Daktronics Inc (DAKT) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fourth quarter fiscal 2006 earnings results conference call. As a reminder, this conference is being recorded Wednesday, May 24, 2006 and is available on the Company's website at HTTP:// investor.daktronics.com. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Bill Retterath, Chief Financial Officer for Daktronics for some introductory remarks please go ahead, sir.

I would like to welcome you to our 4th Quarter conference call, a quarter with record numbers to report once again. Prior to getting into the details of the quarter, I would like to offer our disclosure on cautioning investors and participants that in addition to statements of historical facts this conference call and our quarterly news release contain forward-looking statements reflecting our expectations and beliefs concerning future events, which could materially affect our performance in the future. We caution you 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 as noted in our SEC filings, which may cause actual results to differ materially. Forward-looking statements are made in the context of information available to us as of the date of this conference call. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. With that, I'd like to turn the call over to Jim, our CEO for the highlights of the quarter and year-end results.

Thanks, Bill, good morning, everyone, and thank you for joining us this morning. We're extremely pleased with our fourth quarter and year end results. It was great to surpass the 300 million mark in revenues and beat the buck a share for the year. As noted in the press release, we were up 34% in revenues and 33% in earnings for the year. The 90 million in revenues for the quarter is notably 47% greater than the same quarter last year, which is an indication of the degree that we have ramped up our capacity over the year. It's also an indication of the commitment of our people to get the job done and to serve our customers. And I'd like to thank all of the employees of Daktronics that may be listening or reading this later for their efforts this past quarter and commend them on this achievement. It really is an outstanding achievement.

Orders continued very strong in this quarter. And we entered the year with another record backlog. A couple states here, we had our sixteenth consecutive quarter of growth of net sales quarter over quarter. And also this was the fourth consecutive quarter with quarter over quarter revenue growth in excess of 20%. Looking back over the year, the commercial market was our leader in terms of growth with orders up about 65% compared to the prior year. The growth is across all areas of the commercial market, including sales to sign companies , national accounts, and the digital billboard business and large marquess and spectaculars. The commercial market was approximately 35% of our total order volume for the year as compared to 30% in FY '05. So it is growing as an overall percentage of our business.

As discussed previously this growth is driven by the high degree of the effectiveness of the LED technology as an advertising media, especially in outdoor applications and lower price points of our Galaxy and our ProStar product lines. The Galaxy product is used predominantly in the on-premise retail advertising to [inaudible] smaller displays. Our ProStar video product line is utilized in the digital billboard application as well as in larger marquess such as in Las Vegas and Time Square. We did introduce our Galaxy Pro product, which offers a larger full color display with our Venus 1500 controller, which provides a great functionality at a lower price point in that size range. Kind of a between the, what we had for the Galaxy and the ProStar, kind of a middle product there, that that product's been very well received.

Order of bookings for the year in our Sports business are up approximately 18%. The rate of growth was higher for the larger venues than the small venues. But the growth of -- at all levels of the sports market is due primarily to the increased interest in larger displays for the -- for the venues again across all of the spectrum of venues. We are seeing interest in video at the high school level. As we have discussed previously we are seeing interest in video at the highschool level and we had orders for video displays at five high schools this past quarter. Sports orders were approximately 55% of our total for the year. At the high-end sports venues we are seeing growing interest in high definition displays often referred to as HD. Last quarter we discussed the installation of the high definition ProStar display for the Miami Dolphins as our first HD display installation. This is now up and running and in use for the Florida Marlins ' baseball games. We recently booked our second HD order, a ProStar system for the National Champion Long Horns for the University of Texas. This will be a single display, 55 feet high by 136 feet wide. That's the active area. We believe these HD technology installations will set a new standard for high profile venues. Revenues for the quarter in sports market included a number of minor league baseball systems and new displays in a number of major league parks including a major retro fit for the Chase ballpark, recently remained Chase ballpark in Phoenix. We also brought the new St. Louis Cardinal stadium system online for the baseball season. We were very pleased overall with our baseball season business.

Orders in the transportation business were up over 24% for the year. Sales for the year were somewhat less than this as we built backlog in that market . Just a note on that, about three-fourths of the business in transportation as in there we refer to as ITS, which is the primarily the over the roadway and the roadside advisory displays, typically Amber displays. We see opportunity for continued growth in the transportation market.

On the international front, we continued investment over the past year, as -- and we now have offices in Frankfort, Germany; Bristol, England; Macau and Shanghai. Our international business is primarily large projects, so it tends to be more lumpy than our domestic business. We did just sign an order for an installation of a large spectacular marquee for the new Wynn Resorts Casino in Macau and again our presence in Macau is an important factor in our being able to win that business. And that will be shipping actually in first quarter. We also recently received an order for a nice commercial project in Shanghai. We do plan to do some manufacturing in Shanghai primarily to serve the Asian market, although the investment of equipment there in the near term will be relatively modest.

We've talked about capacity here, early throughout the year. As we discussed previously, we'd been working to increase our capacity throughout the year, even -- or I should say, we've been working at the limit of our capacity throughout the year even as we work to expand capacity. We're just beginning to move into the new addition to our manufacturing building, which we're very excited about. Presents a great opportunity to reconfigure our processes and gain some efficiencies in our manufacturing flow. We've embarked on a [lean] manufacturing program as we've discussed previously. We're actually underway with that now. We expect this will provide improved throughput and efficiency. Of course, the ultimate goal there is an improvement on margin. In addition, of course, to better serving customers and better deliveries and other things that come with that. As we announced last week, we have leased manufacturing space in Sioux Falls and we expect to begin manufacturing there in about six months. Our decision to open up a facility in Sioux Falls was driven initially because there was space available there, but it also allows us a larger resource to draw from for employees, both manufacturing employees as well as nonmanufacturing. And we believe that will be beneficial to us, as well. We are still planning to break ground on another facility in Brookings this fall, and we do expect to continue to grow in Brookings, as well. In conjunction, with outfitting our new space in both Brookings and Sioux Falls we are anticipating significant investment in plants and equipment as noted in our news release.

Our product development expenses for the year were slightly under 4%, which is our benchmark. We expect our product development for this coming year to be in the same range as a percent of sales. Areas of focus in product development for the next year include further enhancements to our ProTour product line, controller for digital billboard applications, and various other cost reductions and feature enhancements across our -- our four major product families. And these, just for maybe review, are our All Sport, sports products, our Galaxy commercial displays, our ProStar video displays, and our Vanguard displays for the transportation market, and then the associated software control system that operated with those display systems. We also expect to continue investment in our network operating center also referred to as NOC, N O C is the acronym there, both increasing our band width as well as a functionality for supporting distributed display systems. And this is really applicable both in supporting our equipment customers buying our displays and distributed systems, as well as the potential media customers, we're actually -- we're selling advertising, getting advertising revenue, which we're exploring. I'll comment on that a little more later.

Our new product line that we've been -- I mentioned [above here] our ProTour, we've invested in that here over the past year, and we did begin shipping our 13 millimeter model of the ProTour in fourth quarter. It was actually utilized at a number of high level golf and tennis events here in the U.S., or a couple, I should say not a number. We also booked additional orders for this product in the quarter.

We have mentioned previously that we're exploring opportunities in the narrow casting and the media rights niche, we believe that this business has potential for us in selected areas. We're working currently on a number of potential transactions, and these could involve investing in the display network infrastructure, at least partially in exchange for media rights. And that differs somewhat from our historical approach, which is, of course, just cash in exchange for equipment. We have done some media sales with our Daktronics sports marketing operation, so we have some experience in that area, and we do still continue to work with our Daktronics sports marketing to facilitate the sports project in college and high school facilities. We are carefully studying these media opportunities and the merits and expect to conclude one way or the other in the first quarter. This could entail a cash investment, although, how much still not determined.

As we stated in the news release, we expect that the revenues for fiscal year 2007 will grow faster than 18%. And while our goal is more aggressive than 18%, there are many variables, and we believe 18% is a reasonable baseline. During the year, we expect to continue to expand our sales of service network, both domestically and internationally. And while we continue to expand our capacity through investments in plants, equipment, and our people. With that, I'll turn it over to Bill Retterath for a few more comments on our numbers.

Thanks Jim, just a few comments. First I'd like to add some detail on the gross profit margin for the quarter. We had anticipated gross profit margins would be nearing the same level as they were in the third quarter. They came in at 30.5, which is down slightly from the third quarter. Three of the key factors playing into the margin included mix, some costs associated with new products and finally better performance on a few isolated projects. Om the mixes you could imagine a greater percentage of our business has shifted to custom video projects, due in part to our outdoor billboard business. Our standard orders for the fourth quarter were slightly over 25%, a level we had not seen since the fourth quarter of fiscal 2004. Costs associated with new products have also kept margins down as we continue to develop our ProTour product. We anticipate the gross margin levels will remain somewhat steady into the first quarter of next year and throughout the fiscal year. During the quarter, our margins on order bookings held flat compared to the previous three quarters, which were up slightly. Overall, we're not seeing changes in the competitive market, which would tend to be driving margins up or down. For the fourth quarter our operating margin was almost 12% and for the year it ended up at just over 10% compared to 3% and 8% for last fiscal year fourth quarter and total year. We are anticipating we can expand operating margins for fiscal '07. The reasons for the improvement are the same factors mentioned last quarter, return on investments we've been making in international market development, the moble and modular business and other areas.

Operating expenses came in higher for the fourth quarter than we had expected. Costs were higher and fees associated with international development, some write downs of equipment we used for demonstration purposes and higher than expected personnel costs as we hired on more people than expected for the quarter. We did accomplish our goal of keeping operating costs below the 20% level of sales. For the first -- upcoming first quarter, we expect the total operating cost will increase slightly, and we maintain our goal of keeping them below 20% of net sales, thereby driving an operating margin of between 10 and 12% depending on the ultimate sales level. This [reman] -- remains a key goals -- goal of ours to drive up the operating margin percent.

On the balance sheet and cash flow, you'll notice an increase in cash for the quarter in spite of the large increase in receivables. The offset to the receivables growth is the increase in billings and excess of costs and profits and customer deposits. This turn around in cash was expected and is attributable to the timing of cash on larger projects. Operationally, I feel that we are doing much better on receivables as our [agings] have improved and our staff is better focussed on. This coupled with the decline in inventory from the beginning of the quarter demonstrates to me that we are showing improvement.

Jim made a number of comments about capital investments. We expect that overall our cash and marketable securities will decline during the upcoming year as a result of these capital investments. We also have announced previously our intention to develop the media business, which Jim talked about, and these opportunities have not reflected in our estimates as a potential capital outlay is still being analyzed. As we stated last quarter, we continuously review our capital and debt structure, and at this time we're not planning on any significant changes there and due to these capital investments. We think the cash flow from operations over the long-term, keeping in mind that this level of an investment for fiscal '07 is unusually high and expect to decline in fiscal 2008, will be sufficient to fund our investment needs. Finally as a reminder, our emphasis of uses of cash is on building the business internally rather than through material acquisitions although we don't rule them out.

In terms of the earnings expectations for the first quarter, just a note with regard to the new option expensing rules, we still expect that the affect will be approximately what was disclosed in our annual report previously in the $0.03 to $0.05 range for the year. And the estimates, as announced, do not reflect this cost in earnings per share.

In closing, I would like to just quickly mention that during this upcoming quarter we'll be speaking at one investor conference in San Francisco and we'd invite you to our investor website for additional details on that conference which we'll post early next week. With that, I'd like to turn it back to the operator to open it up for questions.

[OPERATOR INSTRUCTIONS] Jim Ricchiuti, Needham & Co.

Hi, good morning. Congratulations on the quarter.

Good morning.

Couple of questions. Bill, I wonder if you could give us a little bit more color on the breakout of orders and sales by the sports, commercial, and transportation markets for Q4. Do you -- do you have that? Would you be able to give us that?

Yes. To some degree I'll -- I'll talk about orders primarily.

Okay.

For the fourth quarter on orders in the commercial market, quarter -- Q4 over Q4 we're up almost 30%, no, wait, excuse me -- wrong number, I take that back. Orders in the commercial market were up 40 -- just under 50%. The sports market was up just around 10%, and transportation up 16% for the fourth quarter. That's quarters.

Okay. And Bill, is it possible for us -- for you to give us as a percent of revenues, percent of sales, what these three markets represented in Q4?

Jim gave the year to date numbers for --

I gave orders.

Orders -- yes, just bear with me for --

Sure.

That's sports was roughly 55%.

And that's for the quarter or the year?

For the quarter -- I'm sorry hold on. Sports was roughly 50, commercial was roughly 40, and transportation the balance.

Okay. Terrific. And I wonder if you would, Jim, maybe I'll address this to you, how would you characterize the performance of the industrial business in the quarter and in the year? You've made some investments over the past year, are you satisfied with the -- with the traction you're getting in the international market? Do you expect to see that pick up in fiscal '07? Thanks.

Are you asking about the international market?

Yes.

Okay. Well, I think, we're pleased with the progress, I'd say in both the -- both the European and the Asian front. You know, one thing that has held us back a little bit is the ProTour product line has taken us a little longer to get that launched than we had hoped. And that is a good fit for the European market, so that's probably held us a little back over there. But other things are going well, and we're pleased with the progress so far. We've only been on the ground in Asia about a year now, and again, we're pleased with what's happening there. As we mentioned we have a couple nice orders to date over in Macau. There's kind of a concentration of things going on there with the gaming business. And we've had a few nice orders in Shanghai, as well. So that's kind of, you know, all we were hoping for to get started here just have some things to work with there. And we're just getting -- going with the -- getting the actual manufacturing set up in Shanghai and that will be a -- not a lot of big machinery there, more, we'll outsource some metal work there and we'll do some final assemble as kind of the initial thing. And so we're pleased with how things are going there so far, and we see -- we see opportunity down the road.

Okay. Just a final question and I'll just hand it over. On the capacity additions you're planning, is that being driven primarily by the activity you're seeing in the commercial display business? And you talked about commercial at some point over taking the sports business in terms of the percent of revenues, do you possibly see that happening in fiscal '07? Thank you.

I don't think, necessarily predict that it's going to overtake it in this year. Certainly, it would have gained about five percentage points this year in terms of the -- as a percent of our total. So it has a ways to go to catch up there. We expect that the rate of growth in commercial will still exceed sports this year. But we see growth in sports, as well. In terms of capacity, again, as commercial is the fastest growing, I guess you could say that's the biggest driver of the need for more capacity but again we've had growth in all areas. So I would say maybe the thing to put us over the top to decide if we needed to lease some space in Sioux Falls was really the commercial market growth probably. That was above and beyond what we were expecting. And so the Sioux Falls operation actually will be primarily dedicated to commercial product -- commercial market business and in particular, we'll focus on the digital billboard product line.

Okay, thank you, Jim.

Michael Friedman, Noble Financial Group.

Hi, guys, congratulations on the quarter. Two quick questions for you. One, focus on the gross profit margin. Obviously you're expanding out the manufacturing facilities. I'm trying to get a sense for when the transition happens, I would assume there would be some hiccups there that may affect her gross profit margin. I'm wondering when you expect to see the inflection point on the gross profit margin and what your target is for gross profit margin for the full year '07? And then I have another follow-up.

I guess we don't expect to have a big hiccup, just kind of explain how our transition to the new area will go. We actually have some equipment in the new area now, and we have a 2-level facility, the new area, and the top level is going to be -- the manufacturing in that level will be electronic assembly. And we already have some equipment, most of it is new equipment that we have set up there. We're just getting that to set up as line, a module assembly line, and we're just getting that running this week. So that's mostly new equipment that we brought on. We have moved a couple of pieces of equipment and we're actually running those pieces of equipment today as we speak. So we don't see a lot. There is -- there is, a short time when we have to take each machine down to move it. But that's in a matter of just a couple of days. And each machine would be the goal and certainly not have a big impact on our ability to keep delivering here. And the fact, we've already brought on new machines, the net on that should be that we wouldn't be under the capacity on any given day that we are -- then we are when we start the process.

Michael, if I could add on that too. There's a number of things, the second part of your question dealt with margin for the year, we think that the margin for this upcoming fiscal year will stay in somewhat the same range. And there's definitely an impact of all of this spending on facilities, there's the lease cost to the new building, there's depreciation on the equipment, there's depreciation on the building and those types of things. But offsetting some of those added costs are redesign of our processes and things like that. That will help immensely. We think we can drive inventory levels down through some of these process changes and do a lot of different things. So for that reason, I don't think you'll see so to speak a hiccup. I think if there were significant changes that would happen in margin, it would be due to changes in the competitive environment or our product mix, which are two things we've always dealt with.

Okay. Great. Appreciate it. And then one other question. It relates to Clear Channel, they announced recently an order of 10 digital screens in the UK. I'm sure you saw that, and they mentioned they are going to use reflected light display and not LEDs and I was just curious to know if you had that technology and whether you expect that different countries might use different types of technologies?

Yes, we don't offer reflective technologies at this point. I think, there's -- there'll be some applications where reflective may be acceptable. We -- we are familiar with the technology. But I think there'll be a mix of applications.

So you don't -- you don't foresee there being the digital billboard market going to one technology over -- over another? In other words it's more of a niche kind of an order, is that right? Or is it -- or is it just specific to that particular order, or do you expect -- I guess my question is do you expect LEDs to be the dominant technology for the billboard market?

We still see that LEDs have a lot of -- a lot of advantages in terms of the brightness and certainly the cost. Cost is always a big factor. And the cost of -- of our -- the price point of our product has come down significantly. The image is, fantastic, that we get with our technology and it's -- in fact, if the billboards are set right and being operated within the right parameters, the fact of the matter is that you drive by, you don't even necessarily notice that they'rean electronic display. The difference is that they can be changed frequently. But with the right graphics on, they've just -- they've kind of -- they're very effective as just being able to change the copy. So, we think the LEDs are very effective, cost effective, and the reflective will probably find the niche, as well within the advertising -- the outdoor advertising world. It's a huge world. It's a huge industry. So I think one way to look at it, it bodes well, it just means there's more -- more interest in digitizing that -- the outdoor industry.

One other follow-up on the outdoor display. Have you talked to any new or do you have any orders from any new customers in that market niche?

There's the three big players and then there's a number of sort of next tier, second tier players in the billboard industry, and we've had, a few orders from that group, and we think there's potential for orders in the future from that tier of this company's, as well.

Great, thanks a lot, guys.

[OPERATOR INSTRUCTIONS] Jim Ricchiuti, Needham & Co.

Jim, can you talk about a little bit about the activity in the billboard market from the tier one customers? You've had a heavy concentration of orders and shipments from one customer, are you seeing activity from the other two?

We're seeing some activity from the other two, we're not really free to -- of course, we've talked about with the Clear Channel, and that's public information. A year ago, really, was actually a year ago this month, we turned on the displays for the pilot project for Clear Channel in Cleveland. And so -- but we're -- and we're seeing some other activity in that -- that area, as well.

Okay. And just shifting over to the -- to the sports market, what's the pipeline look like as you look out over into fiscal '07, Jim, in terms of maybe, if you could just give us a little bit of a color in the professional market and perhaps the college university market and any activity you're seeing in -- in some of the smaller venues?

Well currently the pipeline is very strong. And our challenge really is to, again, get our capacity -- keep getting our capacity up so we can keep our lead times where they need to be. That's our -- that's our short-term challenge in the -- in the sports market as well as the commercial market.

Okay, are you -- are you seeing, just given what you've seen in the market, are you concerned at all about any component issues? Obviously capacity has been a challenge for you, are you facing any component problems in terms of availability?

Nothing that really particularly jumps out. Of course, when you're ramping up, there's always, there's always some -- some delivery challenges that come along in kind of a day by day basis. But we certainly work very closely with our key suppliers, and try to give them forecast out as best we can so that even beyond specific projects that we have coming in so that they've -- we have our pipeline of product, parts coming our way, as well. So we do our best to manage that, and it is a challenging area to stay on top of, but I think we've been doing quite well at it.

Okay. And --

I will add, clearly we do have some exposure with some of our key vendors, I think it's inherent that in a technology business like ours, you have some key vendors that if, quite honestly, if they had serious problems, it would not be good for us, that's a fact.

Okay, and just, can you -- is there any way you could expand or elaborate a little bit more on some of the opportunities you're looking at on the -- in the narrow casting in the media side? I mean it sounds like you're close to something, I think you even talked about maybe possibly Q1, fiscal first quarter. Is there -- are these going to be more technology type alliances or, do you see some revenues associated with these?

The kind of two areas that we've looked at. One is the -- and we've done some work in already, is the advertising that gas stations, at the gas pump, we're exploring that. And also in the -- additional advertising opportunities in sports venues, which is an area, of course, we're familiar with, as well. We're just exploring some possibilities in each of those areas.

Okay, thank you.

This will conclude our question and answer session for today, I would like to turn the call back over to Bill Retterath for any additional or closing remarks.

I'll leave that to Jim.

Thank you for all of the questions, I appreciate that. Thanks for being with us today. And again thank you to all of the Daktronics employees for -- and I should add to all of our vendors, as well for supporting us. That's a good point you make, Jim that we depend on them very too, for our success, and we appreciate their support. It is an exciting time here at Daktronics as we move into our new building. We've been watching this building come up out of the ground here for -- seems like forever, actually as we're so anxious to get in it. But it's been about a year now, and so we're, we're real excited about having this new space and having the opportunity to reorganize our manufacturing and take advantage of that. So just comment that our -- note that our annual meeting is scheduled for August 16th, you want to put that on your calendar, if any of you are able to make it, we'd love to have you join us. With that, thank you for joining us today, and have a good day.

This will conclude today's conference call, we'd like to thank you all again for your participation and wish you a great day.