Daktronics Inc (DAKT) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics first-quarter fiscal year 2013 earnings results conference call. As a reminder, this call is being recorded today, Tuesday, August 21, 2012. And is available on the Company's website at www.daktronics.com. 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. Good morning. We appreciate everyone's participation in our first-quarter conference call. We would like to first offer our forward-looking disclosure statement. We caution investors and participants that, in addition to 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 economic and market conditions, management of growth, timing and magnitude of future orders, and other risks as mentioned during this call, 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 out of the way, I'll turn it over to Jim Morgan, our Chief Executive Officer, for some comments. After which I will follow and then we will open it up for some questions.

Good morning, everyone. Thanks for joining us. Our business operates somewhat like a five-cylinder engine, with each business unit being one of the cylinders. When we are hitting on all cylinders, we run really well. And we did that this quarter, not only in sales but in orders, as well, and turned in some nice results. So hats off to all of our employees for their excellent work through the quarter. On the other hand, with the large contract component of some of our businesses, we do occasionally have a quarter where one of the business units is not so strong. And this is where the diversification of our business into the different market niches helps provide a more stable business overall over the long term.

As mentioned last quarter, we went into this quarter with a little pent-up demand in some areas. There were some orders that we were expecting last quarter that got delayed and ended up in this first quarter. Likewise, we had some inventory built in the fourth quarter that converted to sales quickly when orders came in the first quarter. So, to some degree, we set the stage for the good first quarter in the fourth quarter of last year. This is an example of how our business tends to be a bit lumpy, as well as seasonal. Our challenge on the operations side is to deal with this variability. And our people that fulfill orders for customers did a great job, not only during this quarter, but in planning and preparing last quarter to execute this quarter. Again, the fact that we had strong orders and ended with a strong backlog sets us up very well for a strong second quarter.

Our factories are all very busy at this time, which is always a good indication. This quarter does tend to be our busiest quarter of the year. And we are prepared to execute well in the quarter and deliver against our backlog in meeting customers' needs. Although we did have a nice improvement for the quarter, and we were very pleased with the results, we have set a three-year strategic goal for ourself to significantly improve our operating margin. Our strategic plan includes continuing to grow the top line, along with reduction of cost of sales as a percent of sales, and continued focus on SG&A containment as we grow the top line.

I am going to leave my comments at that for now. And we look forward to responding to your questions after Bill gives a little more color on the numbers.

Thanks, Jim. As Jim noted, orders and net sales are stronger than expected across our business units. Reaching the $132 million top line was driven primarily by better-than-expected results in our Live Events and Transportation business units. Live Events revenue was boosted by orders booked during the quarter that generated sales in the quarter. You can see by the comparisons to last, year we had a relatively weak first quarter last year on orders in Live Events, but made up for it in the second quarter. Typically, our first-quarter order bookings in Live Events are higher than in the second quarter. So we're back to this year what is a more typical state. As Jim mentioned, our strong first-quarter order bookings puts us in a good position for Q2, which should drive sales for the second quarter to levels higher than the second quarter of last fiscal year, which was $136 million.

In our Transportation business, we had an unusual gain of more than $1.7 million in net sales and gross profit, as we adjusted cost estimates to complete orders related to a large procurement contract that we had booked in a previous year. This change was primarily due to reduction of previous estimates for rework caused by a component issue from a supplier. Related to our billboard business, we had a very successful quarter for orders at over $18 million. This level is not a run rate. It's more about the volatility of orders in that niche. There were some reports in the public comments by one of the billboard companies on their digital performance and the potential to get more selective on their deployment of digital. Our view remains the same, that we won't see much growth this year in the billboard niche. And when we start to get to the replacement cycle is when we can see some additional growth. Keep in mind that this is a very limited market, driven by a limited customer base and that outlook can change quickly.

We also nearly completed the rollout of a round of replacement displays in our national account portion of the Commercial business unit during the quarter, which added approximately $4.5 million in sales. At this point, we expect a delay before another round, which will cause a sequential decline in Q2 net sales in that portion of the Commercial business unit. Our gross profit percentage of more than 27% was driven by a number of factors, including the adjustment on the transportation project I mentioned, improvements on the Live Events margins, as mentioned, the higher level of net sales, good execution in our factories, and our efforts in managing projects and controlling our costs at all levels.

We mentioned in the news release and earlier the Live Events business, it's noteworthy that the strong order bookings for the quarter did not include any contracts over $4 million. We had four projects in the $3 million-plus range, a couple in the $2 million to $3 million, and the remaining of the orders were in the sub $2 million range. This speaks well for the breadth and depth of the market and also for the effectiveness of our sales forecast. That lower level, the smaller order sizes typically helps drive our gross profit margins as we get higher margins on those small contracts. The competitive market, however, remains aggressive and we hesitate to suggest that there is a market trend here. We still have significant competition on the large orders in Live Events and there are just not that many for the quarter. So that should help us, though, moving into the second quarter.

Finally, at the higher sales level we gained on our manufacturing costs through improved leverage. Looking ahead, we are a little more optimistic on gross profit, although we don't expect to match the Q1 level. But we expect to beat the level of 23% that we had in Q2 a year ago, due to our efforts with cost containment and reduction and our focus on contract execution.

A few comments on operating expenses. We are generally in cost-containment mode, with some limited reductions being planned for fiscal '13 as a whole. We expect a decline in G&A in fiscal '13 versus fiscal '12 as a whole. We could see some increases in product development costs for fiscal '13 compared to '12, but that's more of a factor of how we allocate engineering costs between product development and contract work. Selling expense for the year as a whole will be flat to up compared to 2012. Regarding cash, our free cash flow was $15 million, up from just under $9 million a year ago for the first quarter. We've adjusted our CapEx estimate for the year down to $14 million. Previous statements we were estimating closer to $16 million. Our investments will be primarily oriented to production capability for new product processes and maintenance.

With that we'll open up the call for questions.

(Operator Instructions)

Steve Altebrando at Sidoti & Company.

I think you touched on this, Bill. But quantifying the one-time upside from the contract on the gross margin, was it 130 basis points essentially?

$1.7 million. So yes.

Okay. If you could provide any color on the sustainability of even, say, it was the 26% margin looking out for the balance of the year. Particularly in context with the 10% operating margin target that you guys have put out for three years, which you're not that far from hitting now, it looks like.

Steve, what I said earlier on gross profit will exceed the 23%, you back down, as you mentioned, from 27% to 26%, roughly. We're in that range. The most important thing that we can do in the near term is to execute on our contracts and drive margin in that area. And this quarter we were very successful at that. If we can continue to do that, and control the rest of our cost infrastructure, we will be in good shape moving gross profit. How it actually turns out for Q2 it's tough to say at this point. We're certainly going in the right direction, though.

Right., okay. And I know off of a 23% baseline gross margin, I think you guys thought there'd be upside from three key factors -- services, sourcing and warranty. Where are you making the most progress in this quarter? Or is it more the volume factor?

I think this past quarter certainly the volume helped a lot. If you look sequentially, our manufacturing infrastructure cost stayed relatively flat quarter to quarter. So the increase in sales did not add manufacturing expenses, which is a testament to what we've done in that area. So, from a near-term. And then the other thing I should mention is we did well on contracts this quarter. We did not have messes like we experienced in Q4.

Our goal -- it's more about those things getting control than the longer-term things that we've talked about on sourcing. Sourcing will be a long-term thing to drive margin. Warranty, we have made progress. We have a track record of improvement in that area. So those things you mentioned were more longer term. Short-term things really helped us this last quarter.

Okay, that's helpful. And then just last one. Do you have the billboard revenue for the quarter?

Billboard revenue for the quarter was roughly $13 million-plus. (inaudible)

Jim Ricchiuti of Needham & Company.

Congratulations on the quarter. The question I had is with respect to backlog, Bill. Can you talk a little bit about the overall profitability of that backlog? How does it look versus recent quarters?

I think overall it's a little bit better because we don't have any exceptionally large contracts in there other than this airport contract. And so, generally, I think it looks a little bit better than it did, say, a quarter or two ago. Now we have to execute on that. But with the smaller orders in Live Events, which is why we emphasize that, hopefully we're in good shape to have a good second quarter.

And just looking at the orders that you have booked in the quarter, pretty strong across the board. Would you expect revenues to be up in Q2 year-over-year in each of the five major segments?

Jim, I'd have to get back to you on each segment individually to go through all five. I don't have that.

But just given the strength that you saw, it looks like it was fairly broad based. So are you seeing any signs of any pullback from any customers? You mentioned the national accounts business was a little bit slower. Where are you seeing any signs, if any, from cautiousness just as a result of the economy?

Jim, this is Jim Morgan. I would say we are not seeing any signs of pullback. To answer your question, or respond to your comment, certainly the orders were strong across the board. So in general we are expecting a strong second quarter in terms of revenue on all fronts. The only business unit that was down a little bit for orders in the quarter, even though they were up nicely on sales, was Commercial. And orders are more volatile than sales. You understand that.

So generally that would be the only thing. As Bill mentioned, maybe a check up, out, just see how things compare quarter to quarter. Things can be a little bit noisy that way. But, in general, we are expecting a strong quarter on all fronts in second quarter at the top line.

Okay. And one final question. How does the pipeline look in Live Events as you look out over the next one to two quarters, just in terms of the visibility in the business, potential activity on maybe larger contracts? Bill, I think you mentioned you don't see many large deals. But just how would you characterize the pipeline of business in that area?

I will respond to that again. This is Jim. Certainly we have a good pipeline out there. There is some question as to what's all going to happen in baseball and who is going to pull the trigger for some upgrades in that area. We'll know more about that here in the next few months, who is really going to go forward on that. But that's one of the unknowns there. But, generally, we're seeing a strong pipeline out there.

And I might add also, in terms of International, International and Live Events tend to be the two that focus the most on large contracts and, therefore, can be a little more volatile for us. Our International pipeline also has some nice projects that are queued up there. So we're optimistic on both of those fronts.

Jim, just as a follow-up, your International orders were particularly strong in the quarter. So you feel pretty good about the outlook for that business in the near term. Can you talk a little bit about what contributed to the strength in Q1 in International?

The one underlying, I would say, maybe, if there is a trend there, is that we're seeing increased interest in the third-party advertising segment of the business internationally. And certainly overall Commercial is the more consistent performer there as opposed to the sports and entertainment side of things. And we do see that growing. Again, the biggest part of Commercial is really the third-party advertising part of that. So, yes, we're seeing some nice outlook there.

Jim, if I could get back to your question. I said I didn't have the data. While Jim was answering, I did gather some data points. Clearly, with the orders -- and this is probably a good question you brought up -- our Schools and Theaters business unit in Q2 should be up, with how that market's been. That looks like it's in good shape. Transportation is certainly up because of the airport order. And as you were just talking, International is looking fairly strong for Q2. The other two are a little bit tougher to predict. And that's the biggest part of our business. So whether or not those turn out exceeding last year or not is yet to be determined.

Okay. That's very helpful. Thanks very much, guys.

Dick Ryan, Dougherty & Company.

With respect to replacement cycles, you mentioned it briefly, and for billboards, and I think you also mentioned it in national accounts, what is driving the replacement cycle for national accounts? And has the replacement cycle for billboards, are you starting to see that kick in? Or where should we start seeing that contribution come into play?

Yes, Dick, we are seeing -- it's just a fact that some of the first product that was put out there as part of some of their national accounts programs are reaching end of life. They are getting to that 10-year point. And so we did have as we mentioned, there is a nice little chunk of business of a replacement cycle for one of our customers that we saw most of the revenue in Q1. They are regrouping and determining how they want to move forward on the next round of that, so to speak. So we're saying in this quarter, in Q2, we are not going to see, in that particular upgrade, a lot of activity. But we expect that there will be activity in the future because there are many hundreds of these displays out there. So that's just one example. Again, national accounts, we're talking about our Galaxy product, which is smaller displays that go in front of a retail store. That's what I'm talking about there.

And then if we go to the billboards, the larger roadside billboard third-party advertising business, there again the first units that we put out in the field are getting to the end of life. Now, those tend to be more in that seven or eight year range. But, again, these are full color, they run 24/7. So they are getting to that point where it's time to consider the replacement. So exactly how fast that will come along is to be determined. But we are at the beginning of it at this point. And it's just a matter of how fast the customer decides to ramp up and proceed with that.

Is competition as fierce when you go for the replacement business as it is for a new project going forward? Or is there some legacy relationship there that improves the batting average, if you will?

Two parts to that answer. One is certainly we have relationships with our customers. And if we are working to replace existing installations of our own, that certainly gives us a nice position to talk to the customer about that. In the case of the national accounts business that we just did a lot of replacement on this last quarter, a lot of that was actually competitor's product and that competitor is no longer really active in the business. The other factor, if you ask our customers in the third-party advertising digital billboard business, they will say that a big consideration on this is how cost effective we can be in doing that so that it gives them the ROI they are looking for. So I think that's the other part of it. And so we're in discussions with them how we can do that most cost effectively so that it works for them, as well.

On the school business, you had set up a division to help show that this can be supported, these displays can be supported with advertising dollars. Is that helping that segment? Or are you seeing any easing in the budget problems that, that sector has had?

You're talking about high schools in particular, I assume -- right?

Yes.

The displays, score boards for high schools, for the most part, have never really been funded out of the school budgets, the state budgets that go to schools. Almost all of the funding over the years has been from other sources, be it booster clubs or some combination of advertising. We have a very small group at Daktronics that helps as a catalyst for these schools, to help them go about setting up an advertising or sponsorship programs to help facilitate those. So that is a factor. It's a relatively small group at Daktronics, but they are a catalyst in helping the business in that niche.

Okay. Thank you.

Morris Ajzenman from Griffin Securities.

You touched on Live Events -- professional sports, baseball, uncertainty of the timing of quarter two. Any color you can give us on the other major professional sports, whether it's football, basketball, hockey? Any color how things might unfold over the next couple of quarters there?

Morris, the upcoming opportunity is going to be now in professional baseball that our salespeople will start moving towards that. There are certainly a number of opportunities out there in baseball. But it's too early to have much visibility at all in terms of whether the deals come to market in the end and whether we're successful. But there are a number of transactions out there. It's just too early to know where they will go.

Any other professional sports that's out there that is an opportunity at this point?

Yes. In some of the, in professional hockey, there may be a little bit of question of how things are going to go forward as far as some of the labor discussions. Other than that, nothing in particular stands out. There is the general upgrade opportunities that come along that are there. We are just completing the installation for the new Brooklyn Net arena out in New York. And there is no other major facilities, new construction like that in the very near horizon.

Okay. Switching gears. A question earlier -- Bill, this question to you on a warranty. You spoke in the past about how getting that under control can really help grow the gross margins going forward. You touched on it but didn't give any specificity. Is there anything that's really helping margins at this point, or can help margins by getting a better handle on the warranty?

Getting a better handle on the warranty certainly helps margins. That is one area where, over the last 12-plus months we have demonstrated success at that. Now, this quarter our warranty was just over 3%. We want to get it down to 2%. And one quarter is not a trend. We had one project in particular that had some issues. But I think with everything we're doing on product development, and how we're testing products before they go to market, how we're going about the design and all of that, I think we've proven we're on the right track on our warranty expense. It's a matter of just getting through the products from the past and moving on with the current products. I think we'll find we'll get there sooner rather than later.

Okay. Last question. Again just switching. Free cash flow -- first quarter $15 million. Any conjecture, any feel for what it could be for the full year versus last year at this point?

When you look at a point in time, a snapshot, it's always hard to know for the full year. But we're focused on this. Our working capital can be volatile. For example, at the end of this quarter we had $5 million tied up with a procurement contract, as an example, that winds out this next quarter. So there is a wide range that it's hard to even give an estimate for the year. But I think with everything we're doing in terms of cost containment and management of CapEx and working capital, I think we'll be in good shape. But I hesitate to throw out a number. It depends on what contracts we're working on. It could swing a lot.

Thank you.

Mark Henneman of Mairs and Power.

I was wondering if I could get some additional color on the high schools business. You mentioned some states this time. I was wondering, did you do that because you are seeing extraordinarily large individual projects, or are you seeing multiple projects from those states?

The reason for mentioning that is that the way we'd seen the business grow in high schools is that when a school in a conference decides -- the first school decides to upgrade to a video board of whatever size, that sets a new standard in that area. And so the fact that we see this as kind of a seed being planted in those other states that can grow. So that's why we see that as significant. It's a reference point. In fact, we are expecting our first video display to go into the Twin Cities here in the not-too-distant future, which will be the first one up there.

Would you characterize the level of activity as rising, then, within the high school area, beyond just what you have already booked in the backlog?

Again, it's seasonal, of course. So it's a year-over-year type of thing in terms of rising. But in general we see it rising, yes. And to us it's encouraging to see that we're seeing it in more states. A few years ago we had a tremendous amount of activity but it was almost all in Texas. And so it's good to see that, as we expected, that this would become more common. And of course our product is very cost effective. So these orders, they're not $1million orders. A $200,000 order in a high school market is a very nice size order for us, as an example.

Okay. So the overall size of the high school, individual contracts, really isn't rising dramatically here?

I think it's maybe not dramatically, but I would say we see it as a steady uptick over time.

Very good. Thank you.

Robert Hoffman of Princeton OPportunity Partners.

You mentioned a little bit about a project, one of the reasons why the gross margins are better is because of the lack of the real large orders, with most of the orders or all of the orders being under $4 million. Does that tell us anything about how -- is it more that the large market is just not there, or are you being more price sensitive? And a follow-on to that is, do you need those large orders to get the small ones? Meaning, how much of your business is driven by a school outside of Philadelphia wants to have the same manufacturer as the Philly stadium has?

Certainly the professional sports market is very important to us. I think what we're seeing is that -- and we have always said that generally the larger the project, the tighter the gross profit margin typically because the bidding, the competition, gets very, just more keen on those really big projects. Some of our competitors don't have that big of a sales force. So that's all they can focus on. So that's, they make it or break it on the big ones. So they tend to be competitive. We have continued to be successful in that market. And certainly our salespeople in the high school level certainly do reference the professional sports facilities in their area as certainly a selling point. So they're important. But in general the margins on the large projects tend to be a little tighter.

Do you have any feedback on the large projects that you do win? Are you winning on price? Will you be able to find out that you bid $7.3 million and somebody else bid $7.1 million? Maybe it's not that big of a difference, but $7.25 million. And you got the business because of your reputation or your service or the sales effort?

We are recognized as being a leader in the industry and we're the safe choice for customers. Typically, that's what our customers view us. So then it's a question of how much. If a competitor comes in with a really low price, then how much is a customer willing to pay for a differential. That's really what it comes down to. And that varies by customer, it varies by situation, what the exact product is that's going into the particular project. So there's a lot of variety in how these things come together and who the players are.

My question is, especially when you win it, do you know what the other guy's deal or proposal was?

Yes, we typically do understand it afterward. We learn after the fact how the final proposals came in, typically. Because, for the most part, these are open. We have good rapports with the customer and good relationships with them.

Okay. Thank you. Great quarter.

Thank you. And at the moment I am showing no further questions. I would like to turn it back to Jim Morgan for any further remarks.

Thank you, everyone, for being with us this morning. Thanks again to all of the Daktronics employees for the great quarter. And we have our annual meeting tomorrow night here at Daktronics. I invite anyone who can make it to join us here in Brookings. So thanks for being with us. Have a good day.

And again thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.