Daktronics Inc (DAKT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics third quarter fiscal year 2010 earnings results conference call.

As a reminder, this conference is being recorded Tuesday, February 23, 2010, and is available on the Company's website at www.daktronics.com.

I'd 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.

We appreciate your participation in our third quarter conference call.

As usual, we'll start out with some comments about the quarter and the future, and we'll open it up for a limited time for some Q&A.

I'd like to first offer our disclosure cautioning investors and participants.

In addition to statements of historical fact, this call and our quarter 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 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'll turn it over to Jim Morgan, our Chief Executive Officer, for some comments on the quarter.

Thanks, Bill, and thanks, everyone, for being with us this morning.

This quarter was somewhat of the perfect storm for Daktronics.

Q3 is typically our lightest quarter anyway, and we went into the quarter with a smaller backlog, and the orders didn't come along during the quarter for us to achieve the sales level we would have hoped to achieve.

We announced about a month ago there were no large baseball projects happening this year.

In the past years, we have had anywhere from $10 million to $30 million worth of large baseball projects at this time of year.

This was the most notable gap, but orders were slower pretty much across the board, with some orders being delayed; and of those, some booked near the end of the quarter and others are still out there be booked.

For example, in Live Events, we had equipment out in a rental program that was planned to be purchased during the quarter for more than $1 million, and this got pushed out now to this quarter.

Also, we had a nice project with the University of Louisville that we have booked that got caught up in extended contract negotiations.

In our commercial market, we had a multimillion dollar Times Square contract get pushed out, as well as a multimillion dollar national account order.

So neither of these commercial projects are booked yet today, but we still expect to book them.

I wanted to emphasize at this point., just to point out that we don't see this level of as indicative of the future, but we do see greater time uncertainty and greater time involved in closing orders.

Our plants worked reduced hours through the quarter.

It was just a slow quarter for us; and if there is a small positive, it is that we did build backlog.

While orders were not great, they did outpace sales by about 13 million.

To give a little sense of what we're seeing in our various businesses, the biggest downturn in the past two quarters has been in our Live Events business, for reasons as mentioned above.

It is noteworthy that even though orders are down significantly, we believe we have maintained our win rate in the marketplace.

So for us, the topline in Live Events is more of a factor in total market activity.

Our High School Sports business has actually been relatively flat compared to last year, which in this environment is very positive.

We're also seeing more interest in video displays in this market, but it remains to be seen as to how many of these deals actually materialize this year.

There's certainly enough interest that could drive some growth year-over-year in this market.

Also, our Vortek Hoist business, which we group into our Schools and Theaters business unit, that is on solid ground and is experiencing some growth this year.

It's a relatively small part of our overall business.

Our Commercial business have been relatively flat for the first half of the year, and for the third quarter was down, but we see it as holding its own with some signs of improvement.

Our Billboard business is seeing rather steady activity from the tier two and three companies, and we're getting some indications that there could be a slow uptick ahead.

But time will tell.

We believe that will help position us as things pick up again.

There are signs that the advertising world is slowly starting to get back on track.

Our National Accounts orders were less than expected, as our main customers placed fewer orders.

It's hard to predict when National Accounts business will pick up the pace again as well.

It does appear we have lost one competitor in that part of our business, but it remains a very competitive environment.

Our transportation business has been holding its own through the downturn.

As mentioned in the news release, we have been awarded a very nice contract with the New Jersey Turnpike Authority that is for up to $25 million over a three to five year project.

We also have indications that a competitor that recently entered the US market with some unusually low prices may be exiting the market.

Our international business is always the most lumpy of all.

International today has much stronger activity than we had a year ago; but especially in Asia, the price competition is extremely tight.

We had a number of orders for third party advertising displays internationally, with a $1 million order for Beirut and another $1 million order for Albania this quarter.

So it is interesting to see where the business comes from.

We have some exciting new products that we are just in the process of launching.

These all offer improved functionality at a reduced price point, and thereby enhancing both our competitive position and our margin position.

Our new DVX Video Displays, which we are just now ramping up, adopt a more comprehensive product platform strategy which offers increased commonality across multiple models, and which in turn reduces our manufacturing costs while at the same time offering robust product performance.

Our new and improved 4,000 Series Digital Billboard will start shipping in May.

It offers improved power efficiency, improved diagnostics and improved environmental robustness at a reduced cost.

We'll also start shipping our redesigned Vanguard over the roadway walking display in our transportation business.

And this redesigned, focused heavily on improved manufacturability, thereby reducing our costs while at the same time offering improved performance.

Going forward, we have to adjust our costs to be profitable at a lower run rate, even as we continue to work to increase orders and revenue.

We are being more aggressive on reducing our cost structure going forward and expect that cost reduction efforts will continue as a process.

The two keys going forward will be how things develop in the digital billboard business and how things develop in the large sports business.

We will be giving a lot of attention to both of these markets as we move forward.

This is obviously a very difficult time for employees, as we are used to being profitable.

Our employees continue to work hard to serve our customers, but we have to adjust to this new reality.

I want to thank all of our employees for their ongoing efforts.

It's much harder dealing with the downturn than it is with the growth; and again, thank you for all of your efforts.

With that, I'll turn it over to Bill for some additional comments on the financials.

Thanks, Jim.

I'll start with a few comments on gross profits, which was noticeably worse than expected for the quarter.

The biggest impact to gross profit was due to the lower level of sales.

In the short-term, our manufacturing costs are generally fixed, and when sales come in so much less than expected, there's a significant impact on gross profit percent.

This accounted for somewhere between four and five margin points.

Margins were also negatively impacted by higher than expected inventory writedowns and higher customer maintenance costs.

Inventory was about a point, and maintenance contracts added another point to the margin decline.

During the third quarter, our domestic manufacturing costs did decrease by $1 million sequentially from the last quarter.

Much of this came from the shorter work time and reductions we made by closing down the plants for limited periods of time, as Jim mentioned earlier.

We're continuing to work on cost reductions and manufacturing to adjust to the sales level.

We continue to be down on warranty costs quarter over quarter, which is another good sign.

They were a little bit higher than expected, but were still down significantly -- almost $3 million compared to the third quarter one year ago, with part of that obviously being due to the decline in sales.

But we're still long-term trending fairly well in that regard.

We mentioned in the press release the back end loading of the revenue stream in the forth quarter.

To add a little bit more detail on that, it turns out that based on timing of orders, customer expectations and the DVX Video Display introduction timing, some shipments and their related revenues, therefore, are back end loaded and delayed into March and April.

So manufacturing is actually dealing with a bulge during late March and throughout April.

It's just an added challenge for the quarter, but we expect to see much higher sales on a sequential basis if things go as planned.

Backlog may be an indicator of how much is possible at a top end.

We still have a significant more backlog that extends beyond the quarter, however, and so we remain dependant on our quarter bookings to achieve what we're setting our sights on internally.

With the expectation of rising sales, our expectation is that gross profit rises accordingly, but it continues to be challenged by the competitive environment and cost of excess capacity.

To be more specific on gross margin, expectation is difficult at this point given the level of sales and the competitive issues.

On operating expenses, we mentioned last quarter the benefits costs were unusually low and expected to rise, which they did, negatively impacting operating expense.

This is also the first quarter in six quarters that operating expenses have not actually declined on a sequential basis.

Currently, plans, as Jim mentioned, are to reduce our operating cost structure further.

These efforts will occur during the fourth quarter and into the fourth quarter, and so we expect operating expenses to continue to decline.

On the issue of goodwill impairment, which was noted in the release, most of the impairment relates to goodwill associated with our Hoist acquisition from a number of years ago and due to the purchase of the Sales and Service platform in Europe.

We have a relatively small amount of goodwill left -- less than 3 million -- given the noncash charge and how the computations are done.

It's not an area that we have much control over.

Both of these acquisitions, as it turns out, have lived up to internal expectations.

And the impairment doesn't reflect adversely on how those acquisitions have performed, but the methods of computation caused us to take this hit.

The impartment was estimated, and now during the fourth quarter, we'll complete the valuation process.

We don't expect it to change, but it is an estimate at this point.

The gain on insurance proceeds relates to the fire that we had late in October in our circuit board manufacturing operation.

We should be up and operating there again by the middle of the fourth quarter.

This fire did not cause any interruptions in our customer deliveries or revenue.

And as a result of the fire, we moved the operations into the building which we are contractually obligated to purchase going back, I believe, to fiscal year 2007, and we'll be selling the old building.

The effective tax rate for the quarter was approximately 40%.

On a year-to-date basis, it looks unusual, which is primarily due to the mix between foreign and domestic taxable income and adjustments we made as a result of our actual fiscal year 2009 tax return filings.

Our overall domestic rate is getting hurt by the R&D tax credit, with goodwill impairment and other issues as a result of having a domestic operating loss.

So overall there's lots of moving parts -- tax, especially the mix between foreign and domestic and how that turns out.

So it's difficult to forecast through the fourth quarter, especially when consolidated results are closer to break even.

With that, I'll turn it over to the operator and open it up for any questions that there may be.

(Operator Instructions).

And at this time, we have no questions, so I'll now turn the call back over to management for any additional or closing remarks.

All right.

Well, thank you, everyone, for being with us.

Apparently, we explained things very clearly, we have no questions, and And Bill and I are going to get back to work here.

does conclude today's conference.

Thank you for your participation.