Daktronics Inc (DAKT) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Daktronics first-quarter fiscal year 2008 earnings results conference call. As a reminder, this call is being recorded on Wednesday, August 15, 2007 and is available on the Company's website at www.daktronics.com. I would now like to turn the program over to Mr. Bill Retterath, Chief Financial Officer for Daktronics for some industry remarks. Please go ahead, sir.

Thank you, operator. Good morning to everyone. We appreciate your participation in our first-quarter conference call. We would like to, as is our custom, make some preliminary comments about the quarter, after which we will open up the line for a limited timeframe for questions.

As usual, I would like to offer our disclosure cautioning investors and our 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 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 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 no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

With that, I would like to turn it over to Jim Morgan, our Chief Executive Officer, for some highlights on the quarter.

Thanks, Bill. Good morning, everyone. Thanks for joining us this morning. We are very pleased with the first-quarter's performance. The top line being up over 30% and the bottom line being up over 40% compared to Q1 of last year. Operationally, it was a smooth quarter for us with the investments we have made in capacity over the past couple of years performing up to expectations. And with the operations running relatively smoothly on some savings on raw materials, we are a bit up on the gross profit, which was good to see. We were also able to hold the line reasonably well on SG&A, which brought our bottom line in just above the high end of our estimates.

It is noteworthy too that the vast majority of the manufacturing for our commercial business unit, which has been the fastest-growing area for us the past couple of years, was done outside of Brookings this quarter with the [builder] manufacturing in Sioux Falls and the Galaxy product manufactured in Redwood Falls. So that was a nice milestone for us to achieve that.

And with the additional capacity, we have maintained our leadtimes at about four weeks shorter this summer than they were last summer. Last summer, we were probably getting up in that eight to ten week timeframe and this summer, we are in more the four to eight -- four to six timeframe. So that has been very helpful.

For one thing, it allows our sales people to stay more focused on selling and not following up on delivery and we believe that this reduction in leadtime has had a positive effect on orders in Q1; although it is hard to quantify that specifically, but certainly it is a positive thing and also very positive for customer satisfaction.

As we've discussed previously, we have reorganized our business into business units at the beginning of this fiscal year. The purpose of doing this was to realign our resources more closely with the customer and to improve our financial performance and generally allowing us to better manage the growth of the business going forward. And this transition has taken place and has been really quite seamless for us as we have been evolving in this direction for some time now.

Going into the quarter, we knew we had to control the growth of our nonmanufacturing labor force, which has outpaced sales as of late and we were able to do that and this is an area that we will continue to watch carefully as we go forward.

Regarding CapEx spending, we will be occupying our new building here in Brookings next month and this marks the end of a major build-out program that we began about two years ago and consequently beginning in Q3, we expect a slower rate of CapEx spending. Our projection for the year remains at about $50 million.

Two quick comments on the various businesses. Our commercial business continues strong in all three areas and that is namely the reseller channel -- that's selling through sign companies -- national accounts and then the digital billboard area.

Regarding the digital billboards, we continue to see good interest there from the tier 2 companies in addition to our tier 1 customers and we also continue to increase our capacity to deliver there. We have made some enhancements to our module production line in Sioux Falls and also added a night shift there, increasing our capacity. Actually to more -- given [there's] little excess capacity initially over what we needed to serve the billboard market and we are using that capacity to build some other products for the commercial business as well. And again, as I mentioned, we have eliminated almost all the commercial production here in Brookings. So we are taking advantage of that capacity potential at Sioux Falls to help out there.

One of the nice things -- as we are building out our multiple factories, one of the nice things we have going is that the processes at each of the factories are very similar, many cases identical, so we have developed a foundation here where we can make it fairly easy to redirect work. As the demand requires, we can shift work from one factory to another, so that is good to have going forward to help us balance things.

Another exciting development in our billboard business is that today we will be officially announcing a new display product family, which we have trademarked as Valo, that is spelled V as in Victor, A-L-O. And this is specifically designed with the unique requirements of the digital billboard industry in mind, including ease of installation, reduction in power consumption, integrated security and monitoring and a number of other features that provide overall reduction in the installed cost and the lifetime cost for the customer. And this in turn provides an improved ROI and also an excellent looking product.

This product we have introduced to some of our key clients already and it has been very well-received and as I mentioned, we are making an official industry announcement today on that product.

Our large sports business continues strong. That is now under our live events business unit and we had an excellent quarter for orders. It is noteworthy that none of the large new construction projects that we have discussed in the past that are in the works have been awarded as of this date. The Yankees, the Mets, the Cowboys and Kansas City Royals have all been bid and they are in the review stage at this time. We do expect that one or more could be awarded in the next month.

Our schools and theater business has a great summer season underway. Our K-12 market is the largest part of this business and we tend to have a peak in mid-summer with this business with the fall sports deadline and the start of school in the fall. And our new dedicated sports product factory here that's dedicated to this market has been able to respond very well to the seasonal demand this summer and also we continue to see marquees and video displays as an important part of the business with the K-12 area.

Orders for the quarter overall were excellent and we finished the quarter with $142 million in backlogs giving us a nice start for Q2 and with our new business unit structure and our capacity buildout more or less in place, we are well-positioned to execute on the backlog. With that, I will turn it over to Bill for a few comments on the numbers.

Thanks, Jim. Starting on, I want to give just some basic background on our new business unit structure for the purposes of understanding comparison. As we announced, we reorganized into five business units. These business units are very similar to our prior markets plus really a couple of minor changes or exceptions.

First, we separate out domestic from international. Previously, when we talked about markets, that was in the context of worldwide. Now it is -- when we talk about the business units, it is domestic versus international and the domestic business includes Canada.

Secondly, we split our sports business into two main parts. One being live events and the other being our schools and theaters business. Previously, we referred to the schools and theaters as our small sports venue.

Finally, we moved our mobile and modular business into live events away from the commercial market.

To put this in perspective, last fiscal year, net sales were broken down as 10% international -- excuse me -- in the commercial business unit, last fiscal year as a whole compared to first quarter, that represented about 33% for the fiscal year and 35% of our business for the first quarter. The schools and theaters business unit for last fiscal year was about 12% of our business for all of last year and it was about 14% in the first quarter. Live events was 39% for both periods and transportation was in the 6% range for both periods and finally international all of last year then was 10%. This compared to 5% in the first quarter.

Now keep in mind that when I give these percents for the quarter, that is not -- a quarter is a short timeframe to make conclusions about the long-term percent of mix. I wanted to lay that out just to give a perspective on the business mix compared to what we have been talking about in the past.

Now on the order growth rate, some more specifics for the first quarter. It was interesting in that schools and theaters, international and transportation all had the strongest growth rates for the quarter, which was nice to see because of the depth of our growth rates for the Company as a whole.

Live events was down slightly as compared to last year, but as you recall last year, there was a lot of unusual volume in our first quarter because of our leadtimes and this year's growth has a lot to do with the large transactions that Jim mentioned.

Commercial market continues to perform well in the first quarter and we expect that to remain on track.

Now moving on to gross profit margin for the quarter. Jim talked a little bit about that. Going into the first quarter, we thought that gross margins would be down based on the levels we booked orders at in the fourth quarter of '07, but we knew that there would be some upside due to some recent improvements in raw materials pricing.

At the time of our conference call, we just didn't know how much it was going to be at that time. It turned out positive for us and helped us drive gross profit up for the quarter, which gets us off on the right foot for the year. We also saw our manufacturing costs stabilize more as a percent of cost of goods sold. Further evidence we're controlling those costs as we move out of the capacity buildout.

We are still incurring some CapEx related to our Redwood Falls facility and the new facility in Brookings, but we don't see either as having a real significant impact on gross profit percents going forward.

Going into the second quarter, we are optimistic on gross profit margins. Again, in the fourth quarter, margins were down on order bookings, but we thought that was more indicative of the mix of transactions and not a reflection of the marketplace as a whole. That held true as our margins on order bookings in the first quarter got back on that trend we were seeing prior to the third quarter, so we should be in good shape going forward into the second quarter.

Our small order business versus large order business was consistent with the fourth quarter, so on a sequential basis, that didn't affect margins. In closing on gross profit margins, we thought we could achieve the 30% mark for the year as a whole and we are on track to do that for the year, but that could change depending on the success on these large live events projects.

On operating expenses as a whole, we went into the quarter as Jim mentioned and we are going to take it on a quarter-by-quarter approach on cost containment. We feel we are successful. Moving into the second quarter, not much is changing on this approach. We will be doing the same things in the second quarter. Again, it is all about personnel for the most part and we will add people in key strategic areas like services infrastructure and manufacturing support, but we will work hard to limit it to the essential needs.

I would also like to add, with the new business unit structure, we moved the costs associated with our business unit management into G&A, which added almost $200,000 for the quarter. Previously, the costs related to those individuals was in selling and product development.

There is nothing to report in terms of nonoperating items. We continue to see success in both of our media investments, but nothing new to report there as of now.

On the balance sheet and cash flow, you may have noticed we made progress, but overall I think we can do better on receivables and costs and expenses in excess of billings and inventory. The offset to the growth there was an unusual growth in payables, which was a timing issue, so I expect that cash flow from operations might not be as strong in the second quarter, but for the year, we should be in good shape.

Again, as Jim mentioned, we haven't changed our outlook for CapEx for the whole year, but we may end up as we go through the year financing some of this remaining CapEx related to our new building facility with some off-balance sheet structures, but the extent of that would be limited and not likely to exceed a few million dollars. So we will keep you informed if some of the CapEx switches to off-balance sheet. With that, I would like to turn it over to the operator to open it up for questions.

(OPERATOR INSTRUCTIONS). Jim Boyle, C.L. King.

Good morning. Jim, could you drill a little deeper into the $142 million backlog? How much roughly comes from the different business units and of the incremental quarter-to-quarter increase, did most of that come from which business segment?

I am going to let Bill take that one.

Yes, generally speaking, if you think about what I mentioned on the growth rates -- first of all, Jim, I don't have those numbers right at my fingertips of the breakdown. As I recall, the commercial unit backlog growth was relatively flat -- well, do you have another question? I'll get the numbers and come back to you if you want to --.

Okay. Is Lamar right now your largest recurring individual customer?

We don't -- Lamar is a significant customer. We don't give quantitative comments on where each of the customers is, but certainly I think it is -- we have talked about it, Lamar has talked about that they are a significant customer of ours.

Okay. And on the raw material cost savings, are those sustainable in the near term given whatever fuzzy crystal ball you might have?

We would expect that those material costs -- they have been -- those price reductions in other words will not be reversed if that is your question. So yes, we would expect that. Now does that mean that there wouldn't be some other materials that would increase over time, there is no guarantee that that couldn't happen. But we would generally expect that they will be maintainable, yes.

Okay.

Jim, going back to your question; I have got some of this data. Our live events backlog -- this is sequentially from fourth quarter -- is up, our schools and theaters is up, commercial is actually down and keep in mind that commercial last year -- that was one of the areas where backlogs -- the leadtimes was causing a lot more orders to be booked sooner rather than being --.

We weren't shipping them off as fast as we wanted to is probably another way to say that. So we were building up backlog more than we wanted to is what happened.

Transportation has remained relatively flat and international has increased.

I think generally the orders are strong and positive in all areas overall.

And could you give us a feel across those divisions what the increase was in revenue in fiscal Q1?

Year over --?

Year over year.

First quarter over first quarter. Yes, these are rough numbers in our schools and theaters business. That was up almost 50% in terms of sales. Now remember that is a small part of our business as I mentioned. Large sports venues was up roughly 25%, the commercial market was up 60% in sales and transportation up 25%.

And roughly what -- is it 14%, 15%, 16% of business right now that digital billboards are?

Roughly 15% to 16% of our business.

Okay. Thank you very much.

Michael Friedman, Noble Finance.

Hi, guys. Some of the questions have been answered. Can you tell us -- have you picked up any new outdoor advertising customers recently?

Yes, we continue to pick up new customers over time.

Okay. Anybody of size or a second tier?

Well, there is only -- depends on how you define them, but there are some pretty significant what we refer to as tier 2 customers, but they are significant players, so we don't want to downplay the fact that they are tier 2.

Right. But --.

There is some real interest there from that group and significant orders.

Are you running any tests with any other large outdoor advertising companies that might be a new customer in the future based on how that plays out?

Not tests as such. I mean we are talking to -- talking to potential customers all the time. I think some of the Lamars and Clear Channels of the world have kind of demonstrated that they can make it work and I think others are seeing -- to some degree, that is probably -- part of their test is to see that others have made it work. So I think companies then just find a way to ease their self into it and prove it to their self and then move forward.

Okay. Do you anticipate a change in your business with outdoor advertising companies should the US economy's growth decelerate in the coming year or two?

It is always hard to tie those -- for us, to figure out how to tie that together. Advertising still is important even if the economy is down a little bit, so don't know how to answer that really I guess. We don't anticipate necessarily a negative impact, but it is hard to say for sure.

Okay. And then Bill, you talked about the gross profit margin. Do you think you might be able to hold operating margins in that 9% range for the full year of fiscal '08?

Well, Michael, I will take that. We are -- when you get to operating margins, we are taking it on a quarter-by-quarter basis and if you look at our estimates, it is possible that in the second quarter, operating margins could increase. A lot of it is going to depend on the impact some of these big sports deals have and all that. I think how we phrased it last call and we stay with that is 10% is not a number we couldn't achieve as things all came together, but there is too many variables going into it at this point, especially on the large transactions, to see how that works. But we are definitely moving in the right direction.

Okay, great.

We believe 9% is sustainable. That is -- I think -- we believe that to be the case.

Great. Thank you very much.

Steve Dyer, Craig-Hallum.

Can you hear me now?

Yes.

Hi, Steve.

Hi, there. Thanks for taking my question. With respect to the digital billboard market, how would you categorize sort of the competitive environment? Has it changed much? Are you seeing new guys pop up or is it fairly stable?

I would say we haven't -- of course a lot of competitors have aspirations, there is no question about that, of being a player. So we don't discount that by any means, but I would say we are very well-positioned in the industry and as I mentioned, we are introducing a new product and this is a great product. I think really a good fit for the industry. So I think that we are positioned -- well-positioned to maintain our share in that industry.

Have you seen your share change at all one way or the other with primarily with the big two?

Not that we can quantify.

Okay. Can you tell us a little bit more about this new product? Is the ASP materially different? Are the margins similar?

We are able to bring the selling price down and maintain decent margins on it and again a big part of the savings -- part of the savings to the customer, to the outdoor company, is that we can take costs out of their installation. One of the things that our design does there, it is more accommodating of the wide variety of structures that have to be -- that are used out there that we have to attach these to and just makes that easier, a lot less forgiving so to speak and very easy to adapt our display to those structures. So things like that that just make their -- reduce their installation costs and then the fact that it is less power, so the power bill over time is reduced, the monitoring and the other features, the diagnostics that we have with the project. So all of those things together give a value to the customer.

Okay.

There should be a release out I think today that gives more details on it and it is a neat product.

It will be released sometime today.

Okay. And then kind of switching over to the big stadium deals, how would you say those bidding processes or negotiations are going relative to sort of the timeline you had set out in the back of your head and how that will relate to the portion of revenue that you may be able to recognize this fiscal year versus next fiscal year? Has that changed much?

I would say there are no surprises. These large deals like this, there is always a lot of deliberation and review, in some cases rebidding and reproposing because maybe the first round of numbers is over budget for the customer and they go back and say, okay, we want to trim some things out and then get a rebid. So that is quite typical on these very large projects, so I would say no surprises. They are all moving forward at kind of a typical manner.

Okay. And then as you look at kind of the revenue split between this year and next year, I think last quarter, you had said a third might be a decent number to use in terms of the revenue that could be recognized this year. Does that still seem in the ballpark or high or low?

Of the large projects?

Steve, there is so much unpredictability in how these things shake out. As I recall off the top of my head, one of these that Jim mentioned will be substantially in this fiscal year if we're fortunate to win it. The others will have maybe a small portion of them come into this year, but only one out of these four that Jim mentioned has a material amount in this year based on what we know now. In new construction, there are changes that occur and it is hard to always predict this far out how much will come into the fourth quarter. One of them will be third and fourth quarter if we are fortunate. The others are hard to predict I guess I would conclude.

In particular, the Kansas City Royals is for this baseball season, just to clarify that.

Okay. And then looking ahead, Bill, to the operating expenses next quarter, I know you are kind of taking it one quarter at a time. On a sort of absolute level, how should we think about that directionally? Does it go up materially since revenue will likely go up materially or does it -- should we look at it more as a percentage of sales?

No, I think you should look at it in terms of a dollar increase and I think that the dollars will increase in the fourth quarter during the second quarter and that is just -- we have got some concepts that we are trying to keep them in check, but there will be some growth. We have got a range that we are seeing right now, but again it is not -- it shouldn't be significant, but it will increase on a dollar basis.

Okay. And then finally one last question and I will jump back in the queue. Can you give us any color on FuelCast or Arena Media, how that is going relative to expectations?

Well, during the quarter, not much has changed. And I looked at our comments from that last quarter in preparation for this call and really nothing has changed. We are still deploying more on FuelCast and on Arena Media. They don't start deploying more until you get to the beginning of the season. So there is not much to report there at all with either of those from our last call.

Okay, great. Thanks, guys.

Lakshminarayana Ganti, Thomas Weisel.

Hi, guys. Just a couple of questions. Most of them have been answered. The first one on the backlog, can we say that a majority of that is going to flow in the next quarter or is there some large order in there that is going to be stretching it into the Q3 fiscal timeframe?

There is always some portion of our backlog that of course doesn't get -- if you looked at the orders that we got booked right, some of those will not -- won't realize revenue until Q3. The counter to that is that we also will book orders yet this quarter that will ship within the quarter that will never show up in the quarter backlog. So kind of in our projection for the quarter, those are kind of all taken into account I guess is the way to look at that. There is some offset there. So the answer to the question is yes, there are some that won't ship, but there is an offset from the quick turns. Does that answer your question?

Yes, yes. And a second question on -- it looks like your large contracts -- the large contracts were actually 39% from live events and 16% from digital business, roughly 55% was (inaudible), the small contract of 45%. And it looks like your margins are being a little bit stronger than what we expected. Can you tell us (inaudible) large and small what you saw in the quarter and how sustainable that is going forward?

I'm sorry. Say the last part of your question.

-- sustainable is the margin --.

Oh, just what is in those two business units?

Right.

Oh, I think as I alluded to before, our order bookings in the first quarter -- the margins overall were back on track and so the margin performance on a go-forward basis at least in the near term is sustainable. Now once some of these big transactions book, that can change that, but it sure adds a lot of dollars to earnings or the net income in earnings per share. So are they sustainable? Unless there are changes in the marketplace that would come about or something that we are not seeing now, I would suggest that they are on track to stay at those levels.

Okay. And just one other question on -- Lamar actually -- they raised their end-of-the-year digital billboard guidance by 30 units, at the same time indicating some softness on the static business, the static billboard business. Can you give us kind of your expectations from Lamar, Clear Channel and some of your other tier 2 for the next two or three quarters, especially given the fact that people are talking about softness in North America and the potential slowdown and so on?

Well, we announced our last quarter what our growth expectations were for that area as a whole and as of right now, we are not increasing that expectation, but with that being said, we thought that there could be upside in that marketplace.

Right now, to the best of my recollection, there have been no announcements on what they are going to do for calendar '08, which would have a big impact on our third and fourth quarter or could have and so right now, we are not changing anything in terms of our guidance for the year on that marketplace.

Okay. And could you break out international versus domestic for (inaudible)?

Yes, for the first quarter?

For the quarter, yes.

It was -- 5% of our business was international.

Okay. Thanks, guys. That is all I have.

Jim Ricchiuti, Needham & Co.

Hello?

Hi, Jim. Jim?

Yes, can you hear me?

Yes.

Terrific. Thank you. It looks like you guys had about $132 million of bookings in the quarter, or actually a little higher than and I am calculating somewhere around$ 135 million.

Yes, right in there, pretty close.

Okay. I was just wondering if you might be able to -- can you just say how much of that was the live venue? You talked about orders being down slightly, but I was just kind of curious, of that $135 million or so, what was live venue?

I will figure out the percent here.

And while we are --.

It was about 39% roughly, 40%.

Okay. And so those orders were mostly upgrades to existing displays that were out -- facilities that were out there, not a lot of new -- no construction in there?

Certainly it was mostly upgrades, existing facilities, that's true.

Now, as you think about this quarter, it sounds like you have got some potentially large orders possible if you are fortunate enough to win those. How should we think about the live venue pipeline over the next couple of quarters, Jim? I mean is this -- apart from the two stadiums in New York and the Cowboys and the Royals, is there a fair amount of business in the pipeline looking beyond that in the next quarter or two?

There is nothing that we see that's fundamentally changed on kind of the general run of the business there. The other opportunities are there. There is a lot of facilities that are interested in upgrading, and so we don't see any fundamental change on the other part of that.

And the new construction is they are just kind of big -- instead of these facilities upgrading a facility, they are rebuilding a whole new stadium. So it is kind of an offset instead of to an opportunity for an upgrade, you could say, but they tend to be -- the thing that is unique is most of these projects, new construction projects, the display portion of that could be up in the 10 million and north of 10 million range in terms of our part of it.

To add some color on this, maybe this will help. When you look at our live events business, primarily the large sports venue, during the quarter we roughly booked 12 or so transactions over $1 million, okay? So a big part of the business in that large sports venue is still comprised -- in this case, well over half of it -- is comprised of transactions under $1 million.

I say that to emphasize there is a lot going on there in terms of transactions under $1 million, a lot of colleges and universities and things like that.

Okay. Just with respect to the larger projects that you are pursuing, any color or how would you characterize the pricing environment there?

As we have always said, the gross profit margins tend to be lower on the very large contracts. And on smaller contracts, the gross profit margin as a percent is greater. So it is competitive, no doubt about that.

Any more competitive than in the past?

Oh, I don't think it is significantly different than the past, no.

Just with respect to -- did you pronounce that Valo display?

V-A-L-O.

Okay. Now you are going to be putting out a press release, I guess, later today. But I was just curious, is this display for both bulletin and poster application?

Right. Actually, we are announcing -- it is really a product family. We are announcing the product family and also introducing kind of the first member of that family, and it happens to be what we call an optimized technology pixel arrangement. So we will offer other pixel arrangements in the future in this same product family. This particular one is a 16 millimeter pitch.

Okay. I am just trying to get a little bit of a sense on pricing, because it sounds like some of your larger customers and some of the public comments that they have made said that they didn't see much pricing relief in the digital billboard market. Can you help us out a little bit on maybe ASPs here?

Yes, one of the things that -- there is a little bit of a trend toward going to higher resolution, and this is -- in the past, a lot of the product we shipped in that area was at 23 millimeter. So sort of the price per LED, you might think of it as, has gone down. But as you get the LEDs packed in tighter, the price per square foot and maybe the price per unit doesn't see a decrease. So I think that is part of where that is coming from, that statement.

Okay. And I noticed your R&D, your engineering expense was up a little higher, a little stronger than I had expected this quarter. I am wondering if some of that was due to the finishing up on the new product, or is that kind of a level we should anticipate going forward, Bill?

You know, we have always said that our best market is around that 4% of revenues. So we will bounce around within a couple of tenths of that is kind of what we expect and I think we are just a little under that this time.

Okay. And one final question if I may. I wonder if you would characterize -- it sounds like you are seeing some good activity out of the facility in Minnesota. How would you characterize the demand for Galaxy and other commercial display business and also the activity in the national account arena?

Well, generally, the demand is very good. In fact, our leadtimes -- case in point, our leadtimes actually are creeping up just a little bit on us there even though we are performing very well over in the Redwood facility. So that is -- yes, the demand is strong.

Is this a case, Jim, where last year you were capacity constrained and you may have had to give up some business and this year, you have got the capacity to go after it a little bit more aggressively?

Yes. We have never -- we don't know -- we can't pinpoint I guess I should say too many orders that we actually can say we lost just because of leadtime, but our sense is that we did. We know we lost some. We just can't quantify it. And certainly this year, our leadtime has been very competitive and so it is a much better situation.

Are you seeing any more activity from the national accounts? It just seems like we are seeing more and more LED signage in the major chains. I am just wondering if you have had any wins, new wins, new customers that you have added.

Nothing that -- we have had -- we continue to win customers. We haven't really announced any in particular out there, but one of the areas that is really -- we are seeing a lot of interest in is the whole petroleum market, the convenience stores. We are having some nice wins there and there is kind of two parts to that. One is the digital gas price despite sales and that is a fairly low ticket item, real high-volume, low ticket kind of a product. But in some cases, they are putting message centers along with those and that of course ups the ticket price a little bit. So we are seeing real nice opportunity in that niche at this point.

Okay, great. Thanks very much.

Steve Altebrando, Sidoti & Co.

Hi, guys.

Hi, Steve.

Can you talk a little bit about where you are as far as utilization and I guess just capacity that you have over the next couple of years? I know you had mentioned you added a night shift, but as far as physical space, manufacturing space, do you think you are pretty good as far as capacity --?

Yes, we think we are probably good for a couple of years and we have a little bit of -- what we might have to do next is maybe build a warehouse here in Brookings. We are actually using this new building that we are just -- we are just in the process of finishing, we actually are occupying -- the lower -- the manufacturing base there are occupied at this point and they are being used as warehouse. They can be converted -- two in particular are really ready, pretty much outfitted for manufacturing. It is just a matter of deciding we want to use it for that purpose. So that would be kind of our next step here in Brookings.

But we have got -- we are not even close to being maxed out at Sioux Falls at this point and Redwood Falls has -- that certainly has room for growth over there too. We are just -- the night shift we have at Sioux Falls is really just you might say a partial night shift; it is not a maximum night shift. So for the next couple of years, we are in pretty good shape and then at that point, it will depend on how things grow on the order side.

Okay. And given the guidance that I thought was pretty strong for the second quarter -- selling expense was a lot lower than what I had anticipated. Any color on that and how that came down pretty drastically sequentially?

As a percent? Steve, it was -- in the fourth quarter, we do -- there's a lot of big tradeshows that go on, there is a lot of corporate planning meetings that go on. In short, there is a lot of [T&E] and also remember in the fourth quarter -- we booked a lot in April that was -- it was a flurry of activity and that does cost you. That is kind of the variable component of booking these orders and so it was a big mix of things that happened. Fourth quarter typically does get higher in selling expense because of those factors.

Okay. But generally is the best way to look at really in the selling is looking on it on a forward basis. In other words, selling expense this quarter for the October quarter? Would that be the best way to look at it?

Yes, yes.

Okay. All right. Thank you.

Thanks.

We will take one more question, operator.

Jim Boyle, C.L. King.

Good morning, again. Bill, the billboard revenue in the last quarter, what was the increase year over year?

I believe I would have to check that. Maybe I can get back to you, but I think it was in around the 30% range, maybe a bit higher than that.

It might be a little higher than that I think. We are factoring in (multiple speakers). We were (inaudible) at capacity in Q1 last year at billboard, so I think probably a little more than that.

It might be closer to 50% as I think about it. I can get back you on that, Jim.

Okay. And Jim, what would you say now is the potential run rate revenue capacity near to midterm? Could you handle 700 million, 750 million run rate?

Well, again, always like to define capacity because there are several aspects to it. First of all, you need the space to do the work and then you need the equipment for the processes and then you need people. So -- and our people are all busy at this point, so we would have to add people to get up to say 700 million, 750 million.

Presume you can add the people.

Yes, so -- but I am just saying in terms of what you would have to add, we can get -- we have got equipment that is not working -- that's not working multiple shifts yet, so we can add there. So there is certainly some headroom there. Can we get to 7 -- I would say we would have to add some equipment to get to 700 million, 750 million in some places. But there are other places that we have got the capacity to do that.

And then in terms of facilities, I think facility wise -- again, we didn't talk about it here today, but we certainly have an ongoing very strong emphasis on this lean manufacturing and the whole idea there is to move more through faster and better. So the jury is still out on what we will accomplish there ultimately, but over the next two years, I would expect we will accomplish more there and that it will be relevant to what we can get done in the space we have. So yes, I would like to think we can get to the 750 million mark with at the most maybe some warehouse space here in Brookings.

And that would be in one, two years you could handle that, all else being equal?

Yes.

Okay, thank you.

There was one more question, operator, in the queue and we will take that last one. Sorry to confuse it.

[Tom Kerchow], Pacific Asset Partners.

My question was regarding competition in digital billboards and that has been pretty well covered. But to be specific, we all know there is going to be (inaudible) competition with the market growing like this, so shouldn't be a surprise. But I do -- I am looking at a press release from a company I don't know, LSI Industries, which announced that they had shipped their first five outdoor digital LED billboards. So my question is were they even on the radar screen? Did you compete against them for this order?

I think you would have to ask when that order was booked. I think it was booked a long time ago I think.

I mean it doesn't say that; it just says it shipped them.

I think that is sort of an old order. That is what I would understand on that. But right now as we understand it, they are not a significant player like Daktronics and our main competitor, YESCO, is in that business.

As I said, there certainly are a number of companies -- it's a very attractive industry and there are a number of companies that would like to be a bigger player than they are. No question about that.

We have to continue to offer a good product at a good value proposition to our customers and they have to provide good service and that is -- we're committed to doing that.

Okay. And then quickly, any new technology that has appeared that we should be thinking about outside of LED?

Well, the one that has been talked about a fair amount here over the past few years is the -- it's more or less like an LCD type of technology and there has been a few prototype installations of that. It has its challenges. It may become viable at some time in the future, but just a number of challenges for that technology in an outdoor environment.

One of the companies is Magink that's gotten some press and at this point, they have to have a glass over the front of the display. For example those kind of challenges. So I would say there is none that we see that's imminent as sort of ready for prime time, but certainly there are companies working on alternatives and those alternatives will I think ultimately find at least a niche somewhere in the whole world of digital advertising.

LED technology continues to come down in cost and as I mentioned, we have got -- not only reduce the cost with this Valo product, but also the power consumption. And so in the end, LED is a tremendous -- really provides a tremendous image and for advertising, it is a very vibrant -- one of the -- this LCD technology is a reflective technology, so you have to front-light it at night and of course that is typical of a billboard. In the daytime, -- of course the brighter the sun, the brighter it will be, but on a cloudy day, then it is not as bright.

So I think the LED offers some advantages from an advertising perspective over that. But certainly I think these technologies will find a niche at some point as they get them perfected, but I think it is a little ways away yet.

Okay. Thank you very much.

Okay. With that, we are going to close it down here. Thanks, everyone, for being with us this morning. In particular, thanks for the questions. I would like to, in closing, just thank all of the Daktronics employees for all of their hard work this quarter and for the excellent results that we achieved for the quarter. Also, I would like to mention that we have our annual shareholders meeting this evening at 7 p.m. here in Brookings and we will have an open house with tours beginning at 5.30 and we look forward to seeing at least some of you here tonight hopefully. With that, thank you. Have a good day.

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