Daktronics Inc (DAKT) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fiscal year 2009 third-quarter earnings results conference call.

As a reminder, this conference is being recorded Tuesday, February 24, 2009 and is available on the Company's website at www.Daktronics.com.

I'll now turn the conference over to Mr.

Bill Retterath, Chief Financial Officer for Daktronics, for some introductory remarks.

Please go ahead, sir.

Thank you.

Good morning, everyone.

We appreciate your participation in our third-quarter conference call.

I'd like to make some preliminary comments about the quarter, after which we'll open it up for a limited time frame for questions.

I'd like to first 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 affect our performance in the future.

We caution you that these and similar statements involve risks and uncertainties including changes in economic and market conditions, management of growth, timing and magnitude of future 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'd like to turn it over to Jim Morgan, our Chief Executive Officer, for some highlights on the quarter.

Thanks, Bill.

Good morning and thank you for joining us this morning, everyone.

We had a good quarter generating sales with a 9% increase over Q3 of fiscal '08, despite the fact that our Billboard sales dropped off during the quarter as we had anticipated.

We saw orders overall decline about 9% compared to the same quarter of fiscal '08.

We attribute the drop-off in orders primarily to the current economic environment, the most significant being in our commercial business or the commercial Billboard niche which we also refer to as the outdoor advertising niche, has seen the greatest decline.

We expect orders in our commercial business to remain soft through the economic cycle.

Orders for live events, which is in primarily our large sports business, were up 70% compared to the third quarter of '08.

This included the second portion of the new Meadowlands stadium project totaling about $27 million, again the portion in this quarter.

We also booked during the quarter the two large contracts I talked about last quarter, namely for the Minnesota Twins and for the Cincinnati Reds.

And those two combined total about $17 million.

Year to date orders in Live Events business are up almost 30%.

We still have a nice pipeline of opportunities out there and the interest in high-definition displays continues to drive interest.

There is of course the possibility that the economy might affect the timing and scale on some of these projects that are in the pipeline, and that remains to be seen.

Within our Schools and Theatres, which is our high school sports primarily and then also the automated hoist rigging systems for theaters, orders within the scoreboard portion were up almost 10% for the quarter, but the business unit as a whole was down 10% and this decline was due to the hoist side of our business, which we believe is more a factor of timing.

Year to date our scoreboard business is up more than 5% in spite of the economy and, more importantly, in spite of the delivery issues we had in the first half of the year which we now feel are behind us.

We think this business can grow, but the uncertainty in the economy is still there.

Our international business, as we've discussed before, is typically more difficult to project because of its reliance on large projects, which are always lumpy.

The current economic environment adds a further degree of unpredictability, but we are committed to the long-term opportunities of the international business.

There are still nice opportunities out there in our pipeline, but at this point it is difficult to forecast.

Orders in transportation for the quarter and year-to-date are up approximately 19%.

Sales are not following, so we are building backlog.

This sales delay is primarily due to customer site delays.

We don't see impacts from the economy here and are optimistic that stimulus spending could have a positive effect on this business.

On the product development front we launched a new product a few months ago which is an outdoor 10 millimeter surface mount video display technology.

This provides very high resolution for an outdoor display especially applicable to closer viewing distance applications.

We installed one in a concourse at the new Yankee Stadium and we sold a modular system using this technology to accompany ScreenWorks, which is a rental company.

And they're in turn providing it as part of the touring AC/DC concert as part of the staging backdrop for that concert.

We have recently received a second order from ScreenWorks for this product to be used in another high-profile tour and that product will be delivered yet this quarter.

So we're excited about the response that that product has received and this gives us a nice entree into that transportable market, the staging and rigging market.

Given the overall outlook, which includes reduced overall order levels and sales, we are very focused on cost reduction.

Our strategic goal is to reduce costs, but at the same time retain our core strengths that differentiate us in the marketplace.

We are continuing our strategic initiatives in restructuring our service organization and streamlining our engineering processes.

And we've initiated stringent hiring controls and have reduced headcount primarily through attrition to date.

During the third quarter we didn't achieve the reductions we had desired and so we are continuing as we go forward to focus on cost reduction.

And just to emphasize, we look at cost reduction as a process, not an event, and we'll continue to focus on this as we work through the economic downturn.

And with that, I'll turn over to Bill for some comments on the numbers.

Thanks, Jim.

I'd like to start out with a few comments on gross profit, which was less than what we had expected for the quarter.

We took approximately a $1 million hit on the finishing issue mentioned in our press release.

We also did not get quite the personnel attrition, as Jim mentioned, we expected to achieve within manufacturing.

So our costs were a little bit higher than expected.

Finally, we took some cost estimate changes on contracts which were really unusual and dealt with obligations, primarily with sales and use tax.

The warranty hits which exceeded our expectations, including the finishing issue, was approximately 2% on the margin.

The contract's costs were less than 0.5% and the lack of personnel attrition is a little bit hard to quantify.

That was likely close to another margin point.

We also completed the restructuring of our inventory within manufacturing.

And in the process we became aggressive on identifying inventory to transfer primarily for our field service use.

This had two effects, one was to increase our finished goods by about $2 million, and secondly an increase in write-downs of about $0.75 million as we determined some of this inventory was in the higher quantities than what we needed in service.

This overall was approximately a 0.5 point hit to margin.

Given where we are today with attrition and warranty costs, it's hard to project gross margins for the fourth quarter, but I expect we could see them rise sequentially.

Moving on to manufacturing costs, like manufacturing, we didn't see quite the attrition we wanted to, so we have a ways to go, but we are still able to see a decline in total operating expenses.

Part of the decline was adjusting of various accruals to reflect the change in business which occurred in the third quarter, things like backing down on profit sharing accruals and other cost reductions of other benefit type things.

While this -- this benefit reduces on a go-forward basis so OpEx would likely rise, where -- we think that there are other cost saving opportunities that we can take advantage of to get to more appropriate levels of OpEx as we go forward.

The adjustment of accruals was approximately $400,000, so that's what we have to make up to.

Again, I'll focus on things like attrition, like professional fees, IT costs, bad debt expense.

Those are the things that could inhibit the ultimate decline that we see.

We've had good cash flow for the quarter and our cash position remains strong at $18 million cash in the bank.

Generating free cash flow and preserving our cash remains a high priority.

We're not doing anything that isn't mandatory in terms of CapEx and some of we've got currently planned could get put off or delayed.

The spending represents primarily maintenance CapEx or things that have been committed to.

We also have some assets we expect to dispose of to free up some cash during the quarter, could be somewhere in the $2 million range.

Finally, two quick comments on items below operating income.

We expect that our losses and equity investments will increase a little bit in the fourth quarter.

Keep in mind it's a non-cash impact.

And on the income tax side our effective rate rose slightly primarily based on our assessment of the mix of business at the state level where we have a higher level of projects in higher tax states.

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

(Operator Instructions).

Steve Altebrando, Sidoti & Co.

I think the previous topline guidance of 585, I believe it was, is that something that's still reasonable to hit?

Yes, that's in the ballpark, Steve.

Okay, do you have a number of revenue for billboards in the quarter -- revenue wise?

Revenue wise was approximately $10 million on Billboard.

Okay, and was that sort of a runoff from previous orders or is that --?

Yes, it was.

If you contrast that to orders, they're a little less than $4 million for orders.

So, yes, it was a runoff from bookings in the second quarter.

Okay, and in terms of the margin issue, you spoke of the warranty.

Is that something that you think is largely resolved as of the end of the January quarter?

In other words, that couple hundred basis point impact, how long should we expect that to continue?

Steve, we're trying to finally quantify that.

We've assessed it.

We believe it's limited in scope, as we say.

Through this quarter we're continuing to evaluate that.

So there could be some more there, but we think it's contained.

Okay, and then just a couple quick more.

The Jets and Giants, any color just for modeling purposes in terms of when you'll see revenue recognition?

Is there a certain quarter where you'll see a bulk of that?

Well, over the next two quarters, the remaining -- we've got about $27 million or so left in backlog for that contract and it's roughly $10 million to $12 billion each of the next two quarters with the remaining going into Q2 of fiscal 2010.

Now keep in mind, Steve, that can change the timing on this.

That's normal in our business, but that's our current plan, somewhere around that level.

If anything, it might accelerate a little.

Okay.

And then the last one -- last time I think you were continuing to see nice interest in some of the HD signage from the large sports venues.

Are you seeing less of it or is it just given the economy, it just seems that visibility is a little bit less?

High-definition is still a big driver for the projects that are going forward.

I think the real question is of the projects that have been teed up there, will they slide out or will they be possibly scaled down?

That I think remains to be seen, but certainly given the economic environment out there, those are I think the possibilities we have to recognize exist.

Okay, but nothing -- you're not seeing orders being canceled or getting pushed back, just the sense that it's possible given the outlook here?

We've not had any new orders cancelled.

I think occasionally -- that can happen at any time projects get pushed back.

That happens even in more normal times.

So to quantify it as different right now is difficult, but I have to say the potential is there for that to happen.

Okay.

Thanks, guys.

Jim Ricchiuti, Needham & Co.

Thank you.

Good morning.

It was wondering if you could comment on what you're seeing in Live Events in the professional market versus, say, the university/small college market.

Again, I think what we're trying to get a sense of is looking at the upgrade business out there, are you seeing some more caution on the part of the university/college market as opposed to the professional market?

I'd say the larger projects tend to be more in the -- at this point tend to be more on the professional side.

These are projects that are in the $5 million to $10 million range.

And I don't have the visibility below that so much.

Bill, do you have a comment on it?

Yes, I'll add something below.

The interesting -- a couple of things.

To the extent the economy affects this business, we'll probably -- if it does affect it we'll probably start seeing late in the fourth quarter as we start getting into the sales cycle of the fall sports season.

Now with HD, one thing that we've seen is on the transactions less than $5 million, which is to a large degree our bread and butter and our foundation -- through the third quarter our sales on projects below $5 million have exceeded what it was for the entire last fiscal year, where on projects under $5 million we're at about $100 million, something in that ballpark versus all of last year.

I think we were in the $90 million to $95 million range.

So there are -- it's interesting to see the projects that are out there for renovations and the relative size of those compared to what they would have been two years ago.

But to know how those turn out is the uncertainty that we have at this point.

Okay.

And Jim or Bill, can you comment?

You talked a little bit about the pipeline.

I wonder if you could elaborate on -- you touched on some of the activity.

But the pipeline going forward, mostly the activity it sounds like is centered in the US market or are you still targeting projects international that potentially could come to fruition in the next couple of quarters?

Well, certainly the domestic market is more visible and more predictable.

There are some opportunities internationally.

I'd say the uncertainty of the timing there is more uncertain now than it typically is and it's always a little uncertain with the big projects over there.

So whether it's Europe or Asia, I think there's that uncertainty.

So maybe a little less visibility on timing on some of the things that are over there, but they're projects we've -- we would have proposals in on and bids in on and that we're actively working.

And Jim, the activity of the pipeline you see domestically that's mostly focused in the Live Events area?

Well, the big projects are that.

Yes, of course that's typically where out big project work is anyway, so that's where we see the big project side of things.

There are a few commercial projects in the pipeline as well, but that's much smaller dollar wise.

The large project there are a lot smaller dollar wise than in the sports side.

Sure, and then one final question for me.

Turning to the manufacturing, side, the cost side, you guys have added capacity over the last couple of years to really support the growth in the Company.

And I wonder if you could talk a little bit about -- I know utilization is always a tough thing to get our arms around, but can you talk a little bit about where you are relative to capacity utilization to the extent you can?

Yes, I guess there are two parts to that.

There's the fixed and the variable side of things.

And of course the variable side we can adjust as we go forward.

Certainly we've made some investments in plant and equipment that -- so that depreciation side of things is not something that's readily adjustable.

So some of those will affect our utilization here going forward in the near-term.

But we're looking for all the ways we can cut costs and trim down.

And on the fixed side of the equation, do you anticipate if business remains at these levels potentially looking at some other options?

Well again, we look at this whole thing as a process and I guess as this economic situation plays out we have to adjust as things develop.

At this point we're still I guess expecting that we'll turn around at some point, so we want to be positioned to move forward at that stage and still maintain our capabilities -- some of our capabilities are core capabilities at that point, so we're ready to go.

So that's where we're at at the moment and it's something we monitor on an ongoing basis.

Jim, if I could add -- there are a couple of things we've done, though.

I think you might be touching a little bit on this.

We had some real estate that we thought would be long-term growth.

During this quarter we expect, and we've got a transaction on the table, to sell that real estate.

Now that was primarily land, so it doesn't affect operating income(multiple speakers).

But then also we had -- and in fact we had started just initial steps on starting the build out -- I forget, Jim -- on a $2 million addition at Redwood Falls, to our plant there, we've put that on hold.

So at this point it's more about liquidating assets that we don't need along those lines, but keeping our core fixed infrastructure in place under the assumption that we can carry that for a reasonable amount of time.

Now if things were to go beyond fiscal year 2010, we might think differently about it.

Well beyond 2010.

But for right now we're just putting things on hold or not doing them, and getting rid of some selected assets that really weren't core to our existing capacity prior to this downturn.

Okay, that's helpful.

Thanks, Bill.

Steve Dyer, Craig-Hallum.

Good morning, guys.

Several of mine have been answered.

Just wondering how we should think about the absolute spending going forward on the operating lines.

You mean spending going forward on like operating expenses?

Yes, I mean it was down about $1 million sequentially.

Is kind of 27.2'ish a decent run rate to you?

Are you going to get more aggressive in chopping that?

Steve, we're doing everything possible to reduce it.

Again, primarily it's personnel in our case through attrition and we're working hard on that.

Our senior management team meets on a weekly basis for the sole purpose of going through that and we've got along ways to go and we'll continue to focus on it.

And the same thing happens primarily in gross margin -- we'll focus on it.

And do we think that we can reduce operating expenses on a go-forward basis?

Absolutely.

The timing of how we see it is the somewhat uncertain part of it.

We've put in place some internal goals of where we'd like to see us be at the end of the quarter, but we have to work out the process as Jim described it earlier.

So there's room to go down.

Okay.

And I know it's obviously very early to start thinking about fiscal '10, especially with the lack of visibility, but kind of what are your initial thoughts?

Is it possible to grow the business?

That would seem to be a challenge right now.

How do you think about next year or is it just too early to tell?

Certainly it's not too early to start thinking about it.

We've been doing a lot of thinking about it.

I think as we've discussed in the past, our Live Events business had really a phenomenal -- is having a really phenomenal year.

And so it will be tough for that to probably grow and we're expecting commercial to be down.

So generally we don't see -- we're not expecting really to grow next year given the current economic situation.

Although we haven't got numbers for that and we're in the process of going through planning at this time for next year and trying to get a little better sense of where that will go.

Okay.

And then just any color you can give us on the digital billboard market place?

Obviously sales down quite a bit.

What are you hearing from your customers?

Are they kind of still on a standstill basis with you in terms of -- not only with you but moving forward in rolling that out?

Yes, there's nothing really changed there, Steve.

The larger customers I think are -- definitely have pulled back.

The Tier 2/Tier 3 level customers, one of the challenges there is that they may have interest, but there's a challenge of getting credit to make the investment.

So there's definitely a pullback in that that we see.

At this point we expect it to go through this calendar year anyway.

Okay, I'll jump back in the queue.

Thanks, guys.

(Operator Instructions).

Dick Ryan, Dougherty & Co.

Thank you, good morning.

Bill, you talked about the uptick in tax rate in Q3.

What do you see going forward for Q4 and maybe into next year?

Well, the annual -- there is a year-to-date rate that's about 35.5% and I think that will hold into the fourth quarter somewhere in that, close to that range.

And then going into next year, one of the things we've got going on, I mentioned the state rate, we're doing a lot of business this year in Minnesota and New York and those are not cheap states when it comes to tax.

And so generally our history would suggest that it could go back down a hair, but we're talking maybe a quarter of a point or something like that.

Now the big thing that helps our tax rate is to the extent Asia really takes off because there are taxes there and most jurisdictions in Europe are a lower tax rate.

So the drivers long-term to lower tax our business outside the US.

Okay, you mentioned service.

I'm not sure if you said restructuring or focusing on the service side.

I think that was about 5% of business.

What are you doing there and are you seeing any margin uptick on the service side?

At this point I'd say we're investing as much as anything there because we had evolved into having sort of a number of independent field service entities and we saw a need to pull that together and get more of a cohesive effort out there.

And so that's -- we made good progress on that.

The basic restructuring is done; we're working a lot on the processes and the procedures and that's really where our focus is right now.

We've introduced some new systems, software systems to help with that process and that's an effort that is -- we've deployed part of that capability, that system, but there's more to do yet.

So that's really where the big focus is at this time is the processes and the systems to support all of that.

Okay, thanks.

Jim Ricchiuti, Needham & Co.

Yes, I was wondering if you could characterize the pricing environment just in light of the economy.

Are you guys seeing more pricing pressure in some of your markets and on the competitive side, do you see potentially some of the smaller players struggling a little bit more that you normally would be competing against?

I'd say we have seen some real aggressive pricing from some of the competitors that we'd say may be unusually aggressive, maybe to the extent we question whether it's even sustainable.

That's always a hard judgment to make of course, but -- so there is some of that.

Jim, is that in any specific market?

We've seen some of that in Live Events and we've seen some of that in commercial, both.

You had a follow-up, Jim, or (multiple speakers)?

Well I was just curious if some of the smaller players -- is this price competition coming from the more traditional competitors?

I assume it is if it's in Live Events.

And I was just wondering in some areas of the commercial market if you're seeing maybe some of the smaller players doing this.

And longer term do you see potentially that competition, the competitive yields changing in the commercial market among some of the smaller players that you compete with?

Yes, I'd say it varies.

I don't know that -- in some cases it's companies that are trying to get into the business and I'd say from our perspective trying to buy their way in is kind of what it looks like to us.

Maybe they would describe it differently, but that's -- so in some cases it's some players that haven't been playing so much in the past.

Okay, thank you.

Yes, so thank you for your questions.

I appreciate you being with us today.

We're continuing to, again, focus on containing costs and working hard to generate orders.

That's kind of our priorities here.

So thank you for being with us today.

Operator, you can close it up.

Thanks, operator.

Thank you.

At this time, this concludes today's presentation.

Thank you for your participation.

You may now disconnect your lines.