Daktronics Inc (DAKT) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics first quarter fiscal 2007 earnings results conference call. As a reminder, this conference is being recorded Wednesday, August 16th, 2006, and is available on the Company's website at http://investor.daktronics.com. During the call, all participants are will be in a listen-only mode. Afterwards there will be a question and answer session. Instructions will be given at that time.

I would now like to turn the conference over to Mr. Bill Retterath, Chief Financial Officer of Daktronics, for some introductory remarks. Please go ahead.

Good morning. Thank you for participating in our earnings release this quarter. Prior to getting into the details of the quarter, I'd like to offer our disclosure 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, 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 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 Morgan, our CEO, for highlights of the quarter.

Thanks, Bill. Good morning, everyone. Thank you for joining us this morning. A couple things were notable in our first quarter performance, first of all, we topped the $90 million mark in total sales, hitting the midpoint of our revenue estimates. At the same time, we completed our move into our new manufacturing addition. [audio break] We're pleased to get that accomplished. I'll talk a little more, a little later about manufacturing capacity.

Our gross profit margin was less than anticipated, due to in part to some one-time occurrences on large projects, which Bill will talk about a little bit later, and has put us short of our bottom line estimate range. The 92 million in orders, I'm sorry in revenues, puts us at 27% over Q1 of last year. At the same time, orders continued very strong, and consequently our backlog has increased by approximately 30 million over the beginning of the quarter. So we have a lot of work to do in the second quarter. Again, our commercial market was the leader in terms of order of growth, with greater than 70% growth in orders over the same quarter last year, and about 38% growth in revenues.

This growth is across all areas of the commercial market, including sales to sign companies, national accounts, the digital billboard business, and large marquees and spectaculars, with the growth of digital billboard demand leading the way. The commercial market accounted for about 40% of our revenue for the quarter. And we expect that to continue to trend up as a percent of our overall sales. As we've discussed previously, the growth in our commercial market is the result of the effectiveness of our technology as an advertising medium, for both on-premise and also third-party advertising, and the attractive price points of the product at all levels.

In the sports area, orders for large sports systems were up over 50% over the same quarter last year with revenue up about 20%. We continue to see interest in larger displays at sports venues at all levels. We recently installed the High Definition display for the University of Texas. It's the largest video display in the U.S., in terms of square footage, with dimensions of 55 feet high by 134 feet wide. We're in the process of installing some additional ProAd displays, and are completing that system as we speak.

And that makes that 55 foot by 134 foot dimension, makes that larger slightly larger than the Miami Dolphins board we installed in Q4, sorry. These displays will set a new standard for large sports venue displays. We think that bodes well for our business, and the future opportunity in sports. As we have discussed previously, we're seeing an interest in video at the high school level as well. We had orders for video displays at 8 high schools this past quarter.

Orders were down somewhat in the transportation market, which we don't consider a trend. Sales were up, as we worked off some backlog in that area. We see revenue, I'm sorry, we see opportunity for continued growth in the transportation market, but you should note that that is less than 10% of our business. On the international front, we've turned on the marquee display at the new [Wind] Resorts Casino in Macao, this will be a very visible reference installation for us in the area. And we also recently booked another order for a high profile casino installation in Macao, which is yet to be announced.

Our Shanghai facility and staff is coming along nicely. As noted in the press release, we had some favorable tax situations in both China and Europe at the moment, which we were able to benefit from in the quarter. Bill will comment a little more on that. Considering we have only been on the ground in Shanghai and Macao for about a year, we are very pleased with the success we have been seeing there.

Regarding capacity, we've been talking about capacity the past few quarters. It continues to lag our orders, even as we are increasing both capacity and orders on a steady basis. You know, while it is great to have a solid backlog, the extent of our backlog has driven up our lead times, which can have an adverse effect on booking orders. We continue to work hard to ramp up our capacity as we go forward.

As mentioned earlier, we did move into our new manufacturing addition, which will net us about a 30% increase in manufacturing space. Most notably the move of our electronic assembly area, that involves the moving of a lot of machines and processes, that was a significant undertaking. And that was completed this quarter, and that is great to have that behind us as we move into second quarter.

We plan to move into our Sioux Falls facility in September. And this facility will be dedicated primarily to the digital billboard industry, and that will give us another 40% increase in manufacturing space, and we will ramp up steadily in that facility, with the goal of being at a rate of double our current digital billboard capacity by the end of the calendar year. We expect to be able to continue to increase our output in that facility beyond that level.

We've hired employees for that facility already, and they are working in our Brookings facility getting training. So they will be ready to go when the facility is ready. We have begun to apply some of the Lean manufacturing principals that we've discussed previously. We initially focused in the electronic assembly area, as we were moving that, and relaying out the area. And we've already seen significant decreases in the amount of work in process that we have on the floor in that area, and the throughput time through that area has been significantly reduced.

So we're very pleased with what we have seen for results there, and then we've really just begun on that whole program. We'll apply these principals to other areas in the facility as well. The ultimate goal there, of course, is to improve on margin through cost reduction, and in addition to better serving the customers with better deliveries and better quality, and other things that come along with that. We have begun construction on another facility in Brookings, which we plan to begin partially occupying in Q4. That will be a combination of office space and manufacturing space.

As noted in the press release, we've increased our CapEx estimate for the year to 41 million, with the change due to increase in building rates, and the equipment purchases to respond to order demand, and also some corporate software that we intend to purchase this year.

Product development investment for the quarter was in-line with our target for 4%. We expect our product development investment for this year will be in that range. And again our areas of focus of product development for the year include further enhancements in our video product line, our Galaxy commercial product line, our All Sports product line, and our Vanguard displays for transportation.

We had mentioned previously we were exploring opportunities in the narrowcasting and the media rights niche. We recently completed two investments totaling about 10 million in this area. One with Arena Media Networks out of New York, which provides a network of displays in stadium and arena concourses.

The second one which we just announced is an investment in a joint venture with VST International of Los Angeles, and a newly formed company called FuelCast. FuelCast through an existing network installed by VST has displays at gas pumps in Canada and the U.S., and both of these investments will be based on an advertising revenue business model. Daktronics offers its technical expertise to each of these entities, mainly our display and control system experience, as well as our ability to manage and provide content on display networks. In each case, our joint venture partners have experience in generating advertising revenue on these networks, although they are both relatively new companies.

With that, I'm going to turn it back to Bill Retterath, to comment further on our margins and other numbers.

Thanks, Jim. Just a few comments. First to add some detail on the gross profit margin for the quarter. We had anticipated gross profit margins would be at near the same level they were in the fourth quarter. They came in at 28.6, down from that quarter. We ran it, the net result of the decline from what we expected was some difficulties on a few large projects in the large sports venue market, dealing with underestimating some cost of subcontracting, having a subcontractor actually default on a project.

And finally, some new technology that we put in place in an unusual environment that created some rework. And you know, we've rarely run into that downside, and we didn't have the upside on contracts like we typically do, to offset those items. On the mix, standard orders remained at 25% level consistent with the fourth quarter. And during the quarter, our margins on order bookings were essentially flat compared to the fourth quarter, and that's the margin estimates that we have at order bookings.

So the trend is not declining in terms of margin. Costs associated with the ramp-up of the facilities also impacted this quarter. The ramp-up was only slightly higher than expected. And overall I think our people did a good job at executing this, while at the same time getting the sales volume out the door.

This ramp-up of facilities, however, certainly impacted the amount of sales we were able to achieve. A few things we're dealing with as Jim mentioned the training of the Sioux Falls manufacturing, the staff, the movement, and installation of the equipment, the Lean concepts, all of which are designed to facilitate gross margin, growth, and capacity in future periods.

There are a couple of factors that impacted all areas of cost. First health insurance, we have a self-funded plan, and at times the costs ended up being higher than we expected and this quarter we experienced that. It's hard to know if that's a trend or not at this point. Secondly, during the summer many of our student employees start working full-time, that caused an increase in all areas.

And finally, we wrote off some equipment that we used for demonstration and tooling, due primarily to product enhancements. Overall operating expense as a percent of sales were higher than expected, but not as a percent of orders, and had it not been for the capacity constraints, we would have created a higher operating margin percent. We still think we can do that for the year, but it is dependent on the level of sales.

Getting further down in some of the costs incurred in selling expenses. We are also continuing to invest on the international side, but overall we're pleased at how well we did this quarter for Europe, and then also we've got, there seems to be a trend in profitability with our success in Shanghai.

On the balance sheet and cash flow, you'll notice a decrease in cash for the quarter. We've been investing a lot as of late, including equipment and electronic assembly area, our metal shop, and IT infrastructure. As Jim mentioned, our CapEx expectations are at 41 million, that excludes these investments we've made in the digital media business.

Let me make a few comments on the media business. Our investment in Arena Media Networks was approximately 6 million, for which we have a 50% interest in it. We will not be consolidating their results into ours, and we expect that for fiscal '07, it will not have a material impact on our results.

With regards to our investment in FuelCast of approximately 4 million in cash and other assets, we're still evaluating whether or not that will be consolidated into our financial statements. But like Arena Media, it's not expected to be material.

However, the combination of both these could impact earnings negatively for the fiscal year as a whole. But the effect should be less than $0.05 per share. We expect both of these investments will show solid contributions in our fiscal year 2008. Finally, with regard to implementation of stock option expense, the net effect came in at approximately $0.01 a share on the bottom line.

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

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Jim Ricchiuti, Needham & Co.

Hi, good morning. Bill, I wondered if you could elaborate a little bit more on the cost overrun issues. How many sports projects were we talking about? And if you could just drill down a little bit more. It sounded like you had a problem with one subcontractor. You also alluded to some new technology, I just wondered if you could elaborate on that.

Yes, Jim. Just, essentially three projects that we had some difficulties on. Now both, all three projects are still profitable. But these are large projects, we estimate the margin going into it using percentage of completion, and then as you know, that margin changes and historically for us we experience, we've been in this business so long, that we typically don't run into these types of issues, number one. And number two, three of them bunched together like this.

The one subcontractor that we had difficulties with, we're pursuing, you know, taking action against that subcontractor, I guess I'd say and try to recover some of it. We just had to step in and finish the job and take care of the customer, and we didn't miss opening day, and the system operated beautifully.

That's our job to just take care of the customers from our standpoint. We did that, but It incurred extra costs that we're going to try to get reimbursement on. Another project, just the steel structure and all of that, had significantly more costs involved than we thought there would be.

Okay. Just a couple of other, two other quick questions. If I think about your business, and historically there's been a lot of seasonality, or some seasonality, let's say, in the fiscal third quarter. As you bring on this capacity serving the commercial and digital billboard customers, should we assume less seasonality, or any seasonality at all, in that fiscal third quarter?

Yes, Jim. The one thing that's consistent about third quarter, and one reason there is that seasonality ongoing is because there's fewer workdays in the third quarter. And that doesn't change, and so in effect that takes our capacity down for the third quarter.

So that's the factor that we would expect to be consistent going forward this and third quarter. I expect we'll have more than enough backlog to work out of third quarter, based on what we're seeing at the moment.

Okay. And Jim, real quickly, you gave out some information on the sports market. What percent of revenues was that for the quarter? You gave I think on the commercial side. What did sports represent?

Sports was a little over 50 this quarter.

Okay. Okay. Thanks very much I'll get back in the queue.

The trend there of course, is that commercial continues to trend upwards as a percent of our total.

Okay. Thanks very much.

Thank you, Jim.

[OPERATOR INSTRUCTIONS] We'll go now to Jamie Lester, Southwest Partners.

Hey, guys, I guess on the margin guidance, you said you thought it would increase somewhat from the first level, the first quarter's level, A, does that include the loss you're anticipating from these new investments, or does that make a loss on top of that margin guidance?

Well, bad loss for these investments if they aren't consolidated it will probably go below operating margin. Okay, that $0.05 a share in nonoperating income. Now, the margin going up, in terms of the gross profit, you know, these investments won't impact that at all. Does that answer your question?

Yes. That's good. The second quarter, you know, if I kind of take the mid-range, I get to seems like, roughly a kind of a 9% operating margin guidance for the second quarter. Is that the extent of the margin rebound? Do you think that will kind of persist for the rest of the year? So if I put in. Is 9, 8.5 to 9% the right level for the balance of the year? Is that consistent with the guidance you've given?

Well, it all depends, there's a lot of variables in, but I would think that for Q2 if we hit the low end, we're at 9%. The high end can take it up depending on where margin is to 11 plus percent. It just depends on what we get out the door for sales, and the resulting gross profit margin. So I would say the bottom is at the 9% level, is roughly where that works out to be.

Got it. So if it's not, if the sales is 95, probably that's a 9% margin if you can get in the 105 in sales, you're going to get some leverage on that, and get to a higher level?

Yes. Yes. That is subject to variability, of course.

Yes. As is most of life these days, I think.

I have got to say that.

Yes. And then beyond the second quarter, is there any reason, I guess if you take the high end of guidance and add it to what you've already done in the first quarter, it implies a kind of a slowdown second half to the first half, or at least a flat lining, and that seems, I mean given all the capacity you're putting in. I guess why does that guidance make sense?

It's a matter of -- the question is why isn't the revenue growing faster? Clearly the orders are there, and the backlog is there. And quite simply it is a matter of how fast we can ramp up capacity. That is it.

Okay. But capacity should be certainly ramping up into the third and fourth fiscal quarters, right?

Oh, yes.

We expect it to continue. We have just here in the next two months, we have a number of pieces of metal and working equipment arriving at a couple of new electronic assembly lines. There's a lot coming in in the second quarter, that will be operative by the end of the second quarter, it will be fully running in third quarter.

Got it. So then --

Our hope is that certainly by the end of some time, end of Q2, end of Q3, most if not all of these capacity constraints have been diminished, based on our current outlook of orders, and depending on how successful we are in getting that backlog down as well.

All right. So I guess let me rephrase the question, which is, if the capacity is coming in, and should be somewhat to mostly in by the third quarter, why the back half revenues lower than the front half?

Why are the --

If you take 105 and add it to 92 -- [multiple speakers]

You're focusing Jamie, I understand what you're saying. You're saying we said in the press release 370 million for revenues, and we've got 180 plus now we've got 95 now, and then you're going to add on this for the second quarter. That's the analysis you're doing, right?

I'm saying if you take the mid-range of 100, so you've got 192, then it's actually down.

When we, that's a good question --

I guess, are there large contracts coming off or?

Well, no, historically when we give the long-term revenue guidance, I think in many respects you can look at that as the lower end of our range. Okay?

And we haven't given a top end of the range so to speak. So that number that we put in the press release is by default in terms of how we communicate. Maybe we should be clearer, it's the low end of the revenue range.

Okay. And then can you just talk about the competitive issues if other competitors, mainly Asian, I would think manufacturers are moving into commercial space if you're seeing that? Does that have any impact on pricing?

Yes, we're finding that for the most part that on the larger systems, that the Asians are can be as effective, in terms of service and support, and they can offer low pricing, but they haven't been so effective there. The one Asian company that is active in the sports world in particular is Mitsubishi, and they have been successful on large projects there, and they have a, somewhat of an infrastructure in the U.S. And they tend to focus on just the large projects, primarily.

But we do see some Asian companies coming in at the low end of what we call our Galaxy displays, the retail-type small advertising matrix displays. And they do come in with the low price, and we have to be price competitive. So certainly there's competitive pressure on margin, that's why we're focusing a lot on our manufacturing processes, and really just really work on taking cost out. That's an ongoing thing. We always have done that, and will continue to do that.

Got it. And okay, and Mitsubishi at this point does not sell into the commercial market?

Not too much. Occasionally on a big project they may.

Okay, and do you think there are reasons why they will not enter that market?

I can only speak for what they've done so far. Because they haven't involved me in their strategies sessions lately.

[laughter] How inconsiderate of them. Thanks, I appreciate it.

Thank you.

We'll take our next question from Stuart Kagel, Janco Partners.

Good morning, could you just talk to, with the Lean manufacturing, what you're targeting in terms of long-term gross margins, and long-term operating margins? And then I just had a follow-up drilling down on the billboard side.

The philosophy on Lean manufacturing is really one of more continuous improvement. And when we go into a particular project, you know, it's kind of eat the elephant a bite at a time, I guess is how we look at it.

Like when we go into electronic assembly, we'll do a benchmark on our work in process and our cycle time, and that sort of thing, and then in that particular area, we'll say, okay, what do we think we can achieve here, and what things can we do to improve that? And when we're through that process, we'll measure that and check against our targets.

So we haven't really, and in fact, it's just difficult to say. Through Lean we can achieve X on a corporate basis, one thing you have to understand, Lean is an ongoing thing, it's not a three month deal, where you go in and change some things and then you are lean. It's an ongoing discipline and an ongoing philosophy that we're adopting, and so our intent is to continually improve, and it's typically not a step function. You know, it's a ramp function that you just continually work at.

So I can't really answer your question quantitatively, but hopefully that gives you at least some insight as to how we're approaching it, and how we're thinking about it.

Okay. And then on the billboard front. You were doing mainly the large size billboards for Lamar, have you made any inroads on the smaller poster size boards for them?

Well have done some smaller ones for them, as well from time to time.

and --

I can't give you a quantity, I actually don't know the quantity on it to be honest with you, so I can't give you that. But there has been some.

And then I believe you got the Albuquerque contract from Clear Channel?

That is correct.

Okay. Are there any new data points, I guess from the billboard operators, about expansion plans or their objectives, in terms of trying to ramp materially?

Well, the, in general, I'd say that the indications are that, they plan to continue to ramp. And from our perspective, really, we're limited. We feel that the governor on our what we can accomplish in sales in the billboard industry right now is our capacity, and that's why we're working so hard to get that up. I think in the near term, whatever capacity we can come up with, I think that we can sell into that industry.

I guess the overarching theme at this point based on your order flow that your operating leverage and your top line, is really a function of blocking and tackling, and growing your capacity into your sales.

That is true. That is true. And we're working hard on that.

Great. Thank you.

Thanks, Stuart.

We'll take our next question from Steve Altebrando, Sidoti & Co.

Thank you. There's some pretty substantial sequential jump in the selling expense, do you expect that to normalize a bit? And some of the factors that you mentioned were those mostly pertaining to the gross margin?

Yes to the first part, we do expect some normalizing to that. You know, it does take a jump historically in this quarter, as a result as I mentioned, all our students that we have working in the, during the school year go full-time. That impacts G&A, as well. Ask then, you know, there were some, you know, the health care costs, definitely impacted that area. But, you know, keep in mind that at the level it was at, they did generate that, our salespeople did generate that order flow, and in terms of us managing our business, we look at selling expenses based on order flow more so. And so we're optimistic that we can keep the order flow coming in in the near term. So I think, you know, I think it took a big jump. I think there's some normalizing, but I think overall we're in good shape.

Okay. Could you give any type of idea, I guess, what type of revenue you could have done in the quarter, had your capacity been higher? Any upside to the revenue?

Well, --

Just a rough estimate.

We booked 120 million in orders, so if we could have done 120 million in revenue, that would have been great, quite frankly. So that's kind of a speculative question, obviously we weren't able to ramp at that level on the revenue side, but yes, that would -- it would have been nice if we could have gotten 120 million out the door some way.

Okay. One more. As far as technology formats for the digital billboards, could you talk a little bit about LED technology compared to some of the other formats that have been out there. I guess one that's been spoke about a little bit is Digital Inc.

Right, there's a company called Mag Inc., and they have a reflective technology. And they've continued to perfect that over the years. And there are some limitations to that technology, in terms of size. It's, you know I think it's come along now. And it has been deployed, or is being deployed in Europe.

And so, I think they'll find, it seems they will find a niche in the industry. It's a big industry, so I think to some degree, I think it bodes well because that just reinforces the interest in the industry and going digital. So certainly for the large very large displays, the LED is still the media of choice on smaller displays for closer up viewing, could be in some cases that will be the media of choice.

Okay. Thank you.

Thanks, Steve.

We'll take our next question from Michael Friedman, Noble Financial.

Hi, guys, this is a follow-up to that, I think you're working on liquid crystal, and is MAG Inc something you might move into in the future? Is that something you're working on or might work on?

The liquid crystal displays that we're doing, of course are the smaller liquid crystal displays. One of the things, we're certainly in a position to adopt technology, and so it's conceivable that in the future, although there's nothing set this direction at this point, but it's certainly conceivable, that we would find a way to work with that technology in the future. We certainly wouldn't want to rule that out, I guess is what I would say about that.

So there are no patents protecting that?

On no, that's their technology, -- again the MAG Inc. technology is patented, it is proprietary.

Is there a way you could offer something similar perhaps, that has the same functionality? But doesn't in any way impact --

I guess the way we look at it. We didn't invent the blue and the green LED, but we use the blue and greed LED, and of course with the red LED in our products, to deliver a product to a customer with the control system, support, et cetera.

So if there were a company that was interested, that had that reflective technology and was interested in working with us, we'd certainly be open to that possibility. I don't know that we would at this point we wouldn't envision that we would actually do the basic research to develop the chemistry for that type of a product, way down at that level.

Okay. So maybe license it something like that.

Yes, license or something like that. Again I'm not saying we have anything going, I'm just saying we're open to those kind of things as a company.

And to get to the capacity issue, I think you mentioned earlier you'd probably be bringing on capacity about 30% a year, it seems like over the next couple of years, does that mean you could hit maybe 30%, assuming that you have enough work on the revenue line? Is that a way to look at it?

First of all, I think it's important to understand that space does not equal capacity. And maybe just to kind of clarify how we look at what is capacity. It's a combination of things. First of all, it's the people that have, that you need to do the work. And that's not just manufacturing for us, it's engineering people, it's the installation people, project managers on large projects, and all of that together, of course, you have to have the salespeople to generate the orders in the first place.

So there's a people component, there's an equipment component, you need equipment for especially in the plant, to do the work. You have outsource, we have outsource vendors that do fabrication and assembly for us, in conjunction what we do internally. And that you have suppliers. And then you need space to do the work in and put the people and the equipment in the plant. So all of that goes together.

Space is just one component of capacity. So we did just bring this 30% on at Brookings. We actually had ramped up our capacity last year without increasing our space. We were overcrowded. Now we're getting deployed in the new space more efficiently in a much better layout. But we're going to have that, feel that will be reasonably full here you know within a year or so. And that's why we're of course bringing on the Sioux Falls facility.

To answer your question, is it reasonable for us to try to increase revenue, though by 30%? Certainly our goal would be we'd like to get up to that level, because of the order demand that we're seeing. But you know, that's a big step up. Last year we were able to increase our top line about 34% year-over-year. So a 30% increase is not, it's not out of line for us to shoot for that.

Okay. So how much, I know it's difficult to say, but I'm trying to get a sense for this. When you add let's say 30% capacity in space, how much would that translate into roughly, as far as what you might be able to pump out in revenue assuming it's at full capacity?

Well, again, if you have the same density then you could say it would equate proportional to that. My point is, that you bring on space in chunks. We added a 110,000 square foot building addition here, and your output doesn't track that kind of an increment, because you have to bring along the people, the equipment, and everything else with it. So the actually capacity is more of a ramp function, where you have the space coming online in a step function. Does that make sense?

Yes. But, so in other words, maybe I'll ask it another way. The percentage maybe of space to actual capacity, is there maybe 50% is the actual capacity revenue generating capacity of the overall space that you're going to build out? Is there a way to look at it that way?

Of the space we added here, 110,000 square foot about 80,000 of that will be for manufacturing, if that's what you're asking. And that 80,000 is the 30% increase in manufacturing space. The other space addition is for a cafeteria, and it will be some office space that we'll be adding.

Okay. Great. Thank you very much.

Thanks, Michael.

Our next question will come from [Brian Dombrowski, Pacific Asset Partners].

Great. Thanks. I just wanted to pursue a different one-liner from your commentary, which was on the installation of the corporate software, I'm wondering if you could just flush that out a little bit, in terms of what kind of software you're planning on installing, and the level of complexity of the installation and the timeframe around completion there? Thanks.

Yes. What we're looking at in particular is some software to support our services businesses, or the service aspect of our business, I should say. And that's a lot of different components of that, but it's kind of specialty area, and we have our current software we use, which our ERP, our basic software that we use for plant scheduling and inventory and accounting, our basic business software doesn't have the functions we need as we're growing here, to really support our efforts there. So that's the area that we're looking at.

We have over 40 offices around the country. We give service very high priority. We believe that's one of Daktronics really core strengths. And so we believe that we are just at a point that we need to increase, improve our systems there, so that we can operate really more effectively.

And the price range of that is we're still working on the pricing, quite frankly. But it's in the million dollar-ish type of range, but it's not quite set yet.

Okay and the timeframe?

We're actually in the process of selecting a vendor here in the next 30 days, and then it will be an implementation over the next 6 plus months.

Okay. Thanks.

We'll take our next question from Jack Ripstein, Potrero Capital.

Hi. I was just calling about the capacity you guys just spoke about in length it seems like. But just an idea. I understand the 30% increase. What would be at peak, your revenue on the new capacity? Let's assume that all orders fell in buckets that look the same as to what they've been, but you could all of a sudden fulfill them all at the appropriate time. What would this new revenue sort of ceiling look like with the capacity that you've brought on?

In assuming that we had all the people in there too, and all of those others --.

Right, I'm assuming 100%, what that ceiling is?

I guess, you know, we look at this more as an ongoing evolutionary thing, not something where we go to some point, and we're that's some cap that there is.

No, I understand, you can incrementally stand, just on this last round of funding. What would be, you know, okay, we've got it 100% of what we've done would be, you know, pick a number.

41 million of fully invested and up and running, is that what you're talking about?

Exactly.

That's a good question, exactly I don't know if we have a number. There's so many moving parts to this. A good question, I don't know if we have a number.

Maybe a better way to answer that is that our, what we said earlier, our expectation is that the capacity issues, once this goes up, once the facilities get built, and once the employees are hired and, you know, that's an effort to hire the employees, as well. Once that happens, our goal is to become the Daktronics that we were a year or plus ago, where we have the capacity and we can do those quick turn projects.

And we're not limited like we are to some degree right now. So I mean in short to answer your question, it definitely maintains or gives us this growth that we're looking to handle, and allows us room for up side.

I guess I'm just, even a ballpark, could this be a $500 million revenue company, based on the capacity at full peak?

I would say if you're saying can we do 500 --

Million.

Million with that investment, I'd say absolutely, yes.

Okay. Great, thank you. That helps.

We'll take a follow-up from Jim Ricchiuti, Needham & Co.

Hi, just wanted to again circle back on the issue of the cost overruns. Bill, do you feel you're largely through that? In other words these were projects that are now completed. And as you look at your backlog, and some of the other pieces and large deals that you have in the works, do you foresee any other issues possibly cropping up? I know it's difficult to predict, but how does it look?

Yes, Jim, first thing to clarify. The one project we're not completed with yet. So it still has a little bit of a lingering effect, and that will probably impact this next quarter. But, you know, I think we've got a long, long track record of not running into these types of issues. I can't remember in my time here off the top of my head of having something like this happen.

So I believe it's unusual, but you know, it does talk to the fact that we do quarter to quarter, there is volatility that we have, because we're dealing with these big multi-million dollar projects. I think we do a darn good job at managing that and estimating this. And historically we've got a track record that shows that the margins come out higher on these projects, than what we achieve going into them.

So aside from the lingering effects on one project that will still effect us in Q2. I'm not forecasting this problem to continue, or to arise on other projects. There's nothing in our business that's changed to suggest that.

I might add to that, Jim. When you have things like this come up. You always go back and do a post mortem on it, and say okay, what happened here and how do we make sure these don't happen again? You always take them as a case study, and if there's some things you feel you need to shore up, you shore them up.

Okay. Just to switch over to the commercial business. Before I do that, were there any 10% customers in the quarter?

No, not in terms of sales, no.

And just on the commercial business, what's the level of activity you saw in the quarter from the Tier 2 billboard companies?

You know, it's not significant compared to the Tier 1s, I can say that, but there's ongoing interest there. I don't have the exact number here, but there's ongoing interest, definitely.

Okay. And Bill, just one final question for you. Tax rate going forward, what are you assuming over the balance of the year?

Back up to the 37. And that, just give you more color on the situation in China, as we've got tax free income for a period of time over there. You know, we've been successful on some big projects there, and so you know, that could be a positive effect, but I think you've got to assume it's in the 37 to 38% range like it has been.

Okay. Terrific. Thank you.

We'll take our next question from [Brian Dombrowski, inaudible] Capital.

Hey, guys. Follow-up on previous question about the SG&A normalizing. Can you sort of quantify that? Is that in 10% range or the 11% range?

Are you talking about --

-- the selling expense.

Oh, as a percent --

of sales.

Yes. I mean, our goal, well, yes, you know what I'd prefer to do is talk more on the operating margin, if I could. And on operating expenses as a whole.

Okay.

And, you know, that we've got to drive down to the or drive up, I should say in the 10 to 11 plus percent range. And so in terms of managing our business, we're still a young entrepreneurial company, and if we see opportunities out there to make investments in different areas, we do that. So to lock us into a specific percentage there, does probably not fit within our model. But to look at operating expenses as a whole to definitely drive those below 20% is our goal.

Okay, so the fourth quarter number was 11.9, and then so how long do you think to get back maybe to, you know, the 11%? Or --

Given the range in sales, if you just look at our range. If you normalize it for the quarter and you hit the top end, we're at a somewhere near 11%, if my math is right. So the percentage has a lot to do with the sales we're able to get out the door.

Okay. And then, you spoke a little bit about Clear Channel. Can you talk a little bit more about the pipeline, or how you guys are doing business with them in the near term sequentially?

We don't speak about specific customer pipelines.

Okay.

We try to just talk about the overall picture.

Sure.

The overall picture there we see there is very positive. And again, our revenues in the near term are very much a factor of our ability to deliver as anything else.

I think you also said you're adding another facility or a little bit more capacity, not the two that were, not the Sioux Falls or the Brookings. Do we see any additional costs coming in the next quarter, similar to this quarter?

Cost of what type?

Of employee costs, or any sort of other expansion costs in the operating lines? Or has that all already been done basically this quarter?

I think there still could be a minor minor effect on margin.

So anything like costs without revenue benefit?

Well, we're always. To some degree we're always investing in the future. And in that sense, we're quite reasonably aggressive in investing in the future here. And we see opportunity in our industry and so, you know,we're investing in our sales force, of course and the rate we invest in that certainly has a bearing on what the selling expense percent comes in at. And the rate we invest in our infrastructure has a bearing on the cost for the quarter. And there's a delay in return on the investment. So yes, there are costs that go into the quarter, and investments that won't have a return in that same quarter.

Just some examples that probably would be worth mentioning. We opened up an office recently in Dubai here, early in this last quarter. We're opening up an office in France. And although we've gotten revenues in those areas, when you go into a country, you'll incur rather, as compared to the U.S. opening an office, you'll incur significant costs, and you're not necessarily going to get the payback on that stuff day one.

Okay. Thank you.

We'll go now to a follow-up from Stuart Kagel, Janco Partners.

Thank you. I was just trying to figure out if you had given the number for billboard revenues in the quarter? And then as a follow up to that, I wanted to understand, you're massively overengineered with a full motion video controller on the digital billboards. I'm just curious to know, how far along you might be in a dummied down video controller, that might be able to bring the cost down on the units?

We actually have introduced an updated controller that's more streamlined and does, you know, really, you're right, the digital billboards really aren't full video. They don't use them with full video there. They're a slide show is kind of how we like to think about it. And that's, the most effective use for the display and for the media really. The billboards, people understand the type of graphics that is easily read, and really at just a glance by the traffic passing by.

So the answer is, we have already introduced that. And it's been well received. That was one part of your question.

Stuart, the other part is total billboard business. Obviously we're getting asked that a lot, and it's hard to always quantify that, because the definition of a billboard is not always clear. But, yes, it's in terms of our total business, it's less than 10 million, I believe for the second quarter, if you look at it as broad as possible. In terms of revenues.

Great. Thank you.

We'll take our next question from Ken [Fercellis, Overwise Asset Management].

Hi guys. Good morning. Just a follow-up on a cost site talked about. For example, one of the cost problems that you had with the 3 sports products was steel costs. Can you talk about in general terms, the input cost pressures that you're seeing from your subcontractors and your suppliers? And help us understand your ability to pass those costs through to the end customer, not only in terms of new business that you're signing today, but the ability to go back to previous contracts that have been signed and escalate pricing as need be, with respect to cost inputs.

Most of our subcontracting is fixed price. And as Bill mentioned, we have a lot of experience in that area, and we have a good track record in managing that well. We have a couple of things that came up and bit us this time. But as long as the scope is of the project is set at the beginning, we will give a fixed price on it. If the scope changes, then we're, typically then there would be an opportunity for a change order to cover those additional costs. So in the normal course of things, additional costs that are justifiable can be passed on.

Do you have any other questions, sir?

No, thanks.

We'll take our next question from Steve Altebrando, Sidoti & Co, has a follow-up.

Thank you. I think you guys had previously said you had targeted 31% on the gross margin, kind of going forward as long-term range. Do you still think that's a possibility for fiscal '08?

It's certainly within the realm of possibility for '08.

And can you give any color on recent pricing for LEDs?

Again, that's one of those kind of a trend things that the price since the mid-90s has trended down. We expect it will continue to trend down some. The rate of trending down may decrease because there is somewhat of an asymptote type effect on the pricing there. But we see that it can continue to decrease somewhat.

Okay. And just last question. Are you guys seeing any business or internationally for billboards, or any transit signage, digital transit signage?

We are seeing some digital transit signage. We have a nice order with the North Texas Tollway that we've announced. And that's for over toll booths. I don't know --

Internationally --

Oh, did you say internationally?

Well, both, really. Internationally as far as billboards, and either one, Transit meaning subways and public transportation really.

Yes, we have our transportation group, you know, focuses on all aspects of transportation, including Mass Transits, Tollways, over the roadway with DOTs, all of those are opportunity areas. You know, there's a limited number of subways in the world, but they do deploy digital signage.

The North Texas Tollway, that's a project where multiple toll plazas will have full color graphics displays over each of the toll booths, indicating whether it's, you know, whether it's manned, or one of the electronic pass card type of lanes, or if it's some other special use.

Okay. And are you seeing any business in international billboards?

Yes, we're seeing some.

Okay. Thank you.

So, I think we're probably going to have wrap this up. Maybe take one more question, and I think we're going to have to close it up.

We'll take the last question from Tom Holman, Lee Munder Capital Group.

Hi, good morning.

Good morning.

Jim, you mentioned in your comments that you had been able to fully move the electronic assembly line in the new addition. I was wondering if that meant that the Brookings facilities that you have at the moment are kind of at steady state, or is there still some moving around that's being done, as you migrate the different processes?

We are still moving around. That was one of the dominos to fall I guess, in the moving process. Let me explain what we're doing there. In manufacturing, we're changing how we look at manufacturing, in terms of our structure. We used to look at our manufacturing as being one manufacturing plant or factory, that had multiple final assembly departments.

And now for the past year, we're restructuring where we're looking at really a 6, call them factories or plants, each of which will be autonomous, and it will be one of those for each of the four markets that we talk about. Namely large sport venue, the high school park and rec, commercial, and transportation.

And then in addition to that, we've split commercial into two factories. We've deployed a special factory, the one in Sioux Falls just for digital billboards, so there's two for commercial, so that gets you to 5. And then we have another factory for electronic, electronics manufacturer that will serve the other factories. So that gives us, again, just a broader base to work from, and continue to scale up.

We've kind of reached the limit on scaling up with our old structure. That's a big deal for us, really to have gone through that. And we're well along in that restructuring. Have most of the leadership in place for that. And as we have this new space available, we're moving some of our functions into the new space, and then freeing up some space, and restructuring the others that will be in the existing space.

So there's some ongoing movement. But it's not as disruptive to move the other areas that are more final assembly-oriented, as it is moving the electronic assembly area.

Okay, very good. Thank you.

Thank you. Okay. With that I think we'll bring this to a close. We want to thank you all for all your questions. We appreciate your interest in Daktronics. Just would like to just kind of a broad overview comment on Daktronics.

And many of you have followed Daktronics, I know for a number of years. And we've always encouraged investors to look at Daktronics over a longer term. We do have some ups and downs on a quarter by quarter basis, primarily due to the large projects that we work on. And, you know, we're as evidenced by our order volume and order growth, our businesses fundamentals we believe are very solid.

We have a lot of people here working very hard. And that will continue, so we're very positive about the future here. We have our shareholders meeting this evening, if any of you can make it to that. We would certainly like to have you here.

Also tomorrow we have an event that's kind of unique. We have actually the Governor of South Dakota, Governor Mike Rounds is going to be here for a ribbon cutting for our new manufacturing facility. At the same event, we're having a ground-breaking ceremony for our new building that we're just getting underway here. So it will be an exciting event for us, and a real milestone in our growth here, to get this one building up and running, and be starting another one simultaneously.

With that, I thank you all again for joining us this morning. I appreciate your interest.

Thank you, once again, ladies and gentlemen, that concludes today's call, thank you for your participation. You may disconnect at this time.