Daktronics Inc (DAKT) 2008 Q2 法說會逐字稿

Welcome to the Daktronics second quarter fiscal 2008 earning results conference call. As a reminder this conference is being recorded Wednesday, November 14, 2007, and is available on the Company's Web site at www.Daktronics.com. During the call all participants will be in a listen-only mode. Afterwards there will be a question and answer session. Now I would like to turn the conference over to Mr. Bill Retterath, Chief Financial Officer. Please go ahead, sir.

Thank you, Dustin. Good morning everyone. We appreciate your participation on our second quarter conference call. We'd like to as is our custom make some primarily comments about the quarter after which we will open it up for a limited time frame for questions. As usual I would like to offer our disclosure cautioning invests 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 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 on 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 the call over to Jim Morgan, our Chief Executive Officer for some highlights on the quarter.

Good morning everyone. Thank you for joining us this morning. The results this quarter were mixed for us. Overall many things went well for us this quarter but we did have a few challenges.

As we discussed in our news release we did experience some ramp up problems in our Redwood Falls Factory, if you recall we brought that factory on line this spring, and just to give a little more color to that one of the areas we had problems with there was suppling metal cabinets to the plant. We just brought the metal shop on line at the end of the quarter now so prior to that we were feeding that plant from outside for the cabinets. So that will help us significantly going forward. We think we got things pretty well on track there at this point. We also have a couple of large products that had some cost overrun that impacted our margin a bit. These are cite related. These are one-time occurrences and so a couple areas that could have performed better on this quarter we are addressing those for the future.

As you may recall at the beginning of this fiscal year we began operating under a business unit structure. So this is the second quarter that we've been operating under that structure and overall I'm are pleased with how that is helping us better manage the business and better position ourselves for continued growth. The last couple of years we've had very rapid growth and so to get our arms around all of that and position ourselves for going forward, I think this business unit structure serving us very well. Just as an example of the success of this alignment, and given what we did there was align our engineering manufacture and then our services with our markets and really our customer demands, that's the objective there.

An example of the success there in our sports products statue which is under our schools and theatre business unit, that factors here in Brookings. A year ago this past summer we struggled to meet deliveries and out lead times went out beyond ten weeks for a time there which is not really acceptable in that marketplace. This summer we maintained five-week lead time even though we saw some nice growth in that area and that was a direct result of getting a better linkage with our High School Rep direct market and also the lean manufactory initiatives that we put if place. Those things go in hand-in-hand. Part of lean is really linking the customer demand in with the capacity and the ability to produce products. So that's an example of our success in that area and we are doing the same kind of things in our other plants and our other business units. And very positive results there. And again that's an ongoing effort and we have a lot of opportunities for improvement there yet.

And looking at our business overall on Live Events this business, especially this year was, it was especially lumpy. We new that going into the year because of some of the really large projects that were out there and are still out there. But we are overall, we are optimistic about our win rates on the projects that are still out there. We continue to see interest from facilities at all levels that upgrade into larger more capable display systems. The one disappointment we had there it looks like we won't get the one large NFL project that's out there so that was a disappointment. But as we announced and Bill will talk a little bit more about some of the areas that we saw successor or expect success there.

In the commercial market we still see continued growth opportunities in both our reseller area, that's where we sell primarily through sign companies and also in the digital billboard area and here, again, we will have continued focus on ramping up our capacity in both of these factories to support anticipated growth. I like just to add that for the most part in the near-term that's really more a matter of just adding people in shifts. We have the space and we have the, for the most part the equipment we need in the near-term at least there, it's just a matter of some more man power to keep ramping that up.

International continues to be a development area for us. To put this in perspective we opened our first European office four years ago and our first Asian office two years ago. This business is very large contract oriented. So, again, it's inherently very lumpy. But there are some nice opportunities. For example, this quarter we will deliver a project valued at over $3 million to a commercial sight in Eastern Europe. So the fact that we are over there allows us to participate in that type of opportunity. One thing also worth noting is that we are seeing increased interest in the digital billboard applications in Europe.

So we are excited about that potential going forward. With that I will turn it over to the Bill for a few comments on the numbers and then we'll let you ask some questions.

Thanks, Jim. Starting out, I wanted to give just some quick numerical values on our business units, which likely will be included in our 10-Q that we file within the week or so including some more specific segment data. Net sales on our commercial business unit are up 42% year-to-date and represent 33% of our business. Our Live Events business unit sales are down 3% and represent 38%, again, these are year-to-date figures. Remember now on our Live Events business unit, our business saw significant growth through the second quarter of last year and had it not been for the success that we attained this year on the large mega-projects the growth for the year would have been limited as we said about 10% range. So Live Events being down by 3% is not a negative from our perspective at this point.

Net sales on our Schools and theatres business unit are up 38% year-to-date and represent 15% of our total business. International business unit is down 2%, represents 7% of our business. And just to keep in mind on the International business, that will be lumpy, because of the small number of large transactions that we do and we don't have the base of consistent business there.

Finally on our Transportation business unit net sales are up 19% and represent 7% of our business. I also want to touch briefly on shipments of our Valo product line. When we introduced this product we decided that based on the way we were going about this business, how we are selling it and manufacturing it was appropriate to treat that business as standard order business, meaning that revenue recognition was on the basis of delivery rather than on the percentage of completion. With a little over $2 million of Valo product in finished goods therefore, at the end of the quarter that we would ship in the third quarter.

I also want to do give some revenue recognition estimates on these large mega-contracts that we anticipate booking this quarter. Out of the more than $35 million in anticipated revenues we only expect maybe 2 to $3 million in the third quarter and then approximately 20% of that may come in the fourth quarter. The rest in fiscal '09 was the heavy emphasis in the second quarter of fiscal '09. Keep in mind these contracts are not inked yet so this is subject to change and we don't anticipate updating this on a go forward basis. There are also two other significant, what we'll call large projects on our radar screen in the Live Events area that could exceed $14 million in revenue contribution for this current fiscal year, primarily in the fourth quarter. So potentially depending on how these go the fourth quarter shapes up fairly strong.

A few comments now on our annual guidance, in addition, to those large projects I just mentioned we have other projects pending that we feel our chances of winning right now are fairly strong and they can have a big impact on our fiscal year. Keeping in mind, again, that these are hard to predict, these contracts could really propel the fourth quarter in a nice way. With that in mind, we are estimating that net sales for the year as a whole could exceed 500 million which would require the fourth quarter to be 140 million if, in fact, we hit the low-end of our third quarter revenue guidance.

With that covered let me move into gross profit. Going into the second quarter we felt fairly optimistic on gross margins and overall they are not quite at the level we thought as Jim mentioned, but they are close. He mentioned a few product issues in the field that impacted margin and some higher anticipated costs. Had it not been for those our margin, gross margin would have been exceptionally strong. We maintain our thought process going into the third quarter that our gross margin does look strong and we are optimistic on our performance there subject to these large contracts. On operating expenses we went into the quarter taking our approach on controlling operating expenses on a quarter-by-quarter basis. We feel we are somewhat successful again, but given the expectations for the third quarter we've anticipate getting more aggressive on cost containment and are currently evaluating things to do in that regard. And as we've stated before most of our operating costs infrastructure is all about personnel costs and we intend to get much more vigilant in growth of personnel.

For the quarter sequentially operating expenses were up just under 5% and although the holidays puts a little pressure on us in the third quarter our goal would be to hold down that growth while less or significantly less than the second quarter was sequentially. On the balance sheet in cash flow at the end of the first quarter I thought that cash flow from operations might not be as strong in the second quarter, but for the year we should be in good shape. As of this week our short-term debt levels got below $10 million but keep in mind that these pending large projects could change our cash flow on a temporary basis, but overall we remain optimistic on our free cash flow for the year. We are not making any changes in our CapEx spending for the year. And with that I'd like to turn it over to the operator and open it up for questions.

(OPERATOR INSTRUCTIONS) . We will go first to Steve Dyer with Craig-Hallum.

Good morning, guys, thanks for taking my question. I guess the obvious question is FY Q3 guidance is fairly dramatically below everybody's expectations but then your commentary regarding Q4 snapping back pretty dramatically, does that imply sort of an air pocket here in revenue or how would you characterize the next two quarters?

I think that might be one way to describe it. There's certainly -- we are not -- our backlog is not as robust as we would like it to be at the beginning of the quarter. And so that, there is a gap there. Or it's pretty much a flatness as compared to last year. The, and there are a lot of projects on the bubble here. One of the things, the fact that it's probably an unusual amount of new construction projects in the Live Events area, Large Sports area. So one of the factors of those even if you book the order then the revenue then is strung out so that the fact that there is probably an unusual amount of that in the mix here tends to string some of this out a little bit in over a longer period and there's some benefit to that because it gives us more flexibility in how we schedule that through the plants because they tend to have longer lead times and we can are some more flexibility in how we smooth our plant loading. But in the short-term, yes, we are, we are just a little light on backlog going into the third quarter.

Can you point to anything in particular that's causing that? You said your Live Events is a little bit of a push out but that I don't read to be something that would be that near-term in revenue recognition. What sort of, what's softer in this Q3 than you expect it?

I'll mention some things, Steve, this is Bill. Overall our commercial market is, we did not get the order bookings during the quarter that we had thought that we would get. That was somewhat of a surprise. We don't expect that that softness in order bookings continues on. And in fact as Jim mentioned we are seeing on optimism on the billboard market in Europe. That's some positive factors. And keep in mine one of our large billboard accounts that we've had has historically given us orders in big chunk, and to the first six months of the year we haven't gotten any of those big chunks, that I can recall offhand. So clearly the commercial market in terms of order bookings we don't see a long-term implications there. But it is something to monitor. On Live Events I think as I mentioned that already we had one heck of a first six months a year ago. And so Live Events I think is, overall we feel as though these orders in Live Events are going fairly well. It was disappointing we didn't go four for four. But I think in that area we are looking strong and we don't see in any of our business units any loss of market share or anything like that. Our High School, Schools and Theatres business is actually doing very well and in Transportation, there's some nice projects out there that our guys are working on. So I think in terms of order bookings we don't see a lasting issue on order bookings but it certainly affects our third quarter.

Okay. If I could drill down on the digital billboard business. Lamar raised their digital CapEx last week, both they and Clear Channel were bullish about how things were going. Do you view this as a seasonal thing just given the weather or what do you make of it?

Well, in terms of our billboard business, I'll just mention this, our billboard business Q2-over-Q2 is up 15%, keeping in mind that one of our large accounts placed a large order in the second quarter last year. And so the billboard business is performing well I think and we are in a good position there and with the optimism we are seeing in Europe that marketplace looks strong for us.

Can you elaborate on Europe at all? I know JC DeCoe has talked about rolling out digital bill boards in size over there. Anything you can tells on that?

So-- sort of-- JC DeCoe is the largest player in Europe and we actually have done some business with them. We installed a feature sign in London. It's around the outskirts of London, we did that last year so we've done some work with them. But there are other outdoor companies in Europe as well. So we are seeing interest in more than just one player.

Any time frame when you think that may become material.

There can be some things yet this fiscal year materialize, we think but predict the future is always a little tricky but there's some potential of that.

One more question and I will hop back in the queue. Can you give any color about the big NFL deal, when was that announced or decided that you can point to that you lost was the? Was the competitor aggressive on price to a point that you didn't feel like you could match or anything you can tells there? First of all I don't think it's actually been announced yet to be honest with you, so. I don't know that we want to talk a lot about it in detail to be honest with you. But the decision has been made was made weeks back, any way, maybe last couple of months. But. Okay. Thanks.

That's all we really want to comment on that at this point.

Thank you.

Next question, Jim Boyle with CL King.

On the digital billboard, can you give us a rough feel for what the revenue was in fiscal Q2? You said it was up 15% year-on-year compared to this years robust Q2?

Yes, the revenue was up rather significantly. Revenue was up roughly 14 to 19 million.

Do you have a percentage?

For the quarter -- I don't have a percent, Jim.

So it was 19 million in fiscal Q2.

Yes.

Okay. Also just quick housekeeping, the one time 2.5 million plus book gain in the sale, is that included in your EPS guidance or --

Yes, it is, yes, it is, thanks for asking that, yes.

And one of your biggest individual customers, Lamar had told our CL King clients at our conference that were holding sort of a bake off between their top digital display vendors. How do you think you did at that bake off?

We think we did fine. We still are well-positioned to just serve that customer. Was there.

Was there any kind of the biggest positive take away and any biggest discouraging take away from that meet in or and was it two of you or three of you at that bake off?

There was three. Our product is exciting, Jim. I think there is, we have done some things with our product that we are getting very positive feedback on, just some some of the thing we are doing as far as the ease of installation and reducing the wait and the power. We are getting -- that's been very well-received and we think that's very positive. Just to be clear, we reduced weight, we reduced the power and increased the brightness concurrently while simplifying the installation process.

Okay. And with kind of a tougher economy and dicer financing , are you seeing any impact of this on your commercial business yet? And how do you forecast that demand one year out?

We don't have any sense that the economy is affecting that business itself. At the retail level selling to the sign companies, again that business driven by the recognition of the retail businesses, realizing that this is a good way to advertise. And we kind of look at that as it's an investment of an alternative, we offer at least there so they can look at that as an alternative to their investment in other types of advertising. So all businesses have to advertise and in good or bad times so we believe it's just provides a very effective advertising means. And as far as the digital billboard market I think you get the best sense of that by hearing what the Lamar and the clear channeling of the world have to say in their public disclosures. I think that's the best way to get a reading on that.

La Mar did say they were eager about the coming quarters given the Federal Highway Administration Rule both in New York and Texas coming up.

There's optimism about some of the bigger states that have been holding back a little and it's, it was a clarification by the Federal Highway Administration on how they view this technology and that was positive for the industry. And so to the extent these other states would open up that would be very positive for us as well.

Finally why did you sell 90% of Arena Media Networks and why now and who did you sell it to?

That business is a capital intensive business and we are not, that's not our mode of operation. And so our expertise and our forte there is on the technical side and installing and operating those networks. And so we got into it with the idea of bringing that to the table and one of the things we realized is for that business to grow is its going to take somebody with some, that has some deeper pockets that wants to invest in that. So we felt it was appropriate at this point for us to step aside and let somebody else step in there to drive that and so our involvement there continues to be on the technical side.

Who -- Jim if I could go back to one of your question I want to add something to it on our Galaxy product line within the commercial market. We are probably not going to achieve our original sales projections in that area and what we looked at internally. But I think we'll still exceed the 20% growth year-over-year. The interesting part of your question is the economic factor that play into that and that will be something to monitor as we go forward. I'm not quite sure that had the economy impacting that yet as Jim said for the reasons he said. But probably won't have quite the growth we thought going into the year but it's still a solid nice growth business in excess of 20%.

Who did you cell Arena to?

The company redeemed it.

Okay. Thank you.

Next question, Jim Ricchiuti with Needham and Company.

Just want to go back to the backlog, 35 million in orders that you didn't get the final on, did you say those are all three products that you allude to, baseball projects? Yes. Okay. Bill, is sense you can give us as to on a couple of the projects when are the--- are these upgrades or new projects, new construction?

Those are new construction, one is a big upgrade. They are once we've talked about before.

Okay. And just with respect to the NFL project that you didn't win, had you won that can you give a sense as to when you might have seen the revenue impact from that, one that.

Oh, Jim, I apologize, I've moved on to some degree and I don't recall offhand when that revenue impact would have hit.

Okay. You also talked about the potential for a couple of other large products in Q4. Can you say whether those are baseball or would be football projects.

At this point, Jim, I would rather not. We are in good position on these and I would like to keep them under the radar screen to some degree.

If my memory serves me correctly in your K, you talked about your G&A expense declining as a percent of revenues this year and just given the trend through the first half of the year, do you still feel that's achievable.

Yes, Jim, I'm glad you bring up that question. With what happened in the second quarter and what we achieved in revenues, a coupled with the way the third quarter has shaken out in terms of operating margin we had really had our sites set on 10% and I think that's a tough thing in terms of how you look at it and the reason being is, if we were to keep SG&A flat or minimal growth it might you still be tough. Again, the fourth quarter, it's hard to know what revenues are going to be in the fourth quarter. We think it could be a good quarter if we book some of these deals that look like we have a good chance on but to achieve that 10% goal is going to be tough and I don't think as an organization we believe that we would sacrifice the long-term market opportunity and scale back in the short-term when the underlying fundamentals of our marketplace have not changed. Just to be clear when you talk about that 10%, 10% for the year, is that an original target? We had set our sites internally as that being a goal. And it was a tough goal. It wasn't like our typical guidance type statements where that's the bottom end. That was a realistic challenging goal and I think what happened in the second quarter and in the third quarter makes that not likely.

Okay. Can you help us with just as we think about Q4, it sounds like you've got a number of large projects some of which you feel very good about, others that you might get. Can you help us understand whether these are some of these are, involve upgrades that could slip and if they slip is there much risk to them potentially slipping out more than a couple of quarters or is this new construction?

You really want us to give out names, Jim. I just tell you there is a new construction but bigger money is in a new construction type facility, a major project there.

Okay.

The smaller amounts is an existing upgrade, something like that could slip. In fact, on this other one if I recall right originally it was anticipated to be a bigger project and now the customer has scaled it back this year. So there is some potential that a project like that could slip but it's a smaller dollar amount of that 14 million that I throughout.

Is there any color you can give us on some of the cost overruns that you experienced, how big -- how big of an impact was that on your gross margins in the quarter?

In terms of our, I'll wrap a couple of thing together in term of the cost overruns and then a couple of projects that we had to go back do some work on. It had approached 0.75 of a million to $1 million.

Okay. And you feel that's mostly behind you?

Yes, yes. I mean we've taken the set aside for it clearly,.

That's it for me. Jim, with that in mind though, just keep in mind we are at the nature of our business is-- those things don't have-- they happen infrequently but they can happen and that's the risk and that adds volatility to our margins overall. Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) . We will go next to Steve Altebrando with Sidoti & Company.

Hi, guys.

Hi, Steve.

Most of my questions have been answered, can you give a breakdown percentage or absolute Weiss revenue by segment in the quarter?

The revenue by segment in the quarter.

I think you gave the percents, already didn't you, Bill?

I gave the percent year-to-date. Steve, go with your next question, I don't know that I have the percents here. Maybe I can figure it out quickly. If not it will be in our Q.

That was basically it but it sounded like, just going back even about a month ago you seemed very positive about the business in the near term. Is there anything that's changed near term or a timing issue that's changed that sentiment, I guess?

We are positive, I think.

We are certainly positive about the long-term. The Live Events business in sports is, the lumpiness of that is, timing things can slide around and things can slide out. So that's just an inherent part of the business and long-term we still see opportunities for growth there. We see ongoing interest, sports, all the way up and down the spectrum of facilities, it's interesting a little town of Wagner, South Dakota, I just saw a little presentation in (inaudible) yesterday, what we've put in a gymnasium there? I think the population of the town is 800. It's interesting what they have color displays in their gymnasium. So that's on the one ends of the spectrum. So from there all the way up to major league professional sports we are seeing interest in the expanded use of displaces. So I think the interest is there and it's on these big once it's just timing challenge at time.

Steve, I can give you those numbers, our Live Events is about 36%, Schools and Theatres were 15%, Commercial, 31, Transportation, 8, and International, 10. For the quarter. Those are just rough numbers. It might be off a percent or two.

Okay. Thanks a lot, guys.

Okay.

Next question, Charles [Glosski] with Independence Investment.

Good morning, guys. You keep struggling with this issue of visibility. I think it's in the last six quarters I was just looking at your stock chart there have been four days when the company's lost 20% or more of its value. Which tells me either there's a forecasting issue or communication issue or maybe it's just the nature of the business that it's just, just not that predictable. And I'm not sure there's a real answer to this but I guess the question is, what can you possibly do to enhance visibility so that you don't get the volatility like this in your actual results versus expectations?

What we do is we of course we have our order pipelines on each of our business units and we go through a process of reviewing and as we make our projections we look at those and look at our, what we've estimated our chances are at each of the projects that are out there, the order opportunities and try to factor that all in. But it's not a perfect science predicting what's going to book, obviously. And we continue to work on that to improve our ability to do that. But in the end the customer makes a decision when they are going to do what they are going to do. So there's always is that degree of uncertainty there in the future.

Charles, if I could just add, one of the reasons in giving some feedback on some of these orders for the fourth quarter is if you look at the sports deals, that's 14 million, that's one quarter beyond the current one and it is, in terms of visibility, that's the reality of our business that whether or not that deal happens or not can affect the fourth quarter. And that was one of the reasons why we emphasize that. So in terms of visibility for us as an organization, we believe strongly that used the to look at our company over the long-term and aside from the struggles that we are admitting to on the operating expenses going back to the beginning of the year, our sales over the long-term still are ramping up and we are, we do have visibility over the long-term. But the short-term does, will likely remain a tough thing to call.

Well, I know you're right, at least as far as maintaining market share. I mean that really is key and if you haven't lost market share and you are going to have to accept a certain amount of volatility I would just urge you to be as conservative as you can in planning those numbers going forward. So that's it.

I think it's our intent to always take a conservative approach on what we state about the future and without being in a sand-bagging mode and it's always a challenge predicting the future for sure. But again I would just like to reiterate what Bill said. Now long-term we were see the fundamental drivers of our business are there. We have invested a lot on the operations side of the business here. Not only in plant and equipment but also in improving our processes. And those things all go hand-in-hand. Our ability to deliver a quality product on time is certainly a key component of our ongoing success and we continue to have a big focus on that as well as going on the market side as well. So with that I think we will wrap this up for the day. I appreciate all your questions. We are all here and we are all still working hard to move things forward. So thanks.

Again that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.