Daktronics Inc (DAKT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Daktronics' fiscal year 2011 third-quarter earnings results conference call. As a reminder this conference is being recorded today, Tuesday, February 22, 2011, 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) Once again, as a reminder, today's call is being recorded.

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. We appreciate your participation in our third-quarter conference call. We will give some brief updates about the quarter then open it up for questions.

I'd like to first offer our disclosure cautioning investors and participants in addition to statements of historical facts 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 in our press release and 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.

So 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. As we have said previously, third quarter is typically our lowest quarter for revenues due to the sports seasonality and the greater number of holidays in the quarter.

After the difficult third quarter we had last year, our objective was to at least be profitable this third quarter, so we were pleased to achieve that. It was great to see that activity in Major league Baseball came back this year, and it is great to see the digital billboards have been coming back as well.

One of the areas that we have continued to emphasize as we work through the downturn is product development. I will just make a few comments on that front.

This past quarter, as we noted in the news release, we introduced our Series 4100 digital billboard, which includes improvements to further simplify installation as well as increase reliability, and there's ongoing cost reductions involved in that development as well. We also released a new version of our larger Galaxy displays which offer a reduced price point, easier installation, and enhanced reliability; and again the Galaxy displays are for commercial applications primarily.

One of the new applications we have also discussed is an IP TV for sports facilities; that is Internet protocol television where video is streamed over the Internet to a TV displayed in the concourse or the suites in the sports facilities. We completed our largest installation to date to at the Yum! Center in Louisville and are currently installing a larger system for the Texas Rangers, which will be available for the opening of baseball season in conjunction with the new LED video displays that we are installing there.

Also we are continuing to see some nice opportunities for our new architectural lighting product. We also refer to these as free-form displays. These displays are constructed using either narrow column elements or round pixel elements that are individually mounted and connected on site to form the intended display, which provides a great flexibility in how these can be deployed in any given application.

We will be completing the installation of a number of these projects in the fourth quarter, namely for the Minnesota Twins' ball field, the Target Corporation headquarters in Minneapolis, and the Boston Convention Center. While the use of these products is more prevalent in Asia, it is relatively new in the US, and so as we -- are excited to get these installations on line, because as more people see these and see how they can be used, we believe they will open more opportunities. So we continue to develop new products in this area and find new opportunities.

On the competitive front, the price pressure in the industry certainly remains quite intense. We are continuing our efforts in implementing the cost reductions to allow us to offer improved products at a reduced cost. That remains a top priority.

We will be continuing our focus on cost reduction, looking at all aspects of our business while we continue to work hard to book orders. With that, I will turn it over to Bill Retterath to give more perspective on the numbers.

Thanks, Jim. As mentioned on the press release, baseball contracts have certainly helped this last quarter. We have booked over $20 million of multimillion-dollar professional baseball contracts over the last two quarters, which is in addition to that large contract booked last fiscal year for the Florida Marlins.

During the quarter we recognized over $15 million of revenue and have roughly $15 million more to go, with approximately $11 million left in the fourth quarter. We're also in contract negotiations for two orders approximating $12 million for Live Events that have slipped into the fourth quarter that would contribute to revenues in fiscal '12. Based on these order bookings in the fourth quarter, we should see a rise in orders for Live Events in the fourth quarter this year versus the fourth quarter of last year.

The next important milestone for the health of this business will be orders for the fall sports season, which we should begin to understand better in May or June of this year.

On the International side the business orders were a little lower than we expected, but our pipeline remains strong. We're in contract negotiations on one order for $3.5 million that slipped out of the third quarter.

There is a wide range of potential outcomes for the fourth quarter orders for International, but a lot would have to come together to beat the $15 million in orders for the fourth quarter of last fiscal year. But it is possible.

In our Commercial business unit we mentioned in the press release some issues with the weather. We had a number of billboard displays that were delayed in shipping for the quarter. But quantifying the weather impact on orders is difficult.

Orders were lighter than expected in both billboard and in large video systems for commercial applications. This could help drive some incremental growth in orders in the fourth quarter.

One final comment on net sales for the fourth quarter that we mentioned in the press release. We have a number of projects that are dependent on product development initiatives and, depending on how that goes over the next month or so, it will determine our sales level for the fourth quarter. It's looking like a good chunk of the work will get pushed out of the quarter, which is freeing up time in April for new orders.

We are nearing the time where new orders can be converted to revenue this quarter. So our best guess is that sales, although slightly higher than the third quarter of this year on a sequential basis, would likely be less than the current consensus estimate of $116 million. But there are a lot of moving parts to the fourth quarter yet.

A couple of quick comments on gross profit. We had minimal excess warranty costs this quarter, and there is not much in terms of changing the competitive environment, as Jim mentioned. So it is generally status quo on gross profit margins for the fourth quarter. The largest items that could impact our gross profit percentage is the level of sales that I just mentioned and the cost variability on some of the large contracts that we have in the works currently.

As you will note, operating expenses increased with the increases in G&A being offset declines in selling expenses. That is on a sequential basis from Q2.

There are some cost pressures there we are seeing on G&A related to International expansion, primarily China systems infrastructure from an IT perspective. This could lead to someone higher G&A expenses in the fourth quarter as compared to the third quarter.

We also reinstated some costs that were eliminated during the downturn, such as our 401(k) -- a portion of our 401(k) match. We rolled out a new health insurance plan this quarter that carries some additional cost of approximately $250,000 in the third quarter.

Given that the first and second quarter of fiscal '12 still remain somewhat unclear, primarily because of the Live Events business, we're working hard to control costs, especially personnel costs, and we'll remain focused on that.

The press release mentioned two items [down] below operating income. As the release noted, these are one-time costs that increased our earnings for the quarter and are not recurring.

Finally we ended the quarter with over $75 million in cash and marketable securities, and that is after almost $25 million in dividends paid this fiscal year. That compares to a cash balance of $64 million at the end of fiscal '10.

Last quarter we said that CapEx could end up the year at about $13 million. It looks like we will be down slightly from that due to primarily timing of rolling out CapEx in the next fiscal year. We could see a slight rise in CapEx, but we believe we will continue to generate free cash flow over the long term.

With that I'll turn it back to the operator to open it up for your questions.

(Operator Instructions) Steve Dyer, Craig-Hallum Capital.

Thank you. Good morning. Just a question on the gross margin. I am wondering if the lower level this quarter was a function of just the same competitive pressures on a lower revenue number, or if you have seen competitive pressures increase or decrease. Or are they fairly static over the last couple quarters?

I think the general competitive pressures haven't really changed much in the last few quarters. Pretty much status quo over the last few quarters.

Okay. Just with respect to the potential lockout of the NFL and the NBA, what you seeing on that front? What are your expectations?

I don't know how much is up necessarily for bid for the next NFL season, but would your expectation be -- would you lose a season potentially, or how should we think about that?

Well it is certainly a risk that is out there. I think there is certainly a lot of reason for both parties to come to some form of agreement, because there is a lot at stake there. So certainly it is something we are watching closely.

It is not something we necessarily can predict what is going to happen there obviously. But it certainly can be a factor and it's something that we are watching closely.

I will just add there are some projects for the NFL that are in the works now and we think will go forward. But it is too early to see what will all come out yet. That's one of the things I mentioned we'll know in May-June time frame.

Okay, so your sense that a drop-dead date so to speak to fill or kill a project is probably sometime late spring, early summer?

Right. Just due to the lead times, if it gets too much later than that, then it is difficult to get it in, installed in time for the season, ahead of the season. Because it really needs to be installed in a certain -- in late August, very early September at the latest to work.

Okay. Could you quantify digital billboard revenue this quarter? I know it is folded into the Commercial line item. But what was it this quarter and maybe versus last and a year ago?

It is up -- it is more than double from one year ago. I will get -- just bear with me one minute here.

Just maybe I guess while you are looking for that, anecdotally what are the digital billboard guys telling you in terms of -- are we still very early in the ramp-up here in 2011? Or are we at a level that is sort of the level you're expecting going forward?

Well, I think for 2011 it has -- there's been a projection for the year. Our major customers look on an annual -- on a calendar year basis, and so I think that level is kind of set for the year. We are working against the projections at this point.

In this quarter? Go ahead.

Our revenues were roughly in the $10 million range versus just under $5 million a year ago for the third quarter.

What were they in the October quarter?

In the October quarter, I believe they are in the $5 million to $6 million range.

Okay, so I guess what I am trying to get at is -- is $10 million a quarter a reasonable run rate going forward? Or does that ramp as we get into the spring and summer?

I think we need to see more. As I mentioned in my prepared comments, the orders were little bit less than expected for the quarter. So it is hard to quantify how that will shake up in the end. But they could be higher, but it is hard to know.

Okay, thanks. I will hop back in the queue.

Jim Ricchiuti, Needham & Company.

Hi, thank you. Good morning. Just a follow-up question. Follow-up question on the issue of the NFL, and potential for a work stoppage, and possible impact that it could have on you guys. Is there a way for you to go back and maybe tell us, in previous say two years, was the NFL a meaningful part of the revenue stream or the booking stream in the fiscal first quarter of the year?

Good question, Jim. As I recall, if you look -- we did some transactions last year between the fourth quarter, first, and second quarter. I think we did the Redskins was $3 million to $5 million in the fourth quarter a year ago; and then we moved into a few other projects, first and second quarter, that on an aggregate I think, as I recall, were less than $10 million for the NFL.

So last year during that three quarter time frame I don't think the NFL in contracts exceeded $15 million. I think they were well less than $15 million.

Okay.

But keep in mind when we get into these large facilities, if you look at us over a historical period, sometimes the major college venues are up a lot higher as compared to the professional football facilities. So if the NFL is down, that doesn't mean that major college can't be up.

So it is hard to see how that Live Events in aggregate shakes out at this point for the first two quarters. But I should mention one thing in those numbers; that exclude that significant contract for the Jets Giants stadium. Those were deals aside from that one.

Okay. Then actually, Bill, that was leading into the -- you anticipated the next question. Just with respect to what you guys are seeing in the college/university market, what is your sense in terms of the pipeline?

Take the overall list of potential projects there, Jim, is I think probably as strong as ever. I think it is probably just maybe the confidence factor in how those will play now is what is -- we still need to get a little close to the season to have a better visibility there.

Okay. But Jim, if we were to look at the opportunity set that in that market, that segment of the Live Events market versus last year, you would characterize it as -- as strong?

I think the list of opportunities is as strong. I think that's true.

Okay, okay. Then if you could talk a little bit about -- you alluded to some slippage I think in International orders. I wonder if you could maybe elaborate a little bit more on what you are saying there.

Is that a competitive issue? Is it just potentially some business slipping from the quarter into Q4 orders?

I think one thing about International, that is our lumpiest of our businesses, because pretty much the only thing we do internationally is bigger contracts. We don't have any that sort of flowed. Much of a flow of smaller projects there.

So some of these bigger projects if the timeline slips a little bit they can move from one quarter to the other very easily. So it will be up and down; that is just the way that business is going to be. And one quarter down or up doesn't constitute a trend, I guess, and shouldn't be construed as such.

So we did have one, as Bill mentioned; there is an International project that we are in final contract negotiations. We thought we'd get booked in before the end of the quarter. We didn't; it is still -- we are still working on that. So sometimes these things just take a while to bring home.

Jim, I'll answer the International has been a bright spot for us. We are up on a year-to-date basis over 50%, and slippage of an order in the third quarter -- I think overall International is doing well and the pipeline looks great.

Okay. One last question. If you could just talk a little bit about what you are seeing in the other areas like the Commercial business and some of the national account business. What are you seeing there?

I would say right now we are seeing that still tends to be a little bit on the soft side. One of the other -- on the standard product side we see that a little bit soft.

The other part of that business we group in there is the contracts, the larger contracts in the Commercial business. There's opportunities there.

Again, timing on those, that can bounce around a little bit. So we have got some opportunities there, so I think we see that as being reasonably strong in terms of opportunities out there.

Okay. Thanks very much. I will jump back in the queue.

(Operator Instructions) Dick Ryan, Dougherty.

Good morning. Jim, you mentioned pushouts, projects getting pushed. You talked about the International one here. Did you mention Live Events pushouts? I wasn't sure if I caught that correctly.

Yes, I mentioned in my comments in terms of orders there is one for sure that had a darn good chance of a few million in the third quarter that slipped. The other one is a much larger one.

So in total $12 million slipped out from the third quarter; booked in the fourth quarter, hopefully. And that should drive a nice fourth-quarter increase year-over-year in orders.

And which sports were they in, Bill?

The smaller one was in college football. And the other one -- I don't want to jinx it quite yet, so I would rather be silent on that one.

Yes, no problem. No problem.

Hopefully you can understand.

Oh, yes. You know, with the lower price points on the digital billboards, do you see any -- your opportunities with maybe Tier 2, Tier 3 billboard suppliers out there. Is that changing at all?

We see continued interest from the Tier 2 and Tier 3 suppliers. Certainly the lower price points makes it a little easier for them to get in and to justify, see an ROI.

Okay. On the architectural lighting, you talked about three opportunities there. Can you give a little perspective of the kind of range those projects might be in? Are they million-dollar-plus types of opportunities? Less than that? Can you kind of give a perspective on that, Jim?

Yes, certainly they can vary widely. But just depends how much area that a customer wants to cover with this lighting. But a couple that we mentioned here in that $2 million to $3 million range each.

Okay. Going to market, with the new lighting there, is that direct? Are you using distributors there? Or how are you getting that to market?

For the most part these are -- take a lot of interaction. Some even involve sometimes with engineering. So at this point we are working direct with consultants for the most part, and then we work with local resources as far as installation and that sort of thing.

Okay, and one last one for me. Bill, you mentioned a couple projects hanging out there for new product development. What is needed to bring those to closure?

Yes, this is Jim. I will maybe take that one. It is just the normal product development cycle. Again, it is just a timing thing.

These things are moving along, but there is always a little bit of a variability in bringing new products along. No major hurdles, but they're just -- it's just going to slip into the next quarter here.

So no problems in terms of meeting customer requirements. It is just that it slips from one quarter to the next.

Okay, good. Great. Thank you.

Jim Ricchiuti, Needham & Company.

It might be a little early yet to talk about this, Jim, but I wonder as you look at the School and Theatre market, how is the business shaping up in that area of the business, as you look at the potential order flow in July/August time frame?

Yes, it is a little early. We have had some nice orders with some larger projects for the HS, for the high school market, that have come in here recently actually. So that is good to see.

But I think it's a little early to know exactly how that is going to be. We don't expect it to be really up a lot from last year, if at all.

So again, time will tell on that one. But I'd say it is pretty -- on the order of flat going into -- as we can see it at this point.

Okay. Jim, in the past, you have talked about this, I think. That in many cases the funds allocated for these displays typically come from outside the school budget. I am curious in terms of what you are hearing from your sales people just in light of the pressure that the districts -- some school districts are under.

Is there -- is that an area of sensitivity in terms of going forward with some projects?

Yes, I think there certainly is a lot of concern about school budgets in general in the country, I think, is a true statement. I think the counter to that is sports are still very important in our high schools in the US. It's the community support that funds these projects almost exclusively.

So I think that interest is still there and the resource to fund these are still there. Is there a possibility that some projects might be put off due to the other concerns that are going on, just because of a perspective there? It's possible that that could happen in some cases. But in general there is a lot of enthusiasm for sports in the high schools.

Okay. Thanks very much. Appreciate it.

Steve Dyer, Craig-Hallum.

Thanks, guys. Just a couple of follow-ups. So I just want to make sure I am clear. With respect to gross margin, we should expect the same level of gross margins at associated revenue levels as we have over the last couple of quarters. Is that right? There is nothing that has changed on way or the other there?

No, we're just guessing gross margin will be similar to third quarter. There's -- remember, gross margin for our can vary a lot on these big project. But overall it looks pretty status quo from the third quarter.

In the second quarter, in the first and second quarter it had made a nice move, and there was a lot of commentary about how things seemed to be getting better on that front. What has changed now, that we are talking 24% levels instead of 26% levels, if anything?

I think the biggest thing that has changed is really what we are booking, the large video system projects at -- we saw that gross margin on order bookings go down, as I recall, in the second quarter. And that is the competitive environment.

Okay. What about as you look out into fiscal '12? Are we thinking 24%-ish? Are we thinking 26%, 27%-ish?

Well, our goal is certainly to get that up there. As Jim talked about, there's a lot of things we are doing on the product side. We haven't rolled out completely our DVX line of displays; we are working hard at that. That creates a lot of cost savings.

There's a lot of things, a lot of things going on internally that drive that gross profit up. To get north of 26% we would probably have to do a little bit better at what we are booking some of these projects at.

But certainly our vision is that it increases, and we are doing everything possible, certainly on the product development and operational side, to drive that up. It's hard to know what it looks like for the year, but our goal is to get it up there.

Okay. Then operating expenses, how should we think about that directionally in fiscal '12? I assume it bumps up a little bit. Any idea? 5%, something like that? Maybe more, less?

Well, our goal on operating expenses as we sit here today is to a large degree dependent on how we see the first and second quarter shape up. We will do everything possible to keep those costs from rising until we see sales rising.

There are some unique things that we are doing, for example, in expanding our infrastructure in China. That is primarily to build the architectural lighting products that Jim mentioned. There's some costs with that; it could be a couple hundred thousand dollars of costs incremental over the next couple of quarters on that in G&A and things like that.

So we are going to work hard at keeping that in check. But yes, there will be a slight increase. At this point, I don't know that we have quantified what it looks like for the whole year, because we are still in a quarter-by-quarter mode.

For right now, it is doing everything to keep them flat as opposed to rising.

Okay. Then the last question and I'll be done. Thanks for your patience. Tax rate has jumped around over the last number of quarters. How should we think about that on a normalized basis?

In about the 37% range. What happened, a lot of it is the last -- I think it was in November -- December. December is when it was, Congress reinstated that R&D tax credit, which caused us to pick up in the tax rate going all the way back to January 1 of last year. It took Congress that long to get that resolved.

So the year before that, it is because we were in a marginal loss position. So I think we are back; we should be back on a go-forward basis in a normalized state like we had been for years. That is in the 37% range.

Some variation will arise as a result of the mix of our income in the different countries. So that is hard to sometimes see where revenue comes. Certainly in China, to the extent we get more business in China, it lowers our tax rate because their tax rate there is lower. (multiple speakers)

Okay. All right. Thanks, guys.

There appear to be no further questions in the queue. I will now turn the call back over to Mr. Jim Morgan for closing remarks.

Well, thank you, everyone, for being with us this morning and thanks for the questions, gentlemen. With that we will wrap it up. Thanks.

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.