Daktronics Inc (DAKT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to Daktronics' fiscal-year 2011 second-quarter earnings call. As a reminder this conference is being recorded today, Tuesday, November 23, 2010, and is available on the Company's website at www.Daktronics.com. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

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 and good morning. We appreciate your participation in our second-quarter fiscal 2011 call. We'll give some brief updates about the quarter and then open it up to a few questions and answers.

I would like to first offer our disclosure cautioning investors and participants in addition to statements of historical fact this call and our 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 mentioned during this call and our press release and 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 will turn it over to Jim Morgan, our Chief Executive Officer, for some comments.

Thanks, Bill, and good morning, everyone. Thanks for joining us this morning. We were pleased with our performance and delivered against a strong backlog that we had going into the quarter. But we were also pleased with our order performance for the quarter.

Despite the price pressure in the market we were able to realize an operating margin of just under 8%. We see this as a testimony to the success of our cost reduction efforts over the past couple years.

To provide some perspective on the third quarter, third quarter is typically our lowest quarter for revenues due to the sports seasonality and the greater number of holidays in the quarter. However, one of the more noteworthy aspects of our current situation is the difference between our outlook for Q3 and Q4 this year compared to last year at this time.

In addition to the fact our backlog is significantly greater going into the quarter, the outlook for baseball orders to book yet in third quarter is also much better. In fact, since the quarter end we have already booked three baseball orders totaling approximately $10 million; and we have received a nonbinding award on two additional baseball orders totaling about $10 million as well.

These projects are all work for third and fourth quarter and are not reflected in the end of quarter backlog. We have also been awarded a couple of college football orders totaling approximately $8 million which should book in our third quarter, giving us a start on next fiscal year revenue opportunities.

The other significant change from last year at this time is that the outlook for orders from our two largest billboard customers for calendar 2011 is very positive, which we see as in turn indicative of the overall outlook for the outdoor advertising industry. We are actually hiring a few people at our billboard factory in Sioux Falls.

As we mentioned in the past the new products that we have introduced over the past few quarters -- our DVX video displays, the 4000 series digital billboard displays, and the redesigned Vanguard display for our transportation business -- all of which we are now shipping, are key contributors to cost reduction for us. We are also continuing to see some nice orders for our new architectural lighting product, as we mentioned in the news release.

These displays are constructed using either slim column elements or round pixel elements that are individually mounted and then connected on site to form the intended displays. This provides a lot of flexibility in how these can be deployed in any given application.

A few examples of projects using this technology that are in our backlog include an exterior display at the Mexico City Arena; and a news release just went out on that project today. A large display at the top of the Target headquarters building in downtown Minneapolis; and a lighted tower for the Minnesota Twins' new stadium.

This is a new technology, but the more installations that we have with this new technology we believe the more ideas customers will have for how they can use it. With this product it is possible to provide a much larger display area very cost effectively. For example, the exterior display at the Mexico arena will be approximately 100 feet high by 700 feet wide.

The price pressure in the industry continues to be keen. Our product development and manufacturing engineering, along with our ongoing efforts in lean manufacturing, will continue to play a key role going forward as we continue to design cost out of our product value stream while at the same time offering a product with improved performance.

We also continue to work to take costs out of our business processes across the Company. We believe that the operating income that we achieved this quarter is a good indication of our success in reducing costs in all of these areas.

So in summary our outlook is much improved from a year ago at this time. We expect to be at least profitable in third quarter this year. With that I will turn it over to Bill Retterath to give more perspective on the numbers.

Thanks, Jim. I want to start by giving some background on the increase in sales for the second quarter as compared to the first quarter. Four out of five of the business units exceeded the top end of our internal expectations at the beginning of the quarter, which is great to see.

Underlying this were orders that came in for shipments during the quarter being higher than expected. In addition we also moved up in the schedule some larger orders as our manufacturing schedules allowed for. Finally we executed well on managing parts concerns. Moving the projects up in the schedule has proven to be beneficial in accommodating the work on these new projects that Jim mentioned for the third and fourth quarter.

As mentioned in the release we had a lower than expected gross profit. Going into the quarter we said that it should be the same or higher than the first quarter of fiscal '11. A key factor that kept it from going higher was the warranty cost, which was higher than expected.

For the third-quarter fiscal 2011 we expect gross profit percentage be down on a sequential basis. This reduction is a result of lower margins on large contracts booked during the second quarter as the competitive environment continues to be tough, as Jim mentioned.

The difference from the first quarter is the inherent volatility in margins in the large contract business. Operating expenses were up slightly as expected. In the third quarter we should continue to see stability here; however keep in mind that product development costs, which are primarily the costs of our engineering staff, can shift between cost of goods sold and product development depending on needs. But the total engineering cost should remain consistent.

You may have noticed that our year to date effective rate is close to 38%, which is now more similar to years prior to fiscal 2010. That return to a more typical rate is a reflection of our increased forecast of earnings for the fiscal year. So hopefully the noise associated with the impact of tax adjustments compared to pretax income goes away.

Moving on to capital expenditures we expect to see a rise in capital expenditures in the second half of fiscal 2011 compared to the first half. We still expect, as we mentioned on previous calls, to be less than $13 million for the fiscal year. The increase in the second half relates equipment needs to expand production of our new module designs and other facilities.

Finally, for the third quarter with the lower gross profit that I mentioned and somewhat consistent operating expenses, we expect the third quarter will be marginally profitable. But depending on what we can achieve for revenues and what we end up actually realizing on gross profit, we could see a little upside.

With that, I will turn it over to the operator to open it up for questions.

(Operator Instructions) Steve Dyer, Craig-Hallum.

Good morning, guys, and congratulations on a very good quarter. First question that I have as it relates to the billboard market, would you expect your market share in that space to be relatively consistent with what it has been historically, in particular a couple of years ago when they were going fast and furious?

That is our expectation. There is no guarantees on that, but we believe that that is a reasonable expectation.

Okay. Then I guess hopping over to the major sports stadiums, so with the NBA and the NFL both staring down a potential lockout, have you seen any impact in the bidding activity or some of the early discussions you have had in either of those two sports?

Well, there is discussion about it, of course. But I guess to say we have seen anything yet, no; we haven't really seen anything yet.

But certainly that is an issue that is out there in a number of the professional sports areas and how that might come down. So it certainly is a risk that is out there that could delay some things potentially.

Okay. With respect to International, that has obviously been a real bright spot here in the last couple quarters. How do you see that playing out?

Do you expect that to be a larger and larger part of your business going forward? Or do you view some of these larger projects that you have had in the last quarter or two as more of an anomaly?

Well, just the fact with International, it is going to be a lumpy business because it is mostly large projects. But that being said we have invested significantly in the last few years in development of the International market, development presence, both in the European front and the Asian front.

So we certainly -- it is our expectation to grow the International market. How it grows as a percent of our overall depends on how domestic grows too. So it is always a little tricky to assess how it might grow as a percentage of the total business.

But certainly what we saw this quarter is indicative of what the potential is out there. And we are optimistic about the future for International.

Okay. With respect to costs, do you feel as though you have sort of wrung all of the costs you can out of the business, at least in the near term? Are we looking at operating expenses ticking up here going forward? Or do you think there is more to come there?

Well I don't you will see us decline in our operating expenses. We have got one event going on in the third quarter where we are going to take maybe a couple of extra days off, which will be a one-time help to the third quarter for our staff.

But on a long-term basis I don't see operating costs declining. It is stability, and then if we can continue to see the recovery go forward there is some strategic areas potentially in personnel where we could see some adds; but not enough to be a significant positive increase in operating expenses.

Okay.

Yes, so that is talking about operating expenses. If we look at other -- I think your first part of the question was, is there any other opportunities for reducing cost? And there definitely is continued opportunities to reduce cost.

We think in terms of our product value streams that this gets back to the bill of material costs in our products and the actual manufacturing costs of our product. There definitely is opportunity of reduced cost there.

Again we've demonstrated that we have been -- demonstrated success in doing that here in the last couple years, and we have an ongoing effort in that regard. And we plan to continue to make progress in that area.

Okay. So with all that said, where do you envision or where do you hope you can get operating margins back to? And the mid probably in fiscal '12 I guess would be a better place to look?

Steve, it is probably a little too far out to talk about, more than -- we're not giving any top-line guidance. Our gross profit margin, where it was in the first quarter we are definitely headed to that level and higher, I would hope. But it is too early to tell for fiscal '12.

Operating expenses are going to -- to the best of our abilities stay where they are at generally. It could be a little bit of a rise. So it depends on how the sales numbers turn out to decide what our operating income is going to be, our margin there.

Okay. Thanks, guys. I will hop back in the queue. Nice job.

Thanks.

Steve Altebrando, Sidoti & Company.

Are there any billboards in the backlog, Tier 1 billboards?

Yes, there are.

Yes, the primary -- remember in the first quarter we have got that large order. Much of that is still in the backlog, and then there is consistent orders coming from the other player.

For the 2011 CapEx orders?

Yes. We have orders in the backlog now for delivery in calendar 2011, if that is your question.

Yes. Can you talk a little bit about pricing in the segment? Also you mentioned pricing was still key, I guess segment-wise. But are you seeing any easing in that over the last few months?

Nothing really changed in the last few months, I would say. Maybe the rate of decline. If you look over the past two years maybe the rate of decline isn't quite what it was at one point there.

I think when it started the downturn it seemed like there was a rapid decline in pricing. And I think maybe that is not quite as fast.

Bidding big projects it is hard to -- you have to sometimes look back to see where things have been. So there is always variability from project to project and how things go down.

But it is kind of like (technical difficulty) remains key, and I think there is -- maybe it isn't dropping off quite as fast.

How about more specific to the billboards?

I think that same applies to them, generally.

Okay. Then on the operating margin, maybe I will attack it a little bit different way. But if you had a revenue at the run rate you are achieving now for this quarter, in the $500 million range, would this 8% op margin be achievable for a full year?

Well, I think the best way to answer that, Steve, is at $500 million there would probably be a slight increase in operating expense. Not a whole lot, but there would probably be a slight increase.

I think assuming we can control warranty and inventory costs, that gross profit level of the last two quarters, it should be at the bottom end.

But again, there's a lot of factors go into that on the competitive side. So you can model it with those assumptions and take a look at it. We are not growing our cost infrastructure, so.

Okay. That's helpful. Thanks, guys.

Jim Ricchiuti, Needham & Company.

Hi, thanks. Don't know if you commented specifically on billboard orders in the quarter. Can you give us a sense as to what it represents of the commercial bookings you took in?

Well, you know, in terms of -- I'll just give you the number of billboard orders, were roughly around $5 million for the quarter.

Just from your conversations it sounds like you guys are anticipating that certainly picking up off of these low levels. But how would you characterize it versus prior years?

In terms of revenue dollars, compared to prior years, Bill, how would you say --?

Well, there's two ways to look at it. Units versus revenue.

Again the price points are down, so the units -- it's going to take more units to get to the revenue than we have in the past. And we don't really see getting to that revenue here in the near term.

I was going to say from a pricing standpoint how much are ASPs down versus, say, two years ago?

You know, Jim, maybe a way to answer your question -- I think I understand where you are getting at. In terms of when the billboard business does ramp up, the major players have said they are going to be roughly at the same levels they were in terms of units a few years ago. I think we're at the $80-million-plus range on an annual basis during the peak, $80 million to $100 million during the peak.

If we can capture the same market share maybe it could be $50 million-plus. But that is -- there is a lot of things evolving yet in that number on how it plays out, what percent we are ultimately able to capture and what not.

So if it was $80 million it could drop down to $50-million-plus if it ramped up to the same unit level. Is that what you are asking?

That is helpful. I have a question with respect to the revenues in the Live Events business in the quarter. If we were to think about the NFL portion of that business, as I recall last year was a pretty strong -- you still had some significant revenue I guess as you were completing projects.

If we were to look at it on a -- I don't know if you can do this. But if you can break out the NFL portion, how was the Live Events business versus year ago?

Well, Jim, I can answer that a little bit differently, but I think it gets to your point. For contracts exceeding $5 million -- in other words, these large contracts -- for the second quarter this last, this most recent second quarter it was $6 million of business versus $17 million for the second quarter a year ago.

On a year-to-date basis these mega contracts were $11 million this year versus $26 million a year ago.

Okay.

And we had a number of very nice NFL installations this year. So that was --

Yes, yes, those NFL installations were nice, clearly. They are good. These are contracts over $5 million.

I would have to go back and think through these NFL ones and try to recall which ones of those were over $5 million.

Okay. Now on the baseball, on the MLB side of the business, it sounds like the orders you were tracking or least the potential orders you were tracking are coming in largely in your favor. It doesn't sound like you are seeing anything in the way of pushouts this year. Is that a correct characterization?

I would say generally that is true. We are not seeing -- we are seeing things are happening this year.

There's always some that are -- I think in any year there's always some that are kind of on the bubble. So I would say it is more of a typical year in that regard.

And maybe in some regards the fact that nothing happened last year maybe actually had a little positive effect this year. There was a little latent potential there, I think.

Jim, is the pricing pressure you are seeing in the market, is it more pronounced in the Commercial business portion of the business? Or is it still pretty intense in the Live Events business?

It tends to be more intense -- the bigger the project the more intense it is, is how it typically works. So where we get into these large Live Events projects pricing is quite a -- pressure is quite intense there. It is competitive on all fronts, though.

Okay. Architectural lighting, is that developing faster than you expected? I know it tends to be skewed because you can get some larger deals.

But just in general I am curious how you guys see that business, whether it could potentially be a bigger growth opportunity perhaps over the next six to 12 months.

So, I don't -- whether it is more or less than we expected, but certainly it is good to see that it is starting to take some -- get some legs here in the US. Because it is a relatively new approach for permanent installations in the US.

This type of kind of free-form display technology has been used in the traveling roadshow market for a few years already, but hasn't really caught on in the permanent installations. So that is good to see that these are happening.

Again the more of these are out there, more people can see what they look like. It is kind of hard to envision these if you haven't seen them.

So we actually have a fixture in the front of our building here so if people come to visit us we can show them what it looks like. But you have to see it to understand it.

So I think it is one of these things that as we get it out there, it will help it move forward a little quicker. So we are excited about it.

It certainly has been a contributor to the International, the bookings in the International portion of the business. I am curious again; I know this can get skewed by larger deals.

But just in general how so you view the pipeline of business in your International business?

The pipeline continues to be strong. There are a lot of potential projects out there. Again, the International market is more complex. There's more variables out there. But the pipeline is positive.

Just if I could just add to that, Jim, this replacing a transaction like this $10 million transaction down in Mexico is tough to do. That certainly added to the $26 million for the quarter.

For us to achieve that level, our pipeline -- there is no indications we will be at $26 million over the next quarter or two.

There's opportunities; maybe it is possible. But it is unlikely.

We consider this an unusually high quarter for International. We would not expect to have these the next couple quarters. We had a number of things that came in at the same time, so it is a lumpy business.

But (multiple speakers) potential out there in the pipeline.

So potentially you could see something more in the range that you saw in Q4, Q1?

Yes, in the last two quarters, three quarters for orders investors gained $13 million and $26 million and it is ramping up.

So looking at that $13 million to $15 million is certainly an indicator of the opportunities out there. How successful we are at it will determine where it falls out.

Okay. Thanks a lot.

(Operator Instructions) Dick Ryan, Dougherty.

Good morning. Thanks for taking my call. Say, Bill, what was the warranty impact in the quarter on gross margin?

It was 1% or 2% higher than what we thought it would be, closer to 2%.

How should we look at that the rest of the year?

That is a good question. We are doing the right things. This was -- to the extent we had an issue this quarter it was isolated in a product line that goes back to 2007 and '08, '09, some earlier years.

We are not -- there is nothing -- the good news is there is very little if anything showing up on our new module designs, if I am recalling correctly.

We have had that out in the field now for -- oh, it's been out there for six, nine months, and that is showing some good performance metrics. So I think -- I believe we are headed in the right direction, but it has been hard to say.

Okay, good. A question maybe a little bit longer further down the road. You talk about the refresh or upgrade cycle on the Live Events. I think if I recall the first digital billboards being installed in the 2005 time frame, will there be a refresh or upgrade cycle in that marketplace? Do they have seven, eight, nine year expected life?

If so are some of those customers that are just coming back in with orders, are they talking to you at all about an upgrade from earlier installations?

Yes, some of our major customers have made comments about a refresh if you want to use that term. In a couple years they would be replacing some existing inventory. It has been through its lifetime. So that this out there, maybe a couple years out.

Great. Thank you, guys.

I am showing no further questions. I will now turn the conference back to Mr. Morgan for closing comments.

Thanks for the questions, gentlemen. We appreciate your interest and your questions.

In closing I would like to again thank all the Daktronics' employees for their diligent efforts over the past quarter to achieve what we did. Thank you, everyone, for being with us this morning. Have a good day.

Operator, that concludes the call. Thanks.

Thank you, sir. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.