Daktronics Inc (DAKT) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fourth quarter and fiscal year 2012 earnings results conference call. As a reminder, this conference is being recorded today, Wednesday, May 30, 2012 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. 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. We appreciate everyone's participation this morning in our year-end conference call.

I would like to first offer our disclosure, cautioning investors and participants that, in addition, the statements of historical facts, this call and our news release contain forward-looking statements reflecting 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. 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.

With that, I will turn it over to Jim Morgan, our Chief Executive Officer for some comments, after which I will follow. And then we'll open it up for some questions.

Thanks, Bill. Good morning, everyone. Obviously, this was a very challenging quarter for us. Our first challenge was we didn't generate as much revenue in the quarter as we needed to, to have a good quarter. This was a combination of delivery on some projects being delayed, and some projects that we were awarded, and which could have generated revenue in the quarter, not being booked before the quarter-end. Some of this pent-up demand ended up in inventory, which Bill will talk about in a minute.

Secondly, we did have a couple large projects where the site work ended up creating problems for us, which hurt our gross profit. While there is always risk of cost overruns in fixed price installations, overruns of this extent are very unusual for us, as we pride ourself in our project management capability which we have been doing for many years. We are studying these situations carefully, and making adjustments to insure we don't have repeats of this nature. Our live events business top line was relatively flat for the year. We lost some gross profit points, including some one-time hits as described here above, that we will be working very hard to make sure they don't reoccur. We will be focusing on reducing our overall cost to deliver in this area to improve gross profit margins.

International revenue for the year was actually up, partly due to the higher backlog we took into the fiscal 2012. The gross profit was off of the unusually high levels we experienced in fiscal 2011. We continue to see good activity internationally, but due to it's concentration of large project work, it does tend to be the most lumpy of our businesses. The strongest performance for the year overall, from a financial perspective were our transportation and commercial business units. It was great to see the increases in commercial for the year as noted in the press release, with all aspects of the business having a strong year, led by billboards and large contract business.

One of the opportunities for us going forward, which we are excited about, is participating in the replacement or updating of displays that have reached their end of life. That's both for on-premise, and for third-party advertising customers. For smaller displays, this will often mean just a complete replacement of the display. For larger billboard-sized displays, there is an interest by our customers to minimize the CapEx investment. So we will be working with them to identify what the best approach is. As a minimum, it would mean the module replacement.

The transportation business unit has continued strong through the downturn, and continued to perform well this year. We have started off fiscal 2013 with especially strong orders in this business unit. We have talked about warranty a fair amount in the past. We did see a meaningful improvement in warranty cost over the previous year. And with the increased emphasis on the reliability testing that we have been doing for the past two years, we are expecting warranty cost to improve further in fiscal 2013.

As mentioned in our news release, our largest investment in product development will be on surface mount LED products. We do offer some surface mount LED products now, but these new products will be based on a new platform, to allow us to more cost effectively offer a wider range of pixel pitches. We are seeing increased opportunities for this surface mount technology in out-of-home, third party advertising, especially in international markets. IPTV for sports facilities and architectural lighting continue to be developing opportunities for us. We believe our offerings in each of these areas offers unique features and benefits. We have some nice reference [installations] to both of these product areas, and have a good sales pipeline going in both areas as well.

We are off to a great start with orders in the first month of the quarter which we just finished. Our average weekly run rate for orders for the first month of the year ran about 80% higher than our weekly run rate for all of the fourth quarter. And the point of mentioning this, is not to say we expect to maintain that level for the quarter, but that this fundamental element of lumpiness in our business can cause quarterly fluctuations like it did this past quarter. We are expecting a much better looking first quarter.

Regarding the longer term outlook, we have developed a strategic goal over the next three years to get our operating margin up to 10%. To do this, we will be taking a hard look at all of our cost structure, and looking for ways to simplify our operation to take cost out, while driving -- still driving some top line growth. We have a high sense of urgency to execute on this, to get back to a more consistent and positive financial performance. We fully understand our investors are expecting much better results than we delivered this quarter. With that, I will turn it over to Bill with a few comments on the numbers, before we open it up to questions.

Thanks, Jim. As Jim noted in the press release, our top line was less than expected. One of the biggest factors were some live events projects, which at the beginning of the quarter we had projected to generate $7.5 million of revenue in the fourth quarter. Actual revenue on these two projects came in about $4.5 million. Both of these projects involved a significant amount of site work and subcontracting, which increases the potential for scheduling changes, which is what happened here. This revenue pushed out in the first quarter of fiscal '13.

In the commercial business unit, we mentioned orders, experienced delays that negatively impacted net sales for the quarter. Although we ended up with a great quarter for billboard orders, which were almost $20 million including almost $4 million maintenance agreements, the timing of the billboard orders and actual deliveries of billboards to customers hurt sales, and therefore increased our backlog for billboards going into the first quarter. It also caused an increase of about $4 million in inventory, going into this quarter.

For fiscal 2012, orders in the billboard area were just under $60 million, compared to just under $40 million of fiscal '11. In addition, our large contract order business in the commercial segment was less than expected in the fourth quarter, causing a $2 million decrease in net sales for the quarter. Finally, as mentioned in the press release, we received a commitment for a large replacement program for a national account customer. We expect that this total replacement business between fourth quarter and first quarter will exceed $5 million in orders, and we have received approximately $2 million through the end of the first -- for the fourth quarter.

Jim mentioned the positive start for the quarter on orders. So far this month, in addition to large contracts mentioned in the release, we have booked orders in excess of $3 million for the University of Minnesota, for Syracuse University in our live events business unit. We've also booked over $9 million quarter-to-date in our international business unit. Again, and we have the pipeline of opportunity to drive a great quarter for orders, to position us for the second and third quarter of this fiscal year.

I want to focus now on gross profit margin. At last quarter's conference call, we mentioned a few concerns that caused lower expected gross profit in that third quarter, including higher healthcare cost service utilization, and lower margins on large contracts. Overall, we have said that gross profit percentages could be more or less flat to up in the fourth quarter, compared to the third quarter. Although we have seen improvements in services and benefits cost as we thought we could, and better overall contract performance, the misses that Jim mentioned were too significant to prevent the decline in gross profit. As we move forward, we believe that gross profit will increase in the first quarter of fiscal '13 as compared to the fourth quarter of fiscal '12, as we keep improving our services utilization and cost, contain warranty expense, and healthcare costs, and keep reducing our conversion costs as a percent of sales.

Turning now to operating expenses. We stated during last quarter's conference call that operating expenses would be flat, and they actually increased. In going through the components of OpEx, selling expenses were generally in check, aside from a $300,000 commission expense related to business booked during the quarter. Although our model does not generally include commissions, as we penetrate into some international markets, notably Asia, we realize that commissions are a bigger factor, and they are difficult to predict. This could cause some volatility in selling expense internationally, as we expand our business there. With regard to G&A expense, the issue here was professional fees. We accelerated a few international initiatives, and some tax planning opportunities that generated the recognition of tax benefits. We also have higher HR costs associated with international issues, and finally some outsourcing of IT projects that ended up being a little more costly.

Finally, on product development expenses. During the quarter we decided that our 10-millimeter outdoor surface mount module that we introduced approximately one year ago needed to be redesigned to improve it's manufacturability, and incorporated into a product platform strategy for surface mount technology. As a result of this determination, we wrote down the value of tooling and other items that related to the product, as new tooling will be required. We also have higher patent fees related to various items, including a case with the patent [troll] that has been put behind us, and work associated with new patents. Finally, there was a small amount of the increase related to the mix of time our engineers spend on product development versus contract, in favor of higher costs of product development. In spite of these increases, as Jim mentioned, later in operating expenses we remain committed to driving these costs down over time, and we believe we will see reductions in the first quarter of fiscal '13, as compared to the fourth quarter of '12.

Our inventory balances were higher than expected in part due to commitments we made on the national account business which is a quick turn, a large major university opportunity in our live events business that we are in the process of negotiating now, and the billboard inventory that I mentioned earlier. Overall, we are well-positioned for the first quarter, and expect net sales to rise from the levels of the fourth quarter. Exceeding the level of one year ago, will be dependent on timing of orders and other factors. Much of the airport project we mentioned in the release is scheduled for the second and third quarter versus the first quarter. Which should help us, as our business naturally declines in the late second quarter and the third quarter.

Finally, just a bit of clarity on the income tax benefit for the quarter. There are a number of discrete items that contributed to the positive effect, including a preliminary positive result from the completion of an IRS audit, and adjustment of tax assets, as we completed a significant project reassessing our transfer pricing practices. And finally, a lower state income tax rate based on completion of last years returns. Overall, our long term effective rate is declining, as more of our business comes from our non-US footprint. But that decline assumes that Congress will put back in place the Research and Development tax credit, which is a significant item for us. With that, I will open up the call for questions and answers.

(Operator Instructions)

Our first question comes from the line of Morris Ajzenman from Griffin Security.

Hi.

Hi, Morris.

Just on the guidance here, we talked about in the fourth quarter and release, cost overruns, change in the customer schedules, et cetera, impacting gross margins. And then you highlighted the operation expenses being up in the fourth quarter. But then looking at, into the first quarter, which I think a number of these items start alleviating, I presume they do. You do talk about revenues rising in the first quarter, versus the fourth quarter sequentially. But then you only talk about, well, actually, you give guidance to gross profit percentage to rise slightly, and operating expenses to decline slightly.

I would presume, based on the way you have laid out the fourth quarter, that the gross profit percentage would be rising more than slightly. Again, I will let you to clarify that, and operating expense would decline also more than slightly. What is it that is inhibiting the first quarter, based on the rebound in the trends of orders, the one-off items that happened in the fourth quarter, that does not allow gross profit and operating expenses from your perspective of guidance, to improve greater?

Well, it's a good question, Morris. We have stayed away from giving specific guidance say, on gross profit historically. Our contract business does have volatility, and we've stayed away from describing more than -- describing what the word slightly means. But, overall, what I would say is, ex the misses that we've had of a 1.5 point, that's an opportunity. But it gets offset, maybe diluted by the range of outcomes that we can have on our large contract business. So, we maintain our belief that we've got lots of opportunities in gross profit to improve it, maybe more than what you're thinking slightly means. But, again, the outcomes are a wide range that we can experience in general.

As for operating expenses, there are a lot of opportunities to reduce. I mentioned some of the tax-planning opportunities that we took advantage of, that increased professional fees. Those go away sequentially. There is a lot of things that we intend to do to decrease costs in G&A and of product development, not to get those hits that I mentioned. So I apologize that we are not defining the word slightly. I'll say there is plenty of opportunity for us to decrease costs and improve gross profit.

One last follow-up, and I'll get back in queue here. Pricing pressures, competitive pricing, which is the bigger issue for you right now, as far as improving gross margins? Is it what you can do internally, having a big impact on gross profits decline, or was it the competitive landscape that is having a bigger impact on gross profit decline?

Yes, Morris, this is Jim. I think both of those are factors, of course. So we -- the internal one, of course, we have control of that, and we have continuous effort in that regard. And we're of course, very -- our product costs are very bill-of-material intensive. So that is -- sourcing is one of the key areas that we work on to reduce costs on that side. The other side of it, on the internal side, is just we're looking at really all of our internal business processes, and how we can streamline those. So we can just take time out of the process, and time and effort out of it, and hence cost. So those are some of the things we are focusing on internally. Certainly, the price pressure is a factor, and we have to respond to that. And we have a good value proposition for customers, but there certainly is that -- certainly, is price pressure out there. Hope that, at least partially answers your question.

All right. Thank you.

Thank you. And our next question comes from the line of Steve Altebrando from Sidoti & Company.

Hi.

Hi, Stephen.

In terms -- I know you typically get some visibility into the fall sports season, generally about now. How is the fall -- this season panning out?

The -- what we are seeing is that in the professional side, there's not any real big projects out in front of us. There is some smaller, upgrade-type projects in the professional side that we are -- we have been, we have in the pipeline, or we're ready, are involved in. So the majority of the opportunities in the Live Events is in the college university side, and we're seeing -- there is quite a bit happening there.

Okay. And you had mentioned the shift towards surface-mounting technology. How material is the CapEx associated with that, or maybe more generally, if you have a CapEx projection for fiscal '13?

Well, I think we'll spend maybe $2 million on CapEx this year, related to the surface-mount platform. Overall, we are going to work aggressively to find ways to reduce CapEx from the level it was in fiscal '13. So, to get below $16 million is going to be our goal. And we're going to scour it, especially during this quarter to keep that as low as possible.

Okay. And then I know -- and you had mentioned in the script, internationally typically is very lumpy for you. Is there any material projects out there, that there is any particular optimism on for fiscal '13?

Certainly, there are. In fact, there is one that we -- a fairly large project, we were expecting to book in the fourth quarter that's still in the discussion stages. I think it's about an $8 million or $9 million project, which is an architectural lighting type project, just as an example. And there is certainly, there is, yes, numerous other projects in the pipeline.

Okay. Thanks.

Thank you.

(Operator Instructions)

Our next question comes from the line of Jim Ricchiuti from Needham & Company.

Thank you. Good morning.

Hi, Jim.

I wonder, if you look at your backlog, and the -- just in general, looking at the orders you took in the quarter, how would you characterize the margin profile of that business?

On a sequential basis, like Q3 to Q4, we're hanging in there on gross profit margins. From looking at it, from when we book it, what we expect the margin to be -- so Q2, Q3, Q4, we've hung in there, on gross profit margin estimates at the time of booking.

And I think, Jim, you alluded to your operating margin goals, looking out over the next three years. Can you talk a little bit about, perhaps some intermediate goals, just given the low levels of operating margins we have seen this past year?

Yes. So we have to start where we're at, of course that's point A. And what we will be doing here, Jim, is taking a -- we're taking a harder look at, really, all aspects of the organization, from a cost structure point of view, where we can be more aggressive in taking costs out. Really, it's kind of comprehensive in that regard, to look at those kind of things, how can we simplify some of the things we're doing internally? Now we've grown over the years, we have, certainly some of our internal business processes, as we look at them. And there's ways that we can, in fact, simplify those to have fewer hand-offs in the process, those sort of things. So it's a matter of taking a look at all those things immediately, and finding ways to just take cost out. That's a big part of it.

But if you look at the operating margin in 2012, it's probably fair to assume that you are working toward, I would think, 100 basis points or more of operating margin improvement, just given the low levels, particularly in the second half of the fiscal year.

Jim, to make sure I understand your question, you are saying in this fiscal year, to make progress --?

I mean, basically, yes, Bill, I'm sorry, I should be clearer. Just given the levels of operating margins. We understand you're working toward a longer-term goal, but can you give us some sense, as to even a range of what we might think, in terms of operating margins for the current year?

Well, I hesitate to give guidance. But I will say for us to be on track to get to 10%, we know that, this year, we've got to make a significant improvement from operating income, which was for the fiscal year 2%. I mean for us to get on track to that 10%, we -- I know we have got to at least double that this next year. And we remain committed, especially during this first quarter, as Jim mentioned, to -- we've got to find ways to cut costs out of our infrastructure here, to get us on the path to that level.

Now, we will need some sales help. But we believe, overall, that our business on the top line can grow over these next three years at 10% plus. Our plan to get us to 10% operating income is based on the low end of where we think sales can grow. So we're being fairly conservative in the -- call it the glide path to get us there. But, without giving guidance, I can say we have got to do everything possible to at least double it this year. Now --

That's helpful.

One of the earlier questions that was asked by Morris, I believe, earlier, is the competitive environment versus internal. We do, at the gross profit level, have plenty of opportunities to improve gross profit margin. We have a lot of opportunities to turn around the profitability of Daktronics and get us on that path. And one of the key things is to prevent some of these misses that we talked about. To lose 1.5 point on projects as Jim mentioned, it's just not in our core to do that on projects, and we can't let those things happen in the future.

Okay. That's very helpful. In looking at the commercial business, you had a tremendous bookings quarter. And I wonder if, Bill, I think you mentioned, was it a $20 million in billboard orders?

Yes, just under $20 million. Now, keep in mind though, Jim, the quarter below, the quarter prior to that was -- I want to say it was in the $10 million range as I recall. You get some volatility, but even with that, it was a great quarter for orders.

So, for the year as a whole, for fiscal '12, in terms of billboard revenues, did you -- what were your revenue in billboards for the full fiscal year?

Well, they were north of $50 million. This product alone was $50 million, and then services on top of that.

Okay. So, just given the start to the year, it looks like the outlook for that portion of the business seems pretty positive.

Well, keep in mind, what the major billboard companies out there are saying, in their public comments is generally, they're saying flat deployments in calendar 2012 versus 2011. So, we are not expecting to see significant growth in billboards, certainly, the rest of this calendar year. Aside from we have -- we believe we've increased our presence with one of the major billboard providers. But we don't look at that as making a major change in the top line, a noticeable change. So, and then maybe in late '13 to calendar '14, that's when maybe the replacement cycle starts to happen, which is an exciting thing. So, we don't look for the billboard this fiscal year to be a dramatic growth area for us.

Okay. That actually clarifies it, because I thought you were assuming more upgrade business earlier in the fiscal year -- so you don't really see that happening until later in the year?

Well, we don't see it happening until our fiscal '14.

Okay. Okay. Now that's helpful. And then, on international, can you just talk a little bit more about the condition of that market, just given concerns people have about Europe, and even some signs of slowing in parts of Asia? What are you seeing in the international business, and also should we assume that the cost of that business is certainly going to be higher, because it seems like you're moving in certain regions toward more of a commission model?

So, I guess, first of all, just in terms of, do we hear a lot about the European economy? I don't know that we're seeing direct connection to our opportunities there at this point. Now one of our biggest projects we installed last year in Europe was actually in Madrid, in Spain. And at that time, there was a lot of discussion even then, about the challenges they were having. But, I think this -- it remains to be seen a little bit, as where how things play out there in that economy. And a lot of these projects are done by individuals or entities that have cash and have the wherewithal to do these things. They are not really backed by government funding. So, it's not real clear how those will connect going forward, and certainly is something we will keep an eye on. What was your next question?

The commission. Let me just clarify the commission. Jim, our model is not designed to increase our -- necessarily our commission. I would say it's a cost of projects that we built into our pricing. And, in Asia, we run into the need to pay more commissions. Our overall operating income targets as a result of those commissions remains unchanged. And we still -- we have just got to, in some respects, maybe mark up the product a little bit higher to cover those costs. And so, it's not really changing our model. We just run into it more often in Asia, because we don't have the penetration, and we would have to rely on third parties more. Hopefully, over the long, longer term, that dependence on commissions will reduce.

(Multiple Speakers).Thank you.

Thank you, Jim.

Our next question comes from the line of [Jared Eligen] from [SD Investment Office].

Hi. Thanks for taking my question.

Hi, Jared.

When you talk about the costs internally that you are able to -- you hope to be able to target. You've embarked on the lean manufacturing processes for a number of years, which should have or at least shined light on those opportunities to take costs out. Where will you focus now to take further costs out in this process?

First of all, just to say our lean manufacturing efforts really have been successful, really transformed how our manufacturing operates. The -- in the last few years, we've been working and focusing on what we call lean out of manufacturing -- lean in the office is one term we use -- really which is talking about all of our business processes, and everything else really outside of manufacturing, and a lot of the same principles can be applied.

You look at any process, and look at how you can take steps out of it. And so, really it's all of our business processes, and every one of our business units has opportunities there. And service is probably one of our bigger ones, just how we go about delivering service. We have service delivery worldwide, and a wide range of products, and we've made a lot of progress on that area -- in that area. But there's still a lot of opportunities to take cost out of that process, while still delivering excellent customer satisfaction.

So, it's really -- the focus of it, to a large degree, is on the outside of manufacturing but certainly, the lean in manufacturing effort continues with -- and that's our way of life there. It's not something we did, and now we coast on it. That's -- it really becomes how you -- a way of how you do business.

One more question on the gross margin, operating margin target. It seems like ever since the downturn, your gross margin especially took a step change down. And we've heard a lot of companies who are premier in their industry, and we consider you to be among those, have realized that they gave up too much during the downturn, with respect to pricing. Have you experimented with exerting a little more pricing power? And how elastic is the top line, if you consider some of that?

In some areas, we haven't been able to exert some pricing power. On some of these big projects, the bidding is -- in many cases, in some cases, we get a last look even, and we still have a choice of taking it or leaving it. And there are occasions where the pricing gets down to the point, we have decided not to take a project. So it varies. At some of our standard product, it would be the areas where we have a little more opportunity to, in fact, consider some small price increases. There's some materials are in fact, increasing in price, and on the smaller displays that can affect your cost structure there. And it would, of course, affect the competitors cost structure as well.

Thank you.

Thanks, Jared.

Thank you. And we also have a question from the line of Robert Hoffman from Princeton OPportunity Partners.

Good morning. Two different areas. Unless I missed it, did you talk about some of the site-specific expenses that you took? Can you kind of characterize what happened, and how you can avoid that in the future?

I'm sorry, could you repeat the question please? I'm sorry, I missed that.

In your discussion of your margins, you talked about a couple of projects, where you had site-specific cost overruns. And so I was just trying to get a handle on what those were, and how you can avoid those in the future. Is it a process thing? Is it a not bidding on a particular type of project? Can you just flesh that out a little bit more?

Yes. So there are a couple factors involved. These were new construction projects, which complicates the whole -- the scheduling and the site work, interacting with other trades, all of those things that make it more complex. Think -- one of the things that we're going to be doing, just providing better oversight on these things. In the one case, maybe looking at how we bid it too, I mean, it certainly it starts with how you bid the project. You have to make sure you understand the scope of work, and we're good at that, quite frankly.

We're very good at getting thorough scopes of work, getting good bids on the project. And part of the problem was, in some cases we've got -- you get wrapped up in the deadline at the end. And you have no choice, but to scramble to hit the deadline. And so, some costs came in there that, maybe with a little better foresight, some of those could have been avoided. So, our plan here is to -- like I said, we're studying those situations very carefully to understand exactly what did happen there. And in some cases, I think it's reviewing, it will be understanding where maybe we missed some things on the bidding. But mostly, it's how we're executing on the project management side.

So it's -- I mean you can't look back and say, oh, well we wanted to bid X, and we were convinced to bid X minus 10%, and there it was, right there, so we just have to be -- you can't look back and say, well, we had it priced right, but we just took -- we succumbed to the pressure of winning the deal. So it wasn't something like that?

For the most part, it was on the execution side. So we are certainly, doing our bidding on the thing. But we have identified a number of areas that we just missed it on the project management side, and ended up with overruns on it.

Slightly different question. When you talk about surface mount, LEDs, is that an area in which a competitor has an advantage? Or tell us -- can you tell us a little bit about kind of the evolution of why that's better, and how you decided that you needed to move in that direction?

Well, first of all, we've been doing surface-mount technology for some time. The majority of indoor displays have been surface mount for a number of years. And, again, what surface mount is, you have the three LED die in one package, is sometimes called three-in-one because of that. And by having those in one package, all the LEDs in one package, all three colors, red, green, blue, you can get the LEDs closer together, and get that higher resolution. So that's been the norm for indoor here for a number of years.

The challenge has been for the technology, to have that bright enough for outdoor use, and now that's been available for a few years now. And the second challenge there is, to have that properly protected environmentally, because it's -- because of the different package, it requires a different approach to making sure that it's robust enough to stand up in the outdoor environment. So, we've been doing this for some time. It's not a new thing for us.

We have had -- I think we mentioned or Bill mentioned, we had a10-millimeter outdoor that we've been actually shipping for a number of years. We need to expand that, to address the market to have other pixel pitches in. So we've come up with a platform strategy, that we want to get all of this further development based on, which overall allows for a lower-cost increment for each new pixel pitch that we would offer. Because we would have some common elements -- more common elements amongst those. So that's really an evolutionary thing, but it is a step into this platform approach for this technology.

And is that platform applicable to billboards? And if so, is the new orders that are coming in dependent upon you getting that out the door?

So, in the US, billboards tend to be very large, and along the highways. And for the larger billboards, the through-hole package as it's called, the lamp-style package for LEDs is still preferred. And one of the reasons for that, one of the big reasons for that, in addition to the fact that it's viewed from a distance and it's not -- your eye can blend the colors very well anyway, without having them all in one package, is that energy usage is a very important parameter for the billboard companies. Because these displays are, if not 24/7, they are at least say, 18 hours a day, seven days a week. And so, with the lamp package, there's a -- the light can be focused straight -- more to a narrower viewing cone which is where the audience is on the highway.

Right.

You don't need the wide viewing angle like you need in a stadium. So that still is -- for the large billboards in the US, the lamp-style package is still the preferred -- and the superior -- technology. When we get into the international, there tends to be a more smaller outdoor advertising displays, which you could think of as small billboards, but they don't typically call them billboards over there, in international environments. So, in those cases, because the overall size is smaller, to get the resolution, the number of dots in that space, you need to get the dots closer together. And so, I think that is, as I mentioned in the international out-of-home advertising, that's where we see the real thrust here for the surface mount.

Great. That was helpful. Thank you.

Thank you.

Thank you. And our next question is a follow-up from the line of Morris Ajzenman from Griffin Securities.

Hi. Bill, Jim, when do you think you'll have enough time and confidence, where you can lay out a road map for us to look at this strategy you have to drive operating margins, and what you can do to reduce costs? I understand that it's kind of early, you laying this out for us, but do you think you'll be able to, in the next quarter, to still be able to give us a road map that we could kind of look along, with what you ultimately target to get to?

Certainly, we will give an update on that, in the next, in this quarter. And we will try to give more visibility, certainly on what we have accomplished, and what we have focused on in terms of cost reduction, and understand the -- your interest in having a -- more visibility there.

And is this something that you internally, or you've hired outside consultants? Or what's the process on how this works out?

We did have some consulting assistance in the development of the process. At this point, it's internally driven.

Okay. And one last question, and I'll stop there. This target of 10% operating margins, several years down the road, I guess two or three years whatever that time frame means, what target can we get gross profit margins to, assuming the competitive price, competitiveness of the industry remains where it is now -- hopefully it doesn't intensify -- but assuming it stays at the current level, to get to 10% operating margin, where will gross profit margin be?

Well, we're still working out the details of this, but we believe that if pricing -- if the pricing environment stays the way it is, that we can get gross profit, through internal efficiencies, up 26%, 27% over the next few years. And that is internal initiatives; to the extent pricing gets tougher or weakens -- or improves I should say, they can drive higher than that. So, I think our general view is it's going to get north of 26%, 27%.

Thank you. That helps.

Thank you, and that concludes our question and answer session for today. I would like to turn the conference back to Jim Morgan for any closing remarks.

Well, thank you for being with us this morning. Thanks for the questions, gentlemen, and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.