Daktronics Inc (DAKT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Daktronics fourth quarter and fiscal year 2011 earnings results conference call. As a reminder, this conference is being recorded today, Wednesday, June 1, 2011, 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. We appreciate your participation in our year-end conference call. We will give some brief updates about the quarter and then open it up for questions and answers.

I would first like to offer a 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 on 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 the 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 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'll turn it over to Jim Morgan, our Chief Executive Officer, for some comments.

Thanks, Bill. Good morning. Thank you for joining us this morning. We were generally pleased with the quarter. We wrapped up fiscal 2011 with a reasonably strong quarter, with our commercial and international business units leading the way out of the downturn. We were especially pleased to see that the digital billboard business has come back quite nicely. And the public outdoor advertising companies that are some of our key customers are continuing to report good financial performance on the digital investments. The results are notable that our ongoing investments in our international market development have borne fruit with a record year for orders in the international front.

Our transportation unit had an excellent quarter in revenues, as we were able to increase the throughput of our transportation factory. We were up 64% year-over-year for the quarter, and we were up 36% sequentially for the quarter. And, this is done to a large degree to product and process improvements, with minimal head count increase, which is great to see and is a testimonial to our progress in our lead manufacturing, which has been a key initiative for us for a number of years and continues to be a key initiative for us. So, it was great to see that execution. We maintain a strong backlog in our transportation business, so we have a good outlook there, a strong outlook.

As we mentioned in the news release, we are seeing slow recovery in our sports-related businesses, partially due to the turn down in the economy and partly due to the low-cost Asian competition, and particularly in the live events schedule also because we had an extremely strong performance in that area, with some -- a lot of new construction prior to the downturn. So, a tough comparison there. However, we are pleased with our gross profit margins in our large video display business for the quarter. And, the outlook for the future is the cost benefits of product improvements along with the benefits of some comp and price reductions are realized.

We were disappointed to see warranty costs running higher than we would like for the quarter, which pulled our gross profit down by about a percentage point. However, new products shipped over the past year are performing much better.

I would also like to add that despite the condition of Japan and the earthquake, we have managed to avoid any significant supply chain issues and don't foresee any at this time.

We are excited about new -- two new growth opportunities that we have discussed in the past. IPTV, which is Internet Protocol Television, for sports facilities and also architectural lighting. We have had some nice reference installations in both of these product areas, and have a good sales pipeline going in both areas as well. And, we are continuing to invest in product development in both of those areas to continue to capitalize on the opportunities there.

It was an exciting quarter for us on the baseball front, with our completing four Major League Baseball installations. You can see one of Daktronics latest DVX video displays with control of Daktronics Show Control system in action at a baseball game with the Texas Rangers, the Milwaukee Brewers, the Houston Astros or the Philadelphia Phillies. I trust that everyone has had a chance to read our news release, so with that, I will turn over to Bill with a few comments on the numbers before we open it up for questions.

Thanks, Jim. Starting with the top line, which exceeded our expectations from going into the quarter. As some of you may have noticed, in the prior quarter, inventory levels were a little higher than one would expect, given forward-looking sales going into the quarter. This higher level of inventory allowed us to capture and deliver on a number of smaller projects in the live events unit, that were booked and delivered in the quarter. Secondly, as mentioned by Jim, we were able to make significant progress in increasing throughput and our transportation plan reduced the backlog more than expected. Finally, international came in higher than expected.

I should note that we discussed on the last call that sales were dependent on product development initiatives, and all went well in that area. On a forward-looking basis, we expect that the first quarter of fiscal 2012 will see sales rise sequentially from the $114 million in the fourth quarter. On an annual basis, we also believe that sales will rise; however, at this point, the range of the increase is fairly wide. The key areas up within the range are the international business unit with all its opportunities and what we are able to book in the area. And live events, which is still difficult to forecast for the year, given the overall state of the marketplace. And finally, commercial and whether or not we can see some additional economic improvement, which can drive more the non-billboard area of that marketplace. I would also mention that there are transactions out there still to be awarded, that could impact sales this quarter on the upside.

Next, some comments on gross profit. For the quarter, it was in line with our expectations. We see some upside as we look forward as our costs associated with the new products, primarily DVX-related technology is coming out much better than expected and seems to be making headway in dealing with the cost side of the gross profit equation. We completed the large baseball projects, as Jim mentioned, during the quarter. And the margins were better than expected, enough to offset the expected warranty costs that Jim mentioned.

We are also seeing noticeable reductions in some component costs, and finally, as we enter the busier time of year, a stronger top-line helps us gain margin. With that in mind, we are expecting gross profit will rise sequentially in the first quarter of 2012. In addition, we continue to find that the new technology, as Jim mentioned, is performing noticeably better from the warranty perspective. Operating expenses were higher on a sequential basis. This was net of some reductions due to lower employee benefits cost. With regards to the product development, keep in mind that we allocate our engineering time between product development and contract fulfillment, and overall, our engineering costs were somewhat flat, so it's more of an issue of allocation between costs for goods sold and product development.

In selling expenses, we have some higher payroll expenses and T&E expenses. It's not unusual for T&E to rise in the fourth quarter, as orders increase and trade show attendance is higher.

On the G&A spending, last quarter we talked about a sequential increase, primarily due to international expansion. That increase did not happen in the fourth quarter and has pushed out into Q1, so we expect an increase in Q1 G&A and then potentially some reduction after that as these one-time costs are reduced.

Overall, on operating expenses, we're getting to the point where we need to expand in some areas to maintain the business and take advantage of opportunities. We expect to see slightly higher operating expenses year-over-year; however, we believe that increase will be well less than 10%. And, depending on sales and how they turn out, operating expenses as a percent of sales could show some slight improvement.

On cash flow, we said that CapEx would be down from our $13 million target for the fiscal year; however, we ended the quarter much less than we thought due to delayed timing of deployment of some fixed assets. So it's a matter of items getting pushed out, not savings. For fiscal 2012, we are looking at roughly $16 million. We could end up slightly less due to timing on projects over the course of the year.

Finally, just a brief note on the effective tax rate. A little higher for the quarter due to some fourth quarter computations primarily related to the international business. For the year as a whole, we're at 35.5%. We think that the tax rate, going forward, will be higher due to some international issues, primarily the expiration of our tax holiday in China, and greater foreign income tax in the United States, as our international footprint expands. So, 37% is likely still a good estimate, but has some volatility due to our international activities. With that, I will open up the call for questions and answers.

(Operator Instructions). Our first question comes from Steve Altebrando of Sidoti and Company. Please go ahead.

Hi, guys, how are you?

Good, how are you, Steve?

Doing well. Fiscal 2011, there was a significant number of baseball owners. And I know your visibility is hugely limited going forward. But, is there anything, in the pipeline that gives you conviction that you will be able to hold the live segment, live events segment flat, at least in fiscal 2012?

Yes, there's still a lot of activity out there, and people are upgrading facilities, both at the college level and the professional level. So concerning that, that's our expectation, Steve.

Okay. In terms of the football strike, or lockout, any potential disruption that you are seeing?

There's limited activity in the NFL, in terms of operating for this season at this point. So how much of that, because of the potential strike and how much this is the natural ebb and flow of the business is hard to say. And I don't know that we can correlate exactly there, but there isn't going to be a lot of NFL activity in the display side for this season.

Okay. And then, lastly, Bill. Do you have a digital billboard revenue for fiscal 2011?

Yes, I do. Fiscal 2011 digital billboard segment was in excess of $30 million.

Okay. Thanks, guys.

Our next question comes from Jim Ricchiuti of Needham & Company. Please go ahead.

Hi, good morning. Bill, what were the billboard revenues in Q4?

Q4 revenues were between $12 million and $13 million.

Okay, great. And, you talked about the outlook for fiscal 2012, and you said there were some transactions that potentially could provide some upside. I wonder if you can give us a sense of what areas you might see these upside opportunities?

Yes, it's a good question. And, back to Steve's earlier question. On the large sports venue business, we have gone through years where major college is significantly up compared to NFL, so one being high or low doesn't always give the state of the business overall. So, the NFL doesn't look good, but right now, there's a couple of transactions, one in particular, that is a large football -- college football transaction. That could give us some upside this quarter.

Okay. And, are there any -- you guys had a very strong year in international, and it looks like another strong bookings quarter. Can you talk a little bit about what -- where the strength is coming from and whether you see any potential upside opportunities in international?

International has a lot of variety to it, and we're seeing some success both on the European side and the Asian side. It tends to be more on the commercial than on the sports, in general. We've had some nice, small business and the major mall owner, a worldwide mall company. That's one -- a nice, ongoing business from that company, and had some nice orders here just recently, again. So, that's an example. There is a potential going forward in the outdoor advertising side of things, and that, I think is picking up a little bit. It's slow to get started in Europe, but I think it's getting going and will continue to move forward. So, it's just a variety of things, really, across the globe.

Okay, and Jim, I just had a follow-up question, final question for me, and I will jump back in the queue. In terms of the newer growth opportunities, you seem to be getting some traction in architectural lighting. And it sounds like that straddles live events and international, or I should say commercial. Maybe -- I don't know if there's a way for you to maybe aggregate if it is significant, the architectural lighting piece. And then the final question just relates to the IPTV opportunity. I don't know if there is a way to talk about that in terms of penetration in the professional market.

So I'll start with architectural lighting, and really, that's a product or an application, a product that is specifically designed for a type of application. And that really, it applies and then can be sold to our commercial market, our live events market and serve in international. It can be a contributor to revenue in any or all of those.

And, our pipeline there is actually quite strong, now. There's -- orders in that business can be anywhere from a couple hundred thousand to multimillion dollars. So, there's just a lot of opportunity. Again, it's quite new, so it'd be interesting to see how it does going forward here and how it is accepted. But, it's really, in the US, we're seeing a lot more interest in it, and it seems to be picking up rather quickly in terms of the quoting activities. We're excited about that.

In terms of IPTV, we have a couple of major installations at this point, so in terms of penetration, we're really, we're just getting started at it. In terms of how many facilities have IPTV at this point, I don't have the number on that, but I think there is -- it's a rather small minority at this time. So, I think there's opportunity there.

Can you give us a sense of what an IPTV project might be for either an outdoor or indoor arena on average?

There again, it can vary. It depends on how extensive, how many displays are included. But, it can be a couple million dollars type product, or up or down from there.

Okay, and just a follow up on the architectural lighting side. Is -- revenues for fiscal 2011 in that area, are there a way for you to size it? Was it $5 million, between $5 million and $10 million? I'm just trying to get an idea how big a business it was last year?

Jim, I don't have that, but just thinking back on our projects, it is definitely in excess of $10 million.

Okay.

A couple of projects that we've talked about before, we did an add-on for the Minnesota Twins. We did the Target headquarters building in Minneapolis. We had a big project in China. There were a number of projects in the second half of the fiscal year.

Okay. Thanks very much.

Our next question comes from Morris Ajzenman of Griffin Securities. Please go ahead.

Hi, guys. The question on gross margins, you referenced in the quarter that you saw some improvement. And really, you highlighted the improvement came from better cost effectiveness, discussing DVX, specifically there. Just talking through this again, I've heard this in the past, but you basically deal in an oligopoly, particularly live events and colleges, et cetera, and yet pricing has become such an issue, I guess part of being borne out by the downturn we were in. I understand that this area has not come out yet from this downturn; that it is taking longer. Do you hope or expect to see any alleviation on pricing? I understand gross margins can improve by better cost controls, but what do you see happening this year on pricing from perspective you to your customers?

This is Jim Morgan. The price competition remains keen in the sports world. We're seeing China competition there, and people's budgets are tight. And so low pricing certainly is attractive, given people's budgets today. So, I think it will continue to be -- price competition will continue there. So our approach there is to continue to work to take cost out of our product, while at the same time offering an improved quality in the products.

There are some -- one of the trade-offs there is what LEDs one might use, and in some cases, customers -- we will give customers a choice of which LED they want. So, that's one way to address that issue, and depending on the application, in some cases, a lower cost solution is acceptable. So, there's different ways to approach that. But in the end, it comes down to our having a product that's at a cost point that we can deliver at a cost point that can give us the margin that we are looking for.

Let me switch gears. On the cash flow, you generated a healthy leverage of free cash flow before financing activities. When I look at the numbers there, specifically, a year ago, a big part of that contribution was working capital, really scrunching that down at $21 million. This year, (inaudible) revenues were up materially, but you were still able to generate $3.4 million in cash flow by managing your working capital. You haven't given guidance for next year, but assuming the investments out there, revenues can be up 8% to 10% or so. In that environment, do you still believe you can keep working capital flattish? Or how does that play out as revenues gear up in this coming fiscal year?

Working capital for us varies significantly, depending on the types of business that we are dealing in. If you have a lump chunk of business in China, that tends to hurt our working capital a little bit more. Contrast that to billboards, that helps because those are quick, in and out, for bigger dollars. Ultimately, our working capital is dependent on the type of business and, I'd say, the inventory levels that we take, as we look forward on our business.

And so, at any point in time, it's really hard to say how it will come out because it can change significantly. But with that being said, I think, from a general trend standpoint, there is a lot of improvements we can make in the working capital, as opposed to eating it up. So on a cash -- free cash flow basis, we remain optimistic that we can improve and do better in those areas.

Thank you.

Our next question comes from Dick Ryan of Dougherty. Please go ahead.

Good morning. Can you give a sense on the live events, what the -- I think you talked about the NFL side, but what you're seeing, opportunity-wise on the college side? And also, a question back on the competition. I think the Asian competitor was, I think the past cycle you thought they didn't have staying power. Do they have staying power now? Are they winning jobs that you thought would be yours? Can you address that a little bit more, Jim?

I don't know that we said it didn't have staying power, necessarily. I said they were relatively new back in the game in the last couple years. So I guess time will tell how things play out there. But I think the key there is that we have reduced the profit point on our product, and so our margins -- we are pleased with how our margins came out this quarter on the product there. We are winning orders. We are being price competitive, and we are going to continue to take cost out of our product. And it will be more price competitive. So, that is how we are addressing the competition, and it's not the first time we've encountered this in our history, it's not unusual. So, we have to react to it and have to address it, and I think we are.

In terms of the opportunities with the activities, primarily for the summer here, it is going to be heavily weighted toward the college university side. And there's a lot of activity in that area. So, and we are planning to get our share of that. So, I hope that answers your question.

Yes, that does. Good perspective, thanks.

Okay, thanks.

Our next question comes from Neil Chatterjee of Craig Hallum. Please go ahead.

Hi, guys. I'm just calling in for Steve Dyer. Regarding the NFL lock out and given the comments you've already made, is it safe to assume, for the year, that we won't see any projects there? And then, just quickly, a second question. Regarding NBA bidding activity, what are your expectations there?

Yes, on the NFL we are not expecting any significant NFL revenues for the summer season. I didn't catch your question on NBA?

Just, what are you seeing on NBA in terms of bidding activity, and what are your expectations there?

Oh, we just booked a nice order for the New Jersey Nets in New Jersey this last quarter, so that was a nice one. I don't think there's been any significant big projects going on in the NBA that come to mind. To put this in perspective, though, because a few questions have come up that are related. Overall, what we are saying in live events is, there is opportunities in the college market that cannot set with the lack of NFL projects.

So it is not like we're suggesting there is a rebound, but it's -- there are opportunities out there, over all in the pipeline. I think Jim mentioned on last quarter's call, that we had a lot of opportunities in the pipeline for live events overall. So, there is business out there, and enough opportunity to offset the fact that there is not the NFL projects out there or much in terms of NBA that come to mind.

Nothing off the top of my head here, that comes to mind at the moment.

Okay, but with the NBA, with any possibility of a lockout there, would that potentially limit activity on that side as well?

Again, we're not -- we haven't heard anything that would say that there's -- because of that potential that there is -- people are holding back on decisions in the NBA. We're not aware of that in particular.

Okay. All right, guys thanks.

I'm showing no further questions at this time. And I'd like to turn the call back over to Mr. Jim Morgan for any closing remarks.

Well, thank you very much. Thanks for the questions, gentlemen. And with that, we will wrap it up. So, again, thanks. Have a good day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.