 14th consecutive quarter of growth of net sales quarter over quarter, and for the trailing 12 months, net sales have grown in excess of our long-term target of 15%.

Earnings for the quarter this year and last year were both at $0.26 per share.

For those of you who are newer to our financial model and results, the gross profit margin in the first six months of last year was 33.9%, which at the time we acknowledged, was unusually high and non-sustainable in the near term.

The more feasible level for us to achieve with the current market conditions is in the 31% range, which most of you know as generally subject to a 1% point deviation, plus or minus.

So offsetting the difference in gross margin, we have on a year-to-date basis created some leverage with operating expenses so that our operating margin for the quarter is 10.2%, as compared to 12.7% one year ago.

Consistent with recent quarters and our growth strategy, our commercial market continued to perform well, with sales up more than 50% for the quarter and year to date.

This growth, as Jim will discuss later in the call, was across all three areas of the business -- our reseller segment, the national account segment, and our custom project business.

Our sports market also continued to grow at rates in excess of our long-term goals.

For the quarter, net sales were up over 20% and orders up more than 40.

Included in orders was the recently announced Dolphins Stadium, which will be the world's largest high-definition LED video display.

Year-to-date orders are up more than 30%, led by the growth in professional facilities, and we saw small sports facilities, primarily high schools and smaller municipal facilities, exceed the 15% growth rate quarter over quarter.

As we discussed last quarter, this portion of the sports market was not as strong for the first quarter, something we believed would turn around, and it did.

This area of our business has historically been a steady performer, and we expect that to continue.

On an international basis, net sales remained down for the sports market, but order bookings are up nicely over last year on a quarter and year-to-date basis.

In our transportation market, we saw sales decline compared to last year on a quarterly basis.

Year-to-date net sales are flat year over year, while orders for the year remain up over 15%.

Our book-to-bill ratio was again strong for the second quarter, and although it's historically less than 1 to 1 for the second quarter of each fiscal year, it only missed by a few million dollars in orders.

We expect that it can outpace sales for the upcoming quarter, although keep in mind the [indiscernible] caused by the timing of large orders.

On the international side, orders for the quarter were flat overall over one year ago; however, we're seeing the results of our investments, including successes we've experienced in the Asia-Pacific area, an area where we're currently investing heavily in.

Our mix of standard product sales, total sales, remained at 30%, which was the same as the second quarter last year.

Our goal is to grow standard product as a percent of our business over the long term.

However, with the impact of digital billboards and various other factors, growing standard products at a faster rate than the custom products may be difficult in the short term.

On a year-to-date basis, both standard orders and custom orders are growing in excess of our long-term expectations.

Moving on to gross profit margins, as mentioned in the release, our gross profit percentage was down sequentially and year over year.

At our last conference call, we announced that we thought it would decline slightly.

The actual decline was a little bit higher than expected.

We believe a portion of the decline from the first quarter of this year was due to the costs incurred as we worked hard to ramp up production and meet our customer delivery dates.

Also due to the timing of orders, costs were incurred to expedite parts, and like each year, we also have turnover during the quarter in our plant as our student population converts from full time to part time and we bring in additional newer students.

Finally, during the quarter, we hired a number of additional full-time manufacturing personnel, which we had to train, for the quarter to ramp up production.

In short, we believe that some of these ramping-up costs were a little bit higher, and we're on the road to minimizing them.

We would expect that over the next quarter, these costs will diminish but may stretch into the fourth quarter.

Jim will be making some additional comments on this.

Operating expenses for the quarter increased 17% over the same period one year ago but as a percent of sales, which is how we manage the business, declined from 20.9% to 19.3%.

All areas of operating expenses -- excuse me, in all areas of operating expenses, we have substantially increased our investments to keep pace with the growing demands as the Company grows.

All areas have been impacted by higher personnel costs, costs of international development, health insurance costs, and various other factors.

Selling expenses at $9.2 million were 12.1% of net sales, compared to 12.4% one year ago.

This is the second consecutive decline in selling expenses on a sequential basis.

However, much of the decline was due to employees who typically split their time between selling and contract work, being weighted more heavily towards the contract work.

This is a factor which can be lumpy in the numbers based on the type of projects we're involved in.

So total dollars spent on personnel has not necessarily declined.

As compared to costs one year ago, we have more costs being focused on international development, our mobile and modular product area, which focuses on a pro tour product, travel and entertainment, and the expansion of our sales and service network, to name a few.

These investments are supporting our overall strategy to expand geographically, expanding integration, and expanding product applications.

We expect that selling expenses will increase slightly, but we should be at the lower levels as a percent of sales as compared to the previous third quarters, which are typically in excess of 15%.

Moving on to G&A, which was at 3.5% of sales, compared to 3.7% last year, on a year-to-date basis, it's at 3.6%.

The increase in dollars is a result of increases in personnel costs to support our growth, the international expansion of various professional fees we've incurred.

We expect that G&A costs will increase slightly to 4% of the net sales range depending on the actual level of sales next quarter.

Product development investment was 3.6% this quarter, compared to 4.8%, which Jim will talk about a little bit later in the call.

Operating margins, as I've stated before, at 10.2% are down from 12.7% one year ago.

On a year-to-date basis, we're at 10.1% as compared to 13.1% last year.

In short, the gross profit margins were partially -- the gross profit margin declines were partially offset by leveraging operating costs.

We expect the operating margin percent will go down in the third quarter due to the sales level and then rise in the fourth quarter.

The effective income tax rate was 36.5%, and looking forward, we expect that to be in the 37% range.

Cash from operations returned to positive numbers for the quarter, but on a year-to-date basis, it's down slightly, primarily due to cash being tied up in contracts and inventory.

We continue to work on receivables, and we believe that we can do more to diminish the cash tied up there.

On the inventory side, we had expected at the beginning of the quarter that it would decrease from the beginning of the quarter.

However, the level of orders and timing of specific contracts caused it to actually increase.

We're expecting this to turn around more over the coming months, and we expect to increase our overall cash flow as we reduce DSOs on receivables and costs and profits in excess of earnings to more historical levels.

Our investments in capital assets during the quarter included approximately $1.6 million in plant expansion costs.

Capacity investment has become a priority for us, and as a result, we estimate that our capital investments for the fiscal year will be $20-plus million, including $7 million in facilities and manufacturing equipment for the fiscal year as a whole.

As mentioned in the release, we're expecting revenues for the third quarter to be in the 65 to $72 million range and our earnings in the $0.15 to $0.25 per share fully diluted.

Earlier in the fiscal year, we stated that we expected annual sales to be up 15% for the year.

Given the performance for the first two quarters and our expectations for the second half, we're updating that guidance to 20%-plus.

Obviously, these expectations could vary due to factors we've already mentioned, including the timing of booking orders and revenue recognition on contracts.

With that, I'll turn it back to Jim.

Thanks, Bill.

Again, we were extremely pleased that we were able to not only increase revenues by 27%, but we were at the same time able to maintain an $81 million backlog through excellent order production.

This was an indication of the growth opportunity in the large electronic display industry and also demonstrates that Daktronics is able to respond to that opportunity.

I'd just like to comment.

To achieve this level of sales this past quarter took a lot of hard work and dedication by all of our employees, and I’m very proud and appreciative of all of our employees for responding to this opportunity.

And, likewise, there are many subcontractors and vendors who were very responsive and held up their end as well.

A lot of people worked very hard to achieve this sales level and meet our many critical customer deadlines, so just a thank you to all.

This increase in sales, I might add, was on top of a per-unit price decline compared to the same quarter last year as well.

So from an operations perspective, it's more of an accomplishment than the percentage might indicate.

As has been the case the past few quarters, the commercial market performance stands out.

The percent growth for the commercial market, as Bill mentioned, was the greatest of all our markets, being up over 50% year to date.

As a quick overview, again, we look at our commercial market as having three components -- the resellers, which is primarily sign companies; national accounts; and then the spectaculars and marquees.

And our national account business historically has been through national retail corporations using our Galaxy product line, which is our smaller text and graphics-based displays, and using those for on-premise advertising and promotion.

We have talked in previous quarters about the opportunity for growth of digital billboards, using LED technology, and we've also talked about two major constraints to this very exciting and very promising application of our technology, the first of these constraints being the large financial investment required compared to a traditional billboard to put up a network of these digital billboards requires a fair amount of cash.

Secondly, there are local sign restrictions on some communities that are an obstacle.

Despite these two constraints, commitments to deploying digital billboards have accelerated significantly through second quarter, and we now have a significant amount of orders for this application in our backlog.

Just a little on the industry, as many of you may know, there are three major players in the billboard or the outdoor industry, as it is often referred to.

They are Lamar, Clear Channel, and Viacom, and we won't speak on their behalf but refer you to their public statements for more information about their perspective on digital billboards.

But we can say there are public statements indicating intent to deploy available cash into digital billboards, and we have booked orders for over 25 digital billboards since the beginning of second quarter.

And, again, as we've discussed previously, the dollar value of these orders varies depending on the size of the display, but it's typically in the range of $250,000 to $500,000.

And this business is taking off at a greater rate than we had expected.

We are now dedicating more internal resources to make sure that we adequately serve these customers and meet their delivery and service needs.

We believe our technology, our financial stability, our manufacturing capacity, and our ability to deliver service nationwide position us well to serve this niche.

We expect this to be a significant contributor to near-term business, but keep in mind that the customer base for the higher volumes we're experiencing is limited, which adds some risk to the predictability of this business.

Our reseller channel and commercial market also continues to be very strong.

We believe our cost-effective Galaxy product line, our ease of installation, and our ability to deliver service there as well through our network of offices gives us a tangible advantage over our competitors in serving this group of customers.

The product is very well received as a viable advertising medium for many retail businesses, especially those who have chosen to locate on a busy street or highway as part of their business strategy.

And, again, we've continued to see opportunities in the large marquees and the spectaculars.

Just a couple examples.

We're in the process of installing a very large marquee for the new South Coast Casino in Las Vegas.

We just completed two video marquees for Virgin, one in L.A. and one in New York.

They're located on the Virgin stores there.

So our technology is great for this application as well.

Our large-sport venue business, which is heavily dependent on large orders, tends to vary from quarter to quarter in how it's made up, but to date this year, even though sales for the colleges and the universities in the mid-size facilities is the larger in dollars, the sales for that area are down from last year's somewhat, while the sales for the professional sports is up.

We announced recently the order for the Dolphins Stadium, as Bill mentioned, and this is a true high-definition -- will be a true high-definition display, and we see an interest in the industry, especially with the high-profile venues going forward and wanting to incorporate HD, as it's referred to, in their -- in the displays.

And the main requirement for HD is that the display have at least 720 pixels vertically and 1,280 pixels horizontally.

And this display actually will be slightly more pixels than that in height and actually over 2,000 pixels wide.

So dimensionally, it's 50 feet high by 137 feet wide, to give you an idea of the size.

So it will be an awesome display of our technology and certainly be a landmark of video display technology, and we do see that that's kind of a new trend again with the higher-end venues.

We continue to see opportunities nonetheless of the midsize facilities.

We continue to assist some of these midsize facility customers through our sports marketing divisions, although these -- what we refer to as DSM, Daktronics Sports Marketing, support of projects accounts for less than 10% of our sports business.

For the high school market, both sales and orders were up about 10% for the year, as Bill discussed.

Net sales could have been up greater had we been able to push more of our backlog through our plant during the quarter, and we're continuing to increase our capacity in that regard.

We continue to see nice interest in both the Galaxy product for marquees with high schools, as well as video displays, for the larger high schools.

As Bill mentioned, our transportation market is flat year to date in terms of sales, but we're seeing good interest in the product there, and our backlog is actually quite high, and we're working to increase our throughput there as well to convert the backlog to sales at a greater rate.

We have also redesigned our Vanguard product to reduce assembly time, and this will have a measurable effect in coming quarters as we phase in that new design.

Bill has already discussed margin and quantified our expectation for that for the coming quarter.

I just wanted to add that -- just kind of expound a bit, the fact that the rapid ramp-up that we experienced the past two quarters, there are just some inherent inefficiencies that we incurred, including expediting costs, both in manufacturing and onsite, with the installation portion of the projects, among other things.

We believe there is opportunity to help our gross profit margin to increase the efficiency in our manufacturing and installation processes.

We're also looking forward to bringing our new building addition of about 100,000 square feet online around the beginning of next fiscal year, which is about May 1.

This will give us a further opportunity to realign some of our manufacturing processes and continue to look for further manufacturing efficiencies.

Bill mentioned product development.

Our investment there is a little less than the 4% target that we've discussed in the past, primarily due to the increase of the top line.

Product development continues to be a key cornerstone of our strategy for serving our markets, and we'll continue to be proactive in that regard.

Again, we have the four product families -- our sports products, which is our scoreboards and timing systems; our video display, our ProStar and other video products; our Galaxy product line, which is the text and graphics; and then our Vanguard product line for the transportation markets.

So we have a product development group for each of those, and we continue to move forward with product development in each of those areas.

Developing new products that serve our markets and then reengineering our products to add features while reducing manufacturing costs is a constant objective in each of those areas.

Going into the third quarter, increasing throughput continues to be a high priority.

We would actually like to decrease our backlog somewhat to allow us to shorten our lead-times.

As we have demonstrated, we've been able to increase our capacity significantly over the past two quarters, and we will continue to do so.

Our sales for next quarter really are dependent more than anything on our ability to process the backlog we have and the orders that we will, of course, receive during the quarter.

Our range of estimates reflects the opportunity at hand, tempered by the fact that the quarter has fewer workdays due to the holidays.

Our international development efforts, as Bill alluded to, continued to put upward pressure on selling expenses, although as a percent of sales, our selling expenses were in line this quarter.

Asia is our newest frontier, and just a little update on where we are there, we just got our China office opened in Shanghai, and we did recently install a display on Nanjing Road in Shanghai.

And Nanjing Road is one of the main nightlife areas in Shanghai, kind of their Times Square, I guess, you could compare it to.

We also have our office in Macao operational and just completed the installation of the display on the Emperor Hotel and Casino there, a very high-profile display in Macao, and that will be a nice showpiece for Macao operations.

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

Thank you. [OPERATOR INSTRUCTIONS]

Jim Ricchiuti, Needham & Company.

Congratulations on the quarter.

Question on -- a follow-up question on the digital billboard market, just to your comments.

You look like you experienced a pretty good increase in orders, and I wonder if you could talk about it in the context of the customers.

Were they spread out among more than one customer?

And if you could, a little bit about how these customers are thinking about deploying these units.

Are they typically going into more urban areas?

So, anyway, if you could on that, please.

Yes, this is Jim.

The majority of the orders were heavily concentrated on one of the major billboard companies.

The [indiscernible] deploy them, of course, obviously these are always deployed where there's a lot of traffic, so they tend to be in more urban areas.

In some cases, there are multiple displays going to one metropolitan area, but they're again just starting in the deployment really.

So time will tell, I guess, what their ultimate plan is there.

Okay.

Jim, you talked about the pilot you've got with Clear Channel, I believe, in the Cleveland area.

Can you just give us an update as to how they see that progressing?

I guess I can't really speak for them.

From our point of view, we're giving those displays a lot of attention, making sure everything's working well for them from the operational side and supporting that.

And I guess from our perspective, it appears to be going well, but I guess you'd have to ask them for their perspective on it, but it seems to be going well.

Okay.

And just with respect to -- this -- it sounds like there's going to be some lumpiness to this business.

How should we think about order activity going forward in this?

I mean this seemed to be an unusually strong quarter for orders, but I wonder if you could just talk a little bit about what you're hearing from these customers in general as it looks, as we think about this business over the next one to two quarters.

I guess the -- based on what we're hearing, I think we would say we expect through the end of this fiscal year that it will be a -- there will be a strong component business.

To predict beyond that for us right now would be probably difficult to say.

Okay, but you do have some order visibility looking out into the next couple of quarters in this business?

Yes, I think it will be a factor through the end of the fiscal year, positive factor.

Okay.

If I could ask one follow-up question just on an unrelated topic of the margins, can you talk a little bit about the pricing environment in general?

And I may have -- if I heard you correctly, that you expect to still see some impact from just some inefficiencies as you try to get as much product out of your plants in the current quarter.

If you could talk to that, please?

Well, as we've said, we believe that we can gain some efficiencies.

Of course, we are still in a ramp-up mode, so it will take some time to work out some of those.

But that's -- I guess we're giving our best estimate of where we think the margin will be.

As Bill mentioned, I think 31 plus or minus is kind of where we're estimating that it will be.

And there are a lot of variables.

And, again, our margin is an aggregate of all of our orders, obviously, from this small 10,000 -- 5 to $10,000 orders up to the $1 million orders, so there's a wide mix of margins on all those different orders that go together.

So it is always a little difficult to predict, but certainly, I know that there are opportunities for efficiency improvement.

Jim, if I could just add something, too.

We are making -- if you think back over the third and fourth quarter of the last fiscal year when we got into the heavy competitive environments, factoring out the ramp-up in some of these things we've talked about here, we are making ground at slowly driving margins up at contract signing, so there is -- we are making progress.

Okay, terrific.

That's it for me for now.

Thank you.

[OPERATOR INSTRUCTIONS]

Jim Ricchiuti.

Bill, in the past, you've been able to give a breakout in the quarter of the three markets -- commercial, sports, and -- I wonder if you could give that again - and transportation, as well, as a percent of revenues for the quarter?

Yes, roughly as a percent of revenues, sports was about 60, and commercial was about 30.

Okay.

And transportation, 8, and then the rest of some of the other smaller items make up the difference.

Okay.

Jim, is it true that normally this quarter would be seasonally a softer quarter for orders?

Third quarter?

Yes.

Third quarter is -- typically, our lowest quarter for orders is the second quarter, and the lowest quarter for sales is third quarter, which --

Okay.

-- follows.

It takes the delay in processing orders.

And so the -- it's a little bit seasonal typically because of the order cycle but then also the fact that the holidays are in this quarter, we lose about five workdays out of the quarter.

So it's tough to overcome that, obviously.

So, typically, the third quarter is our lightest quarter in terms of sales, and that, we are projecting, it's going to be down slightly maybe from -- our range is down slightly from what we had for this quarter, or for second quarter, I should say.

But for the fiscal second quarter, your order intake, your bookings, appear to have still been pretty healthy, and that sounds like it's more of a reflection of the commercial business coming on.

So it's not like there's going to be potentially some less seasonality to the business as commercial gets to be a bigger part of your revenue.

I think that's a reasonable [inaudible] assessment that that will take some of the seasonality out of it.

And, certainly, this -- you're asking what's typical.

I mentioned typically our second quarter orders are a little down, but obviously, this second quarter, we had great orders and it's not for lack of work at all that we have -- as far as what we can get done in third quarter; it's strictly a matter of how many days there are to get the work done.

Jim, in short, too, in this second quarter, to have a book to bill where we ended up was very high compared to historical standards, and part of it is the reflection of less seasonality.

Okay.

And, Bill, I think you indicated the book to bill was just below one?

Yes.

Okay.

I wonder if you could also discuss the outlook in the sports market, the level of activity or the pipeline [indiscernible] you're out there pursuing in the professional sports market?

We still -- we see a very strong pipeline out there, Jim, both the upgrade market, and there's some new construction out in the future, as well.

Of course, we have some new construction projects we're working on right now that are already in our backlog.

But we see a lot of opportunity, and again, we see the expectations of the display -- you know, the level of displays in the large venues, as we mentioned, with HD being kind of the new buzzword.

We see that that will just kind of raise the bar, so to speak, on these venues even for the upgrade opportunity.

So we see opportunities going forward, very good opportunities there.

And, Jim, if you were successful in winning some of this business, that would potentially have -- you'd see the impact in that in fiscal '07; is that right?

Well, if it's new construction, certainly, it could be out in '07.

There are some -- we'll still be writing some business that will be -- we expect to write some business that would still be for the baseball season that's coming up.

So there would be some business to be written for that yet.

Okay.

And on the upgrade side, is that what you're referring to, too, is in reference to this, you know, people looking more at HD-type displays?

Is that being a factor in fueling the upgrade for business or the interest you're seeing?

No, the short-term -- there are just a few venues that are actually seriously talked about purchasing HD here in the near future, but I think that it's raising the bar and setting a higher level of expectation going forward.

Okay, thanks.

That's it for me.

Thanks, Jim.

Jon Braatz, Kansas City Capital.

Bill, you broke out the revenue by segment -- sports, 60, commercial, 30.

With the electronic billboards and so on, could you see a significant shift in that percentage over the next two to three years?

And can maybe you talk about the relative profitability of those segments?

Jon, maybe I'll tag-team this a little bit with Jim.

First, I'll let Jim talk a little bit maybe on the future.

Actually, for this, if you look back over the last few quarters, at 60% or just above 60% on sports, that was a little bit higher, when you look at stuff on a quarterly basis, in our business, you can get some fluctuations, but definitely the trend that we've experienced over a trailing 12-month period is the sports as a percent of our business has declined.

It hasn't been over 60% for over a year now.

And so the trend has been for commercial to be a bigger percent of our business.

Do you want to take it from here, Jim?

Yes, the growth rate in commercial is -- you know, it's extremely good right now, and we do see that that can continue for the foreseeable future, and so that would tend to keep shifting the percentages toward commercial and make commercial a stronger complement of our overall business.

We expect that trend, that direction, to continue.

Inherently, what about relative profitability levels between those two segments?

And what might we see in terms of gross margins versus some of the other costs associated?

Do we see -- how will that change the -- sort of the dynamics of the P&L statement?

[Indiscernible] do you want to make a comment?

Just on an overall basis with the strength of the Galaxy product line, which typically carries higher margins, you would expect to see overall the margin increasing as a result of that influence.

But then you've got the offset with the billboard market, which is more in the custom product business.

That is a factor to consider, too, in how much it expands.

Just in general, the -- kind of how the margins tend to vary with our business, it tends to, I think, correlate most closely with the size of the order.

So, obviously, on a $10,000 order, the gross margin is a higher percentage than it is on a $1 million order.

So has a lot to do with our mix there.

And the Galaxy product line, for example, as Bill mentioned, those are typically maybe 20 to $50,000 and can up to $100,000, or even a little greater sometimes, orders, and don't typically carry higher margins than $1 million orders or even, say, half -- 250 to $1 million orders; $250,000 to $1 million orders would be a ProStar product line.

So that's kind of the mix.

And, again, that doesn't make a -- that's what makes it difficult, I think, to really project our margin as kind of a statistical thing of how all that mixes together in the aggregate.

But certainly, we see the Galaxy product line as being very well received.

We see that growing.

And the other thing is we have to sell the value of Daktronics.

We're -- we offer more than just displays; we offer the support and the back-up to our customers, and we believe that has value as well.

Okay, one final question.

In the billboard market, what are you seeing on a competitive front?

At this time, obviously, it's an industry very much in its infancy, but are you seeing -- what kind of a level of competition are you seeing as this market begins to grow?

We're really seeing only a few companies that can, I think, be seriously considered because of the factors we mentioned.

First of all, just the financial stability of vendors.

It's not a place for a start-up or the smaller company, I don't think.

The ability to deliver service nationwide, which we have.

Our ability to continue to evolve our products and to stay on the leading edge of technology.

I think all of those are factors that are -- make us very well positioned to serve this niche.

And there are not too many companies that have full mix there of those strengths.

So have you actually lost any business to anybody else in that area?

We don't have a monopoly on the business, I can tell you that.

There are --

I understand.

There are some other participants.

Okay, okay.

All right.

I appreciate it.

Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]

Michael Friedman, Noble Financial.

[Inaudible] manufacturing facilities.

It seems as though it was almost 100%.

Is that possible?

Michael, we didn't get the first part of your question.

I'm sorry.

The manufacturing facility, the utilization rate in the second quarter, it seems as though you guys said a couple of times that if you could have pushed through a couple of more orders, you could have generated a little bit more in sales.

And what kind of utilization rate did you have in the quarter?

Of our capacity?

Yes.

I'd say we were right at max.

You were?

You're maxed out?

Okay.

And --

I'd like to clarify that.

That doesn't mean that we're not capped out for the future.

I mean we're increasing our capacity going forward, but we were definitely running at capacity during the quarter.

Okay.

And so your new capacity is continuously coming on, so you have extra capacity in the current quarter than you did in the previous quarter, is that right?

We expect to continue to grow, that's correct.

Again, we're up 27% over the year before, and we'll continue to ramp up our capacity.

And we mentioned we've got 100,000 square feet of space coming online -- about maybe 80,000 of that actually manufacturing space -- coming online here in about six months, so that will be very welcome.

And so we're -- I just mentioned, we've added about, oh, I think 100 full-time manufacturing employees since May 1, so we're able to find good people here, and we have the -- we're, I think, well positioned to continue to increase our capacity.

Okay.

Is there any way to quantify how much additional revenue you might have gotten if you were six months ahead as far as capacity being built out?

Boy, that's a tough one to answer.

You know, that's a very -- you know, could we have gotten 10% more out?

I'd say there was certainly work there to be gotten out.

If we could've got at it, I think we could've gotten 10% more out the top line.

Would you agree, Bill?

Yes --

It's somewhat conjecture and speculation anyway, so I'm not sure how you want to interpret that, but certainly, we could've gotten more done if we just had a little more capacity.

And it could've been material amounts of revenue, I guess, is the bottom line?

And then the second question for you, do you think you're a little bit more selective in the bidding process in the second quarter than you were maybe even in the first quarter, especially on the larger orders?

Well, again, we try to sell and convey the value that we bring to our customers, and we believe that the educated buyers appreciate what Daktronics brings to the table and to just electronic display.

So, certainly, we try to -- and we'll walk from a project if it gets below a certain point.

Especially when you're really busy like we are, there is a point where you just won't go down to take a project.

That's for sure.

But, boy, Michael, we go after them all.

Right.

That's where [inaudible] difference.

We are aggressive in going after the business.

I understand.

Okay, great.

Congratulations, guys.

Thanks.

Thank you.

Jim Ricchiuti, Needham & Company.

Question on the transportation market.

I think I heard you say that sales were down a bit in the quarter, and I wonder if you could just elaborate on that, although the order activity, I think you said, picked up.

So I wonder if you could just give us a sense as to what's happening in that market?

Well, one thing, we were pressed, of course, very hard this past quarter, and one of the things we're trying to do is make sure we're meeting all critical customer deadlines, and we did meet all critical customer deadlines in the transportation market, but it just tends to be that we have longer lead-times in that market.

So in the matter of allocated resources, we've allocated resources a little more heavily to some other areas that [inaudible] more critical.

But that's a very important part of our business, and we're going to bring more resources on and are bringing more resources on to that so that we can ramp that up as well.

Okay.

And, Jim, did some of that also play into the college/university market as well in terms of being able to balance out the demand?

Well, we -- again, we were very busy with the college university market, and there are a lot of deadlines -- football, of course, opening -- so we had a lot of resources committed to all of our sports projects that had fall deadlines.

That took a lot of resources.

We had some nice projects that came online during the quarter -- Georgia, South Dakota State University, which was a multi-million-dollar deal, a few more.

Yes, we listed a lot of those in the press release.

We didn't go through those this morning, but a lot of very nice large sports projects that were brought online this fall.

The other thing I just might mention, along that line, we did purchase Dodge Electronics last December.

That was a company that we had used as a subcontractor for sound systems, and so this -- and that primarily is outdoor stadiums, although a couple very nice arena projects as well, basketball arenas.

And so we did install roughly $2 million' worth of sound systems here in the past six months, and so that's -- we're well on our way with the integration of that effort into Daktronics and --

It's been highly accretive, in other words.

Jim, was that in the small sports market where you had the Dodge installation?

University of Georgia was one very large installation.

In this case, what we're -- just to describe what this is, we're basically putting a very large speaker system up, actually right -- as part of the main scoreboard structure.

It's up in that structure.

Then in that case, there was also some distributed sound around the seating, where there's some shadowed -- from a sound perspective, shadowed areas that we needed to fill in.

So a very complex system.

KU is another one.

We did a very large arena system there, very complex.

That's up and running.

So some high profile.

And then we also have a standard product in that -- we call our Sportsound 1000, which is designed more for a high school football stadium, and we have -- I think we had a number of nice sales, maybe on the order of 10 of those.

We're just getting started and just getting going marketing that and getting underway on manufacturing for that product, but a nice launch for this past year.

Okay.

If I could ask one final question on the digital billboard market, I’m just wondering, as you've gone through some of the deployments and as you've taken in what looks to be a higher level of orders, do you see a model beginning to develop as to how some of these customers are approaching this business?

And by that, I mean who's doing the installation of these systems?

And I know in the case of the one pilot you were working on, you were doing some of the -- controlling some of the content from Brookings.

Anything further along those lines as to how the model seems to be developing for this business?

I think each of the companies will -- they'll determine their own model.

In some cases, they’ll maybe be interested in more content and more support from Daktronics; in some cases, they'll prefer to do their own.

We're flexible.

We adapt to the customers' needs and support them how they would -- however they'd like us to do that, so it really depends on the customer.

Okay.

And as far as you doing any of the kind of the general contracting and --

Oh, I’m sorry, yes, installation.

Basically, what we provide typically is installation supervision or the technical support on the installation.

These companies are -- you know, they're sign companies, so they're set, for the most part, to do a lot of the installation or handle the installation themselves, but we support them on the technical side.

Okay, terrific.

Thank you.

[OPERATOR INSTRUCTIONS]

Jon Braatz, Kansas City Capital.

One follow-up.

A lot of -- I know you've been spending some resources over in China.

You talked briefly about China.

Obviously, the Olympics are coming up in a couple years, I think, something to that effect.

You making any significant inroads into the Chinese market?

I would think that there, obviously, is a heck of an opportunity in there, but are you getting -- I guess are you pleased with what has been happening at this point -- at this stage of the game?

Yes, you know, it's a big effort just to get established over there, just to get an office opened, as there's a lot of red tape to go through and that sort of thing.

So we're pleased that we have that accomplished, so we just have a good base of operations over there, number one.

We have -- in terms of the Olympics, a lot of the Olympics venues have already been taken care of, and so we don't see that that's a huge opportunity.

We may get to have a chance to participate in a little in that Olympic venue business, but certainly, the commercial business is an opportunity over there, and there are other sports facility opportunities as well.

But I'd say we're pleased with where we are to date.

We're really just getting started.

I mean we're just getting started over there, and that's -- China's a big country, it's a complex market, and so we're learning every day as we go.

Thank you very much.

Gentlemen, there are no further questions at this time.

I'll now turn the call back to you.

Please proceed with your presentation or closing remarks.

Well, first of all, thank you for all the questions.

We appreciate your interest.

And I'd like to mention that we did announce that we had a resignation from our Board. [Roland Jensen][ph], who actually has been on our Board since 1994, resigned due to health reasons.

And just like to extend our thanks to [Rollie], as we called him.

Was just a great resource, brought some great large company experience to our Board, and was always a great source of advice and wisdom for us, so we'll miss Rollie.

Our Nominating Governance Committee is leading the process to address that vacancy.

And with that, we'll bring this call to a close.

With Thanksgiving just a week away, I'd like to wish all of you participants and listeners a happy and enjoyable holiday season, and thank you for being with us today.

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

Thank you very much for your participation, and we ask that you please disconnect your lines.

Have a nice day.