Daktronics Inc (DAKT) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fourth quarter and fiscal year 2007 earnings results conference call. As a reminder, this conference is being recorded on Wednesday, May 30, 2007 and is available on the Company's website at www.daktronics.com.

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.

Thank you, operator, and good morning to everyone. We appreciate your participation in our year-end earnings conference call. We would like to make some preliminary comments about the quarter, the year and our other two releases this morning on dividend and reorganization of the business, after which we will open up the line for a limited timeframe for questions. First, as is our custom, I would like to offer our disclosure cautioning investors and participants that, in addition to statements of historical facts, this call and our quarterly news release contain forward-looking statements reflecting our expectations and beliefs concerning future events which could materially effect 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 and growth, timing and magnitude of future orders, 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 call. We undertake take no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. With that, I would like it turn it over to Jim Morgan, our Chief Executive Officer for some highlights on the quarter and the year.

Thanks, Bill. Good morning, everyone. Thank you for joining us this morning. We were pleased with the final results of the fourth quarter, with the bottom line in the center of our revised estimates and the top line exceeding the revised estimates. We had strong order bookings at the end of the quarter that actually exceeded the range in our mid-quarter release. Manufacturing and project management also had an outstanding performance in April and gave us a strong finish for the year in revenues and giving us a great backlog to start the year with.

For the quarter, the bottom line was down compared to last year. I would like to talk about a couple of areas where costs are on the high side. Selling is up as a percent of sales, more than a basis point. However, as a percent of orders, it's kind of in the range where we think it should be. We tend to look at selling expenses as a percent of orders, since that is the, first, the function there. And this selling, investing and selling expenses really is investing in our growth. As we ramp up revenues, we do expect that that can back down somewhat as a percent of sales.

G&A is also up more than a basis point over where it has been. We expect the dollar amount of G&A to grow going forward, but at a much slower rate than the top line. We are investing in some infrastructure in our IT area and that is putting some pressure on the G&A line in the short-term. Again, we see that as an investment in the future to allow for future growth. Product development has very consistently, historically, been around the 4% mark. We finished fiscal '07 at 3.6%. It's likely that we could see it also finish on the low side of 4 in the fiscal '08, but in general we see this investment as an important investment in our future. It is not our strategy to reduce this significantly below the 4% mark.

I would like to step back and take a look at a little bigger picture, namely the accomplishments of the past year. It truly was a building year for Daktronics and there are a few things that stand out as we look back over the year. First of all, just the top line growth of 40%, which follows a 34% growth in fiscal year 2006, almost doubling our top line over a two-year period. And I think it's noteworthy that all of our major markets were up nicely over that period. We initiated our Lean manufacturing program. This was an important new initiative for us. We made significant investments in the program to streamline our overall manufacturing process and this investment is in the form of both consulting fees and the time of our employees. And we began realizing tangible benefits from our efforts during the year.

Digital billboards came on even stronger this past year. We opened a manufacturing facility in Sioux Falls, South Dakota in September and had shipped over 150 units from that facility by the end of the fiscal year. We have positioned ourself as a major supplier in the digital billboard world, reliable supplier of product with a diligent attention to service. We also brought a new manufacturing facility online in Redwood Falls, Minnesota to serve the rapid growth in demand for our Galaxy product line. This plant came online at the beginning of the fourth quarter and contributed nicely to the top line in the quarter. We are continuing to move product over to that facility, adding the -- our digital gas price displays to the product line that will be manufactured over there. Both of these new facilities are based on the Lean manufacturing principle. We're extremely pleased with how they have started up and are running with excellent efficiency. Having said that, there's always more that can be done and we have ongoing efforts to continually improve our processes.

It is important to note that these new commercial facilities will also free up capacity in bookings for our sports market growth, as we have moved almost all of our commercial manufacturing now out of Brookings. The people in Brookings who have been working in the commercial area are being reassigned to help with sports systems manufacturing and it's great to be able to bring that level of capable people to that task. We achieved nice sales growth in mainland China, as well as Macau, as a result of investments we've made in our sales, service and basic manufacturing capability based in China. We have laid the groundwork for continued growth in that area and our expectation is for continued growth in international, with the fastest growth being in China. The projections for growth there are -- actually the range is fairly wide because there's a lot of large projects involved and we're dependent on large projects for the revenue there, for the bulk of the revenue internationally.

We made an initial investments in digital media, with investments in FuelCast and Arena Media Networks, to get a better understanding of the place-based media market and establish ourselves as a provider of network services for that market. We installed a high-definition ProStar display for of Texas, which is the largest video board in a sports facility in the U.S., about 55 feet high and 134 feet wide. And this installation, along with our earlier installation at the Miami Dolphins, is indicative of the interest in high-definition video in sports facilities. And the interest in high-definition is expected to be a driver for business going forward in the large sports venue business.

One of the more significant accomplishments has been our transition to a business unit structure, allowing manufacturing, engineering and customer resource -- customer service resources with our markets. We actually began the process of realigning the organization about two years ago and we have the business unit structure in place for fiscal 2008. By aligning our resources more closely with the markets, we believe we can better serve our customers and do it more cost effectively. Separate announcement today introduced the business unit structure and the managers of those business units. This evolution is an important step to be able to continue to manage the company effectively as we grow to exceed $0.5 billion in revenues and look forward to growth beyond that point.

I'm not going to go into detail on the business unit structure except to just comment on one new term that we've introduced and that is live events. The live events group is -- consists primarily of our large sport venue groups, so that's the bulk of it. We also are including within that live events group our mobile and modular group, which is the group that builds, designs, manufactures and delivers product for the -- the rental and staging market, the portable -- or the travelling shows and travelling events. And also in the live events, we include Perimutual, which is the horse racing tracks primarily. The other business units are primarily -- use the same terminology that we've used in the past, namely the Commercial Transportation, the High School Park and Rec and then we have carved out International as a separate business unit.

All of the business unit managers have been with the Company for more than 15 years, all have a technical background, as well as many years working with our customers and our sales organizations. All have been serving the same customers that their business unit will be serving, so the transition is quite seamless for us. I'm excited about this new structure as a base to build on for the future. With that, I'm going to turn it over to Bill to talk some more about the numbers.

Thanks, Jim. Starting out, I would like to add some detail on the gross profit margin for the quarter. We had anticipated margins would be up a little bit higher, the key factor playing into margins ending up where they are involve some additional warranty expense and inventory write-downs that we didn't -- did not expect, expect. Roughly that cost us about a margin point. We don't see either of these factors continuing into next quarter. Overall our large contract business continued to perform well from a margin perspective on sales.

We expect to see gross profit margins decline somewhat in the first quarter, primarily due to the impact of larger projects that have been booked during the fourth quarter at lower margins. We don't see this as a trend, but rather an issue of the natural volatility on the very large projects. And when you book in a single quarter three projects in the large sports venue that account for $25 million in orders, you can -- it's not unreasonable to expect some margin pressure. Offsetting this, however, to some degree, will be decreases in raw materials prices that we should benefit from in the first quarter, for which we are still evaluating -- that have come up recently. This could end up being more significant than we have projected in the numbers, but due to the timing of it, we're still evaluating its impact.

We continue to see higher costs of all our manufacturing infrastructure, but as evidenced by the performance at Sioux Falls and Redwood Falls, we think that offsetting these costs will be greater efficiencies driving down labor costs. Finally, margin benefited slightly by mix due to a larger percentage of the small order shipments, primarily due to the better than expected progress of our Redwood Falls plant, which helped to further reduce our lead times. In closing, on gross profit margins, I think we can still achieve the 30% mark for the year as a whole, but the first quarter could see margins lower than this and ultimately our success on gross profit margin percents will be dependent on the large mega projects in the sports world and how those projects turn out.

On the G&A side, we did not hit the numbers we expected in the fourth quarter and, as Jim mentioned, we're making changes in the business and we are committed to significantly cutting the growth rate of G&A. Our investment in the hoist business continues to perform well. During the quarter we made a few management changes and we expect to drive better results than we already are achieving, which are above original expectations. Our media business on a whole seems to be on track, as our field cast investment is rolled out well, with over 300 stations in Chicago, L.A., San Diego, San Francisco, and an additional plus in the near term. The level of interest both with the petroleum retailers and the advertisers seems to be extremely high, and now we are one of the countries largest digital networks in field cast.

On the balance sheet and cash flow, you may have noticed, we did see some declines in the level of inventory. We're seeing significant improvements in our new plants, where inventory turns are 50% higher than in our main plant. This is a testament to the new processes we laid out for those plants that will evolve over time into our Brookings facility. We're making progress, obviously, but we have a lot more to do. Also we changed our approach somewhat on the new building that's in progress and expected to be complete near the end of the first half of the fiscal year, and the overall level of equipment we're putting into our Redwood Falls plant, so that the bottom line on CapEx is that we still have approximately $15 million left over on our capacity initiative that's shifting into fiscal '08 and $35 million in what I would call normal levels of CapEx spending. Remember that a portion of CapEx includes building equipment for rental to our mobile and modular customers and demo equipment for new technologies, which are later sold off to customers. Overall, I remain optimistic on cash flow from operations and declining CapEx in the future. With that, I would turn it back to the operator to open up for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Michael Friedman with Noble Finance.

Hi, guys. Couple of questions for you. On the SG&A side, I guess you said you are taking steps to mitigate the rise year-over-year on a percentage basis and that you expect to see the operating margin increase as a result. Can you give us a little more color on this? Do you plan on growing the top line and getting improved gross profit margins? Is that what we're talking about? Or could you just give us a little more color about that, in that regard?

Certainly, Michael, the plan is to continue to grow the top line. That's a given. And, and we are giving a lot of attention to our -- we did a fair amount of hiring last year. We've increased our head count considerably, and our plan is to not continue to hire at that same rate here going forward and we've had a lot of discussion about that here and given that a lot of attention. So to let that percent settle back down a bit.

All right, but as far as improving the operating margin, obviously you would even need to get more top line or improve the gross margin. Is that really where you're focused, as well as holding that tight?

All of the above actually. I mean that's -- as Bill mentioned, we believe that 30% gross margin is attainable and then in the operating expense area, it's a matter of, you know, shaving a point here and a point there and getting that to the bottom.

Okay. As far as the first quarter fiscal '08 on a sequential basis, as a percentage of sales, Bill, do you think SG&A could actually decline? On a percentage basis?

Compared to what, Michael?

On a sequential, 1Q F '08 compared with 4Q F '07?

On a sequential basis, is it possible? Yes. From Q4 to Q1, yes, it is.

Okay. And then you talked a little bit about -- in the press release about the billboard business. Didn't hear too much about it in the script. You said you added some billboard, electronic billboard customers. Can you give us some color on that? Are they national accounts, regional accounts? Can you give us just a little bit more of a flavor for that?

Well, again, the digital -- or the billboard business overall, there's three major players, which I think you're familiar with. That's Lamar, Clear Channel, and CBS Outdoor. We do business with two of those three, significant business with two of the three. And we also have -- do nice business with what we call the tier two group and that's been, some very nice business actually in that area. Some of those people are becoming fairly aggressive in the -- in deploying digital billboards, so we have -- we've seen growth in really all of those areas. Again, of the top three, as we've discussed before, at this point, CBS Outdoor has a, kind of a unique relationship with a Taiwanese supplier. We're not sure what opportunity we might have there going forward. At this point, we're, I guess not counting on that, but would certainly be open to working with them if they would consider that, but we're working with the other two and we are seeing growth in that area.

Okay, and related to that, on billboards, can you tell us how much of a percentage of your overall sales billboards were for the fourth quarter and what the percentage is for the backlog as of the end of the fourth quarter?

Michael, I don't have handy what percent of the backlog, but in terms of sales, it was under 20%, between 15 and 20% on sales, the billboard market.

In the fourth quarter?

Yeah.

Okay, and then one last one, my recollection is, I think the last conference call, you said fiscal '08 the CapEx was going to be down compared with fiscal '07, I think fairly significantly. Am I remembering that right? Did something change there?

Yeah, the -- I guess the thing that really changed is, over the last month or so, it's what Jim mentioned earlier on expanding the capabilities of the Redwood Falls plant. That's added a significant amount. And then ultimately what we're doing with the new building here in Brookings, it's, oh, about half done to two-thirds. Well, half done or so that we'll move in, some things going into that. So-- Cost wise, cost wise as of the end of fiscal year was less than half finished, even though if you looked at it you might think it was more than.

But it's a lot of the -- more than half the costs are left to go in it.

Okay, great. Thanks a lot.

Had it not been, Michael, for those, we would have CapEx in kind of the range we're saying the $35 million.

Great. Okay, thank you very much.

Our next question will come from Jim Boyle with CL King.

Good morning. Which segment, sports or the digital billboards has the most price competition, and do you see that changing for the better or for the worse?

Jim, we have competition in all of our areas and we always have -- we believe we always have to be a low cost provider, low cost producer to be able to provide a good value to our customers. So that's really across the board. We don't talk about specific margins in -- by market. In general, what we've said is that, and what is true, is that typically really large contracts tend to be -- the gross margin percent tends to be lower on those than it is in smaller contracts. That's typically true. And certainly in the digital billboard area with customers that have ongoing significant business with us, they expect, and we expect, to provide a very cost effective product to them.

But is one more competitive than the other, even though they are both competitive? In terms of price competition?

That's -- you know, it's two different markets. We have different competitors in the different areas. o say one is more than the area, I -- it's a hard, hard thing to peg because, you know, there's viable competitors in both areas, and we, again, we feel we have to perform, we have to execute, we have to deliver a good product at a good price in all those areas.

Now, you mentioned the potential for 30% gross profit margins in fiscal '08 subject to the usual items. What is the operating income margin potential or goal, subject to the usual caveats?

I'll tell you what, we're, we're still targeting to grow operating margin year-over-year as a whole. For '07 we ended up at 8.5%. And on things like the G&A side of the business, we're taking that on a quarter by quarter basis. And so here in this first quarter, we have significant efforts to prevent growth of G&A on a dollar basis. Now, it probably will grow slightly and so, looking at it for the year as a whole, we still remain optimistic that we'll expand.

Can you get to 10%?

I think we have to take this quarter by quarter, but 10% wouldn't be unreasonable.

Okay, and on the digital April record, it was said it came from an added number of customers and improvement with existing customers, and that some orders came in earlier than expected. Is that just a timing shift or might it signal a faster, larger ramp in digital from maybe one or two customers?

I think that's -- there was certainly some of that is timing, just when things happen to come in and they tend to come in a little bit in bunches there. We believe that there is an underlying growth trend that is certainly ongoing here, but certainly if you look at it on a quarter by quarter basis, it can be a little bit skewed and a little bit lumpy.

Okay, and finally, Bill, could you give us a feel for what each of the old three divisions did in terms of top line in fiscal Q4?

Yeah, let me just give you the percents here, again. Bear with me for one minute. The sports business was 51%. The commercial market was roughly 42%, and the balance being transportation.

And what was it on a year-over-year growth basis?

Year-over-year growth basis, sports was up over 25%. Commercial was up over 46%, and transportation up over 17%.

That was for the quarter or the fiscal year?

Fiscal year.

And what was digital's growth inside of commercial?

Year-over-year?

Yes.

I'll have to get back to you on that, hopefully on this call. I'll have to look it up here and I'll come back to that, Jim.

Okay. Thank you.

Thanks.

Our next question will come from Jim Ricchiuti with Needham & Company.

Thanks, good morning. Just a quick couple of questions on the bookings outlook, the pipeline for new business, I wonder if you would characterize how the sports market looks over the next one to two quarters, relative to new facility construction and possibly upgrade business, and also how you view the opportunities for increased bookings in the commercial business, particularly in billboards.

On the -- in the large sports area, there are, as we've discussed before, there's kind of a, maybe a little bit of an unusual amount of new construction business that's kind of in the happening mode right now. Of course in New York, there's several that -- the Mets, the Yankees. We already have the order for the New Jersey Devils' new arena, Jets and the Giants also. So those are all in the future here. The Cowboys are building a new stadium, of course. The Kansas City Royals and Chiefs, and the Colts. And if you look at the -- essentially I want to say seven projects there and the potential for those seven projects is in excess of $100 million, so certainly there's a lot of business involved just with a few projects there. And so our revenues will be certainly effected by our success rate on those projects.

We believe we're well positioned there, but certainly they all go through a bidding process and there is, there's competition. We see the -- again, the general driver for displays in sports, in the sports world is increased expectation, the -- the bar continually gets raised for the expectation and the -- maybe the appreciation of what the displays add to the event itself and to the spectator experience at the event, whether it's at a high school or it's professional sports, it adds to the experience. And so we see growth in all areas from high schools on up through professional sports, in all venues there.

Jim, just with respect to the Brookings facility it sounds like that's going to now be mostly sports, maybe some transportation, is that correct?

In terms of manufacturing, that's correct.

Yes.

The main, I guess call it our main building here will be all sports. Our high school park and rec, kind of -- we think of it as two factories, our high school park and rec factory and our large or live events factory, as we're referring to it now. We also have a -- actually a separate building, and Jim, you've been here and others maybe have been here. We have a separate building here on our campus that now we have moved all of our transportation sales, engineering and manufacturing into that one building. That's our transportation business unit. So, and that's been good. We just got that accomplished over this past year to get them in the building together and that's working well for us. So that's what we'll have at Brookings in terms of manufacturing.

But the fact that, you know, you have one building, sounds like set aside for live events, I guess suggests that you're expecting a pretty good continued ramp in that business.

We, we certainly expect good growth in that. We think, again, in terms of orders, we think 15% is -- is on the low side and, again, depending how some of these other orders opportunities come through for us, it could be upward from there.

Okay, and just shifting to Redwood Falls, the -- it sounds like you're moving equipment in there perhaps at a little faster rate. Is there any way you can give us a sense as to what you think the revenue capacity of that facility could be?

Well, eventually I don't -- I think we could get $100 million out of that facility eventually, not necessarily this year, but I think we can get it to that point. What we're -- and what we're specifically putting over there here, actually as we speak, we're just firing up what we call our digit line, which is electronic assembly to manufacture the digits, like for gas price displays, and that will be -- that will be up and running here within the week. And then we're also going to get metal shop, metal processing and paint capability over there. At this point, we're manufacturing -- or doing that work in Brookings and delivering over there and that's actually working fairly well. We've got a good system for that, but we think long-term that that's, that's not the ultimate solution.

So that's what we're investing over there, and it is -- we didn't necessarily anticipate putting all the metal shop equipment over there right at the outset, but we believe with the -- what we see coming down the line here, in particular the -- of course the Galaxy product line is growing very nicely for us and we expect that to continue. The gas price business is also growing. In terms of percent growth rates, that's probably the highest growth rate within our commercial market, although it's, it's a smaller number at this point. So I want to keep that in perspective, but we're seeing that that has -- there's some good opportunity there. And, you know, in terms of the value-add in that product, there's a bigger percent of that is in the metal cabinet versus the electronics, compared to say a ProStar display. So it seems to make sense to get that, that processing over right on site there to really be able to have a good lean operation.

Okay, and just two final questions. It sounds like you're seeing increased activity, Jim, in China, and then if I heard you correctly, Bill, China is now, you know, large project business, but it's going to not necessarily be reflected in live venue. It's international, is that correct?

Yeah, that will be in the international business unit.

Okay, but a good chunk of that is going to be larger project business, is that right?

Absolutely.

Inherently, that's what international is.

Yeah.

Again, in terms of our management structure, Reece Kurtenbach will be responsible for live events and also international, because there is a lot of commonality of the products and what we have to do to serve those customers between the live events and international. So, in that sense, they are together, but we'll look at them as separate business units.

Okay, and just finally, the outlook for billboard orders in the next quarter, it sounds like it's going to be seasonally a decent quarter, given what we're hearing.

Yeah, we, we're expecting the order rate to continue to ramp up and basically what we're -- we're in the process of ramping up our actual production in Sioux Falls and we're -- really in the end that's what's sort of gauges what we can deliver out of that plant. But we're -- we are adding some people to another shift there, so we can get more out of that facility. Just--

Terrific.

to follow up, Jim, on that question and Jim Boyle's questions. Our billboard numbers, excuse me, more than doubled fiscal '07 over '06. And then now, Jim Ricchuiti, a follow-up to you, as we announced previously, we see that the billboard business for the year will grow in excess of 30%. Keep in mind, just narrowing that in on the first quarter, it's -- there's lumpiness in some of these orders, as evidenced by our success in April.

Sure.

And so long-term stretching over the year, I think we'll be in great shape. But quarter to quarter could be some differences based on timing.

Okay. Thanks very much.

Thanks.

And our next question, gentlemen, will come from the line of Lakshminarayan Ganti with Thomas Weisel Partners.

Hi, everybody. Couple of questions. First on the sports segment, is it a fair assessment to say that the sports segment was dominated by orders from the large professional stadiums? And if you could also talk about the outlook you have for small sports venue business, given the fact that you are increasing forecasts there and after that, I have a couple of bookkeeping questions.

I wouldn't necessarily say it's dominated by the professional sports stadium. Certainly that's a significant part of the business, but we do a lot of business also in the college/university market. That's a very significant part of the large sport venue business, as well. So those are both very significant components to the large sport venue business. In the high school park and rec, or smaller sport venue business, there we see nice growth potential and we -- one of the drivers there again is that we're seeing these smaller venues are putting in color matrix displays, not necessarily always what we call full video, but they are full color graphics displays and so that, instead of a scoreboard order being $5000 or $10,000, it can be 25 or 30 or whatever. So it's a nice uptick in the order size in that business.

One thing we, again, with the new business unit structure, we now have a factory and it's going to add a little to that. We have a factory now dedicated to that smaller sports venue. And last year in this, we kind of got in the crunch. Our lead times went way out on that. We feel that we probably lost a little business. It's hard to quantify how much, but because of the fact the lead times were so far out. And so our goal this year is to keep our lead times in a little better and we believe that will be positive for the, for that small venue business. And I might add that's also true in our commercial market, just to talk about lead times, I think Bill mentioned this, but, again, this past year our lead times in commercial got way out, maybe close to the 10-week point and in some cases maybe a little more than that. I think we're somewhere in the 5-week lead time right now and that's definitely important for us to be booking orders. Otherwise, we will lose business if we're out that 10-week range. So that's -- we believe we're well positioned as far as lead time goes and that the capacity we've added.

Great, and second question on your CapEx guidance of $50 million for 2008 fiscal, I was wondering if you have some projections of your free cash flows for the next fiscal year and would you still be needing to borrow some more money for your CapEx plans, if you could talk about that?

The question is will we be able to reduce debt over the year, and I think so. But keep in mind that with some of these big projects, you get a lot of volatility in cash flow and when I think about some of these business projects on the horizon and the timing of them, they could -- we could see, if we're successful on winning those projects, on an annual -- if you cut it off just at the end of fiscal year '08, we could have a lot tied up in some big projects if we're successful, which would be good news. So long-term we're improving our free cash flow, though.

Okay. Great.

I was going to say we do expect in our terms of our capacity investment, you know, Sioux Falls we pretty well have built out. We're not investing a whole lot there this year. There's a few things we're adding. After this year, Redwood Falls will be pretty well built out. We don't expect the year, in '09, fiscal '09 to have to be doing a lot there. We're kind of in the, sort of the finishing stages of this capacity buildout that we've been working on and so I truly would expect in '09 that our investment in manufacturing facilities would be significantly down, because we'll have it in place and we'll be able to just work and leverage what we.

Okay, and G&A was up more than we thought, and what should we be expecting for the whole of next year, the G&A expense line?

We're not -- we haven't given any guidance on any individual items for the year as a whole, other than our gross profit margin, and what I said --

Dollars and -- (inaudible).

Yeah, go ahead, Jim.

Well, just G&A itself, you know, what we're seeing is that we expect the dollars there to continue to grow, but slowly. We're going to throttle that and manage that so that's growing slowly. We don't think we can actually reduce the dollars probably, but allow the dollars in G&A to grow much slower than the revenue line. So we --

Okay.

expect to see that that percentage will bleed down on G&A.

And one last question, can you break out your domestic and international sales for the quarter?

For the quarter, roughly, we had roughly $20 million on international business.

Okay. Thanks a lot.

Thank you.

Our next question comes from Steve Dyer with Craig-Hallum.

Thanks for taking my question. First off, on depreciation, looks right around $13.3 million in this last fiscal year. What would you forecast that to be in the next year, given kind of all the CapEx that you spent? What I'm trying, kind of, to figure out is how much of the increase in operating expenses is due to higher depreciation?

Say the last part. I lost the last part of what you said, Steve.

What I'm trying to figure out is how much -- I'm sure depreciation increases year-over-year, given all of the CapEx and building out that you've done recently. What do you expect depreciation to be in FY '08?

Okay, just the -- bear with me one minute here, I'll -- I mean, I think that overall what we're looking at is just slightly higher than the run rate of '04. A lot of the, of the fourth quarter, excuse me. A lot of the CapEx that we're adding now in fiscal '08, the $15 million, the big chunk of that is going to be spread over 30-plus years, and so we're left with the $35 million, for the most part, that has the impact. So it will rise a little bit, but the run rate for the fourth quarter, plus 5% or so is probably not far off.

Okay. So the bulk of the increase in operating expenses is going to be cash expenses as opposed to stock comp or --

Yes, yes, yes, yes, that's right.

Okay, okay. And then with respect to the digital billboard business, you had indicated it's up another 100% or so year-over-year. Does that get you to right around $60 million?

Yeah, just over mid-60s.

Mid-60s, okay. And would you say you're gaining market share? How would you categorize sort of your place within, within the big two?

We're -- certainly one of the two major players with the big two, and it's been, again, Lamar has talked publicly about the fact they are utilizing both Daktronics and [Yesco]. We don't have exact numbers on how that's split out. We believe that we're, somewhere 50% or north of 50% of that amount, but we don't have specific numbers on that. Clear Channel, we're getting good business from them. Again, we don't have specific numbers on what they are giving to others, but from what we see, again, we believe that -- we believe we're maybe getting 50% or more there as well.

Okay, and then with respect to CapEx going forward after this year, what would you say is a good sort of maintenance CapEx number to use? Is it the $35 million, or is it that high?

For '09?

'09 and '10. I mean, what should of your, sort of, the base CapEx to keep the business going?

I think in our business we've always look at CapEx growing at a level slightly less than the top line growth. That's the way we've looked at it. A lot of people ask us about maintenance CapEx versus growth CapEx and we don't really think about it in those lines, but I think that $35 million to -- for that to be a base that grows slightly into next fiscal year, again, there's a lot of investment. When we talk about this $15 million for capacity, there is -- there is still a lot of other things that we're doing and a lot of it depends on new technologies we come up with, how our mobile and modular market performs and how much inventory we build up to support that market and so we haven't done any planning for '09, so these are just general comments that I'm giving, but for 30 -- if we grow 15 to 20% in '09 over '08, for example, can CapEx grow under 15%? Yeah, I would sure think so and expect that to be the case, but it's hard to project now.

From a , from a base rate of 35, though, would be kind of the starting rate. You wouldn't be growing at -- on top of the 50 million?

Even that though, Steve, I remain challenged to see if we can get more out of our capital spending, so maybe I shouldn't be giving much in terms of guidance there. It's just really hard to say at this point.

And we haven't really worked on that yet, but certainly I would -- again in terms of manufacturing of facilities, just we'll be down significantly in '09. We'll have finished this, our new, our corporate headquarters and manufacturing combination building that we're putting up here, about a 200,000-square foot building we're doing and that will be finished and that will hold us for a little while here. And the equipment we've put on for manufacturing, that's -- in each of these facilities we have, we have time -- we have shifts we can put on in these manufacturing facilities that we can do without, essentially adding any equipment. So, not to say we won't add some equipment in '09, but there will be things I'm sure we'll want to bring in that are here and there. But I see that, in terms of facilities and manufacturing equipment, it would be drastically down in '09 compared to where it is.

You know, the one thing that I always go back to is in fiscal '06 our CapEx was, if I recall right, somewhere around $18.5 million. If you expand that on the rate of sales, you end up for fiscal '08 at $35 million, roughly, which is where we're at. So we haven't created leverage, but there is still a lot of things in '08 that are dealing with building out these separate plants, for example, and doing some things. And we have considerable capacity, so we're ahead of the game, but I got to hope and expect that we'll get leverage off that $35 million base into '09. Something probably would have to change in our top line outlook, where it would have to accelerate a lot faster than we're seeing now for us to not leverage that in fiscal '09.

What kind of, what kind of base, I guess, capacity do you think you have just as this next year will draw to a close, what -- is there a number that you feel like we could do? Obviously you would have to add shifts and maybe some head count, but from a pure capacity equipment standpoint.

Yeah, if you talk about space and equipment, I would say, there's several components to capacity. You need the building space. You need the equipment, and then you need the people to work with equipment. So talking about equipment and facilities, that's a good question. What would we be in position to do? Have to do some thinking about that.

It's got to be significantly more, though, Steve, than what our current outlook is for the year.

Sure. Okay. And then one last question. Can you give any more color on, kind of, these big stadium deals? You know, I know that the Mets has already bid. Can you give any color as to where some of those deals are in the pipeline and, sort of, what percentage of the revenue you see falling in this fiscal year versus next? I know it's obviously very early.

Yeah, the timing -- a few of those, the timing is out a little ways. You know, some have bid -- the Mets, Cowboys are bid. Yankees, those are all a bid. But -- these large projects, there's usually quite a process that's gone through after the initial proposals, because they are complex systems. There's a lot of components to the system, lot of major pieces and so there's typically a fair amount of discussion that follows and sometimes requoting and rebidding and that sort of thing as of the order kind of zeros in on exactly what they want and exactly how much they want to spend. So, we expect there is a number of these that the decision will be made in a matter of the next months and some of the revenue would fall yet in this fiscal year and some would fall in next fiscal year. I don't remember the percent how we thought that would break out exactly, but somewhere, I think more than half could fall on this year yet if it bid, is that right, Bill?

It might be a little bit high. If we have our normal win rate, there is -- we could see maybe more like a third of the revenue on these in this fiscal year. But, boy, it's so hard.

It just depends on which combination, which combination we might get of course, too, of how that would break out.

Yeah, it's, it's really hard to say, Steve, how this shakes out.

Okay, great. Thanks a lot.

Okay.

Maybe next quarter we'll have an update for you there with more specifics.

Our next question comes from Steve Altebrando with Sidoti & Company.

Hi, guys.

Hi, Steve.

Just a couple quick ones. Looks like the minority interest or the other income took a little bit of a step back sequentially. Where do you see that going over the next few quarters?

The what took a--

The other income, which I assume's the minority interest.

Oh, our investments, yes.

Yes.

Where do we see that going down the road?

Yeah, over the next few quarters.

Improving. Improving. These businesses are, when you do a start-up mode, the concept is you're making investment in early years and it turns around and we're pretty optimistic on how that business was going. So I'm just doing in my head, I think initially we sai it would be about $0.05 to $0.07 cents a share was the impact on that. And it's probably not that far off from that. I would have to think through that a little bit more. But that will improve in the next year, but I would imagine there's still some losses, but not near what it was in this year.

What would be the reason, I guess, for the -- because in third quarter it was much lower than here in the fourth? Is there any seasonality there or?

Well, yeah, one of the biggest things that happened is in our field cast business, we deployed in January that significant network and all of those assets became depreciating while the add revenue was building up. So that would be natural that at the beginning you take a little bit of a hit. Now, that being said, our outlook on the revenue side to offset that is looking pretty good.

Okay, and last quick one. Not to harp on the G&A, sometimes your costs are kind of lumpy on those lines. Are you anticipating that, on an annual basis, it's declining on a percent, as a percentage of sales, or are you basing that off of this quarter, which was a little bit higher than what you've historically had in that line?

For the year, G&A was at 4.6%.

I would hope sequentially into the first quarter, as a percent, it declines. But there is some -- as evidence would be on top line range, that's why and it depends how the top line comes into some degree and then just the timing on some of these things. Jim talked about before the IT spending, and how that ultimately shakes out over this quarter, but for the year and the first quarter -- for the year more so. In the first quarter, it could be down as a percent of revenue.

Are some of this IT that you referred to, is that one-time spending or something over a few quarters, or does that -- is that continuous expense?

Some of the projects will run over a few quarters. You know, we're investing in some software for our services business. We actually did a lot of that in fourth quarter. We're finishing that in first quarter. Just a number of different projects. But typically bigger projects will spend more than a quarter.

Okay. Well, just for the quarter, it looks like -- I'm looking at it now -- G&A was close to about 6% of sales, then only about 4.6% for the year.

Right.

I guess what I'm getting at is what you're targeting on improving on that 4.6% for the year or the near 6%.

I would say in the short-term, our target would be to get it back down to that 4.6% level and then take it from there.

Okay, okay. That's all I have. Thanks.

So I think we'll have time for one more question here today.

Our final question will come from Scott (inaudible) with [SunVest]. Your line is open.

Hi, yeah, thanks for taking the question. I just wanted to go with the margin thing from a, from a -- from maybe a broader perspective. I mean you're obviously enjoying some pretty good top line quarters here and I guess the only thing different with the business is the digital build in the last couple of years. But other than that, everything would seem to be fairly similar to -- other than the size factor, fairly similar to what you enjoyed in the past. So maybe I'm just wondering, has anything changed systemically regarding the gross margin dynamics of the business, or is the business more SG&A intensive than it used to be? Anything we might consider as we think about where the margins might go long-term? Thanks.

I would say long-term we don't expect it to be more -- significantly more SG&A intensive. It's possible that -- if you go back to '06, I think our G&A was 3.6%. I don't know that we'll get it maybe back -- quite back down to there. We might have been a little undermanned in some of our areas at that point. The two areas we've had to ramp up here in the last couple of years is both our HR area and our IT area. And 3.6, at least in the next couple years might be a little, I think a little on the light side. So I don't know if we'll get back to that, but I think some are getting back closer to that 4.6 is reasonable. But, again, there's a lot of -- the top line and several parameters there, the top line is certainly a big factor there.

Thanks so much.

Okay. Well, thank you for all of your questions and for your time today. Maybe just in closing, this, I think this last quarter is kind of an example of kind of how our business goes. It's -- there is a certain factor of lumpiness in the business and uncertainty and unpredictability from time to time and just to maybe reiterate that here at Daktronics we're committed to long-term profitable growth of the company and we will continue to make decisions for the long-term interest of the company. We believe we've reinforced our position in the marketplace over the past year and we look forward to another exciting year here at Daktronics. Thanks for being with us today.

Thank you, everyone, for your participation on today's conference. You may disconnect at this time.