Daktronics Inc (DAKT) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics first quarter fiscal year 2010 earnings results conference call. As a reminder, this conference is being recorded Tuesday, August 25th, 2009, and is available on the Company's website at www.Daktronics.com. I would now like to turn the conference over to Mr. Bill Retterath, Chief Financial Officer for Daktronics for some introductory remarks. Please go ahead, sir.

Thank you. Good morning, everyone. We appreciate your participation on our first quarter conference call. We intend to make some comments about the quarter and the future, after which we'll open it up for a limited time frame for questions. I'd like to first offer our disclosure, costing to participants that in addition to statements of historical facts. This call and our year-end 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, everyone. Needless to say the declining top line we've realized certainly creates a challenge. The good news is we were able to keep the bottom line positive despite the topline declines, and I want to first of all thank all of the Daktronics employees for their conscientious efforts toward reducing costs over the past quarter and of course this is an ongoing effort. This is the beginning of football season, so I thought that I might note a few of the stadiums that opened football season under new Daktronics displays. The University of Florida Gators, they are a long-time customers of ours, they installed one of our very first Prostars back in 1998, and we have enjoyed the opportunity to serve the Gators display needs on campus since that time. University of Minnesota, the Golden Gophers, are playing in their new stadium, St. Louis Rams, an existing stadium with new displays. The Oklahoma State Cowboys, stadium upgrade there. The Kansas City Chiefs as part of a major stadium renovation, and Louisiana Tech. Those are some of the larger projects that we've completed here recently.

Some color on new large orders. We had a significant change order from the new Meadowlands Stadium to enlarge the displays for their stadium. And this is indicative of the importance the owners place on having a good digital display component of fan experience and the fact that the bar continues to elevate for those displays. Other notable orders, University of Alabama at Tuscaloosa for football and basketball, University of Alabama at Birmingham for basketball, baseball and softball, the Ford Center in Oklahoma City, that's the home of the new Oklahoma Thunder NBA team, actually moving from Seattle, and so those are some of the recently booked orders. On the international front, we had a nice order for displays for a shopping mall in Australia that exceeded $2 million.

And an order for a -- displays for a theater in Paris that exceeded $1 million. And one thing we have noted a fairly significant increase in quoting activity internationally over the last six to eight months. And so that's been encouraging. On the commercial side, as we noted in the news release, we are seeing some positive things happen in our national accounts business. We were selected as a vendor for a convenience store chain in the upper midwest, and this could amount to a few hundred Galaxy displays over time. We also have had positive indications from some of our existing national account customers in terms of contract extensions. The billboard business is coming in primarily from what we typically call tier three customers. Some nice steady business there, but we don't expect a major pickup in that area in the next 12 months.

One trend we are seeing in most areas of our business is extremely aggressive pricing at times from some competitors. We believe some of it is not sustainable. But it can be disruptive in the short term. On the other hand, it appears a couple of our competitors in the commercial market might be going through some internal changes that might affect their ability to perform, at least in the short term. So time will tell how some of that plays out. I will comment on a couple of our strategic organizational initiatives, these have been ongoing for a while. We've been aggressively pursuing lean manufacturing techniques for more than three years here at Daktronics. And the interesting thing, the more we accomplish in that regard, the more we see we can accomplish or the more we learn about the process. And we really have made great strides in that area. And that allows us to get a better product through, a more consistent product in less time. And overall it is just a more predictable process.

A key to making this work has been the redesign of our products to allow even those that we think of as custom contracts to have a high degree of standardization at the manufacturing level. As mentioned in the news release, we have a strategic part of our development underway that will pretty much revamp our entire outdoor display product family to increase even more of this degree of standardization at the manufacturing level, while still offering full flexibility and choice for our customers. We expect to start shipping that new design in the fourth quarter. And so that's a big deal for us. And we are, as noted in the news release as well, we are committed, we will continue to invest in product development. As a percent of revenue our product development will increase here in the short term with the declining revenues, because we believe this product development is really strategic for us.

Another area we've discussed in the past is our after-sales service operation. At the beginning of fiscal year 2009 we consolidated our field services under one umbrella and we've made significant progress in establishing standard operation procedures for field operations and better utilizing our field resources. We have implemented a new software system to support improved business processes and procedures in all areas of our after-sales service. And that includes in addition to the field service area the phone help desk and then the repair center. So these areas continue to be strategic opportunities for us to continue to streamline our operations. With that, operator, we'll go ahead and open it up for questions. I'm sorry.

Okay.

I'm sorry, I'm throwing over to Bill. My mistake.

Well, thank you.

Go ahead, Bill.

Thank you. I'll start with a few comments on gross profit which was better than expected for the quarter. In spite of some of the competitive issues we talked about last quarter and as Jim alluded to, they are still go on, there are a few large products came together nicely during the quarter which caused our gross profit margin to compete. We're still in that competitive environment as Jim stated, and it is currently hard to see how this will affect us for the next quarter, but we're certainly headed in the right direction on internal performance. In the margin on the contracts in our backlog suggests that we can be close to maintaining that contract margin. As noted, our warranty costs improved for the quarter, and were down from both the fourth quarter of fiscal 2009 and the first quarter of 2009 by almost $2 million. It is going to take another few quarters before we start assuming that we have things under control.

We've talked about the finishing issue that we had in prior quarters, and it was generally insignificant in this first quarter, and hopefully as we move through the football season openers we can conclude that we have the issue in check. On cost control within manufacturing, we decreased our labour payroll costs consistent consistently during this downturn but still have more to go. For a quarter we're down an additional 5% personnel. Total costs of manufacturing for the quarter which excludes raw materials have reduced more than $3 million from the second quarter of fiscal 2009. We're just below the cost base of approximately $16 million, which includes a fair amount of non-payroll-related fixed costs. Manufacturing costs are still higher than we would like, and as we move into the next two quarters of sequential revenue declines we know we still have a ways to go and will keep showing improvement. On operating expenses, Jim talked a little bit on product development costs, we see those rising in fiscal 2010 over 2009. Given these initiatives and depending on sales, it will likely exceed 5% of sales.

In other areas like G&A and selling, we continue to see reductions. We should continue to see some reductions, but the rate of reductions may not be the same. G&A and selling is now down almost 10% from the level of the second quarter of fiscal 2009 when this downturn hit us. G&A is down almost 14% from that second quarter and selling 8%. We'll keep working on it though. We continue to focus on cash flow and still believe we can continue on this path as we move forward. For the quarter, our cash positions grew by approximately $3 million, which included the dividend to the shareholders of almost $4 million. CapEx is all about maintenance with some strategic purchases in there. We didn't get close on that building for almost $3 million due it some issues, but we're expecting and hoping that that closes this quarter. Also with the product development, we're looking at some CapEx there.

So overall for CapEx we're looking at the $15 million to $17 million range this year. Our income tax effective rate increased again for this quarter. This results primarily from the impact of losses in foreign jurisdictions and the smaller tax benefit being created by those losses. Our hope is that throughout the year the income internationally does improve and the effective rate goes down. With that I'll turn it over to the operator and open it up for questions.

Thank you. (Operator Instructions) Our first question today comes from Steve Dyer of Craig-Hallum.

Thanks, guys. Good morning.

Steve.

You alluded, Jim, in the press release to some large sports opportunities that could create a pickup in the fourth quarter. Would that be in the backlog of the fourth quarter or already recognized as revenue in the fourth quarter? And any more color you could give on the nature of those would be great.

Yes. Just -- there's just some large sports opportunities, some in the baseball world, so there could be revenue in the fourth quarter.

Okay. And then your competitors have announced, a couple of wins lately, and I'm thinking, I guess, of the Dallas mavericks arena and the Pittsburgh Penguins arena. How has your win rate, has that evolved over time? Is that more or less competitive than it is has been?

It's -- our win rate, there's this -- I alluded to the -- or mentioned the -- there's been some aggressive pricing and that's indicative and those projects are something of an example there. In general our win rate is -- overall is, I would say, just down slightly maybe from what it has been. It's not down dramatically. But we are seeing some of this very aggressive pricing.

And is it kind of the typical players or have you seen anyone new enter the market market?

Some of both. In one case a company that hasn't been in the US market for some time is making an effort to get back in. In other cases it is the players who have been here.

Okay. How do -- how does sort of the biddable opportunities over the next three or four quarters look to you maybe relative to the last three or four? Obviously you expect revenue to sort of trend down over the next couple of quarters, but what about backlog? Is there a scenario where that grows, or is that pretty tough too for now?

Well, for the next couple quarters we see it declining. And then -- and that's -- there's a lot of variables, when you get out to the fourth quarter, of course, it is harder to predict. And so what the economy is going to do and what else is all going on in the world is one of the variables there. But generally we'd see backlog in the near term going down. Bill, do you want to add something to that?

Yes. Just to clarify our hope is it's hard to see given what's going on to the fourth quarter but end of third quarter backlog, depending on timing of these orders Jim talks about, success third quarter backlog, you will could see that rising. There is a lot of uncertainty there obviously, but --

That's true. Some of those orders could be booked in third quarter, by late third quarter possibly. Yes.

So we'll have to see how the timing turns on.

Predicting things out that far is a uncertain science at best so.

Sure. Okay. And then in terms of the size of some of these sports deals, is it safe to assume kind of the days of the $20 plus million deal are over for a while. Can you give us any color on maybe the magnitude of some of these?

$20 plus million, I don't think we see any on the horizon. There's some in the $10 plus million.

Okay. And then, Bill, any other color you can give us just on how to think about gross margin going forward? I mean, is this a decent level to use or did you have kind of -- should it a little lower with some revenues or how should we think about that the next couple of quarters?

Yes. I think these -- the warranty costs are uncertain, that's the big factor, that's a $2 million impact sequentially from fourth quarter, approximately $2 million. So you've got to factor in how that plays in. And we hope that we'll maintain and improve over the levels of this quarter. So there's that variable. And then on contract performance performance, what I had said is that the backlog that we've got on these contracts suggests we could be close to maintaining that contract margin. So it will slip a little bit. And so those are the two variables that, to me, overall I would plan on margin maybe going down and the extent of it, it's hard to say. If warranty does great in -- we could potentially do better if -- and it depends on the contracts we're booking now that play into this quarter, which is -- we're running out of time here in a little while. But, so there's some variables. It might be tough to maintain that margin.

Okay. And then my last question and then I'll hop back into the queue, from a head count perspective, any color you can give us on that, and has it been primarily attrition as you've talked about before?

Primarily it has been attrition, that's correct.

Can you give us any sense as to how head count has trended over the last couple of quarters?

Just -- I'll give you just round numbers, we're probably down about 100 in the last quarter.

Okay. All right. Thanks, guys.

(Operator Instructions) Our next question comes from Jim Ricchiuti of Needham & Co.

I thank you. I wonder if you can comment again on -- a little bit more color, the potential for order activity in the sports market to pick up toward the latter part of the year. Are these projects that you feel fairly comfortable are going to go forward? Have you seen any pullback from customers, either in the professional market or in the large university college market?

Well, the reason we're saying that there's a -- that we believe there's an opportunity for pickup is that, yes, the projects that we have listed out there in our pipeline, we believe there is a good chance they will go forward. Your second question, have we seen some pullback? There has been some cases where we've seen college, universities decide that even if they have the money, maybe they don't want to do it right now, or they don't want to do it quite as big as they were thinking, just because of maybe the perception that it might be involved in, so there's some of that that we are seeing in some cases.

Okay.

Still a lot of things that are going forward as well.

Okay. And I think you made some comments on the commercial market and the competitive environment and potentially some shifts there with customers. Can you elaborate on that and talk in terms of which product lines? Is this something related to Galaxy? Is it to billboard market?

Galaxy. It would be -- it's the Galaxy in terms of competitors that I mentioned, maybe there would be some changes there, that would be on the Galaxy side.

Okay. Jim, this business, the transportation business tends to be very lumpy, was a little surprised that the orders looked like they came down sequentially, what's the outlook for the transportation business just given the level of government funding related to the stimulus?

We'll we're seeing some activity there that we believe has been freed up because of the stimulus money that's been made available. How long that lasts or how that goes in the long term is -- I guess remains to be seen. But there are things happening out there. Transportation is another case where we're seeing some -- a new competitor come in with some very low pricing and that's caused a little bit of a -- at least short-term disruption. Again, we believe not sustainable. But we are seeing some of that in that niche as well.

And last question for me, as you look at the revenue opportunity for the year, and you think about potential upsides to business, do you see that coming from the engineering market, do you see it from the professional market or the commercial market? I'm sure a little bit of all of --

So obviously in the aggregate, the question is what is the aggregate of everything? We mentioned there's some opportunity for pickup potentially in Q4 with live events. International, again, we're seeing some good quoting activity in international. I mentioned the order for the mall in Australia. There's at least some indications that that customer may want to move on with some additional things there, for example. Commercial, I think we've talked about that. The reseller with the sign companies, we're still seeing activity out there. It's not as fast as it was back when things were a year ago or two years ago. But there's still things happening there.

Our high school market, alluded to that in the press release, for the quarter it was down, but interestingly enough towards the end of the quarter we had a fairly strong and almost as strong orders in July as we had last year. So, again, month by month comparisons are -- do not tell the whole story. But it was encouraging to see that the orders came in pretty decent in July. So it's -- that's kind of the -- I guess a quick recap around the horn, if that helps.

And our next question today comes from Dick Ryan of Dougherty & Co.

Good morning. Say, Bill, I didn't catch your commentary on the tax rate. How should we think of that going forward?

Well, if -- on the big part about -- I would expect overall we'll finish up at a lower overall effective rate for the year. But it's dependent just to give you some color on this, in the first quarter we had some rather significant losses in China for which the tax rate there is only 12%. So when you combine that loss with an effective rate here domestically, that, if you do the algebra, it works out, it increases your rate.

So it's dependent on places like China where the tax rate is so low at getting income over there through transactions. And there's some -- number of opportunities over there. That's what's going to drive the lower tax rate, is the switch around the loss we had in the first quarter in China into income in China. There's a few other countries. Our US tax rate is the highest worldwide. So any time we get income elsewhere it helps us. So I would -- bottom line is I hope and expect it to go down over the year as a whole.

Okay. And the redesign, what kind of will be the total impact from product development? How much will you be spending on the redesign of the product line?

To have a number, just what's on that?

Yes, just a rough one.

I guess we tend to think of it more as our run rate on product development. And, there's phases to that project. So kind of what's the -- what accounts as the whole project, we're redesigning a number of different modules and there's the cabinetry, the installation phase and all of that. So it's a --

It's millions.

Yes, it's millions of dollars, for sure.

Part of it includes CapEx too for things like tooling. I think we've got potentially $1 million or $2 million within CapEx for the tooling that we end up having to purchase once it goes online. So this product flat form is millions of dollars for sure.

Okay, okay, thank you.

And our next question today comes from David Levine of Dialectic Capital.

Hi, thank you very much. Can you speck a little bit more about the pricing pressure in each individual segment? Is that a function of a larger conglomerate coming into the market, just essentially trying to gain market share? And second question just regarding backlog, have you seen a lot of cancellations out of backlog? And, if so, how does that compare to historical sort of backlog trends?

First of all on the pricing, no, it's not a corporate conglomerate coming in. It's just a -- it is a number of different instances and it's just an array of different companies, but they're not -- I certainly wouldn't describe it as corporate conglomerates, it's not huge companies coming in. Regarding backlog cancellations, we haven't had much of that at all. We don't put an order in our backlog and consider it in backlog until it is signed and sealed, so and in some case it is there's downpayments required, we don't put it in until we have the downpayment, and so it's -- we don't have that situation typically.

Thank you.

And having no further questions in queue, I'd like to turn the conference back over to Jim Morgan for any additional or closing remarks.

Okay. Well, thank you all for your questions, I appreciate that, and appreciate your time this morning. I'll just note this evening is our -- or tomorrow evening, I'm sorry, is our annual shareholders meeting, and certainly invite anyone who can get to the Bookings area to participate and join us there. We'll have an open house before that and have some tours available. So we're looking forward to that event. With that again, thank you for being with us. And we'll hope to talk to you in the future.

And that does conclude today's conference, ladies and gentlemen. Again, we appreciate everyone's participation today.