Daktronics Inc (DAKT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics first-quarter 2014 financial results conference call. As a reminder, this conference is being recorded today, Tuesday, August 20, 2013, and is available on the Company's website at www.daktronics.com.

I would now like to turn the conference over to Ms. Sheila Mae Anderson, Chief Financial Officer at Daktronics for some introductory remarks, please go ahead, Sheila.

Thank you. Good morning, everyone. Thank you for participating in our first-quarter earnings conference call.

I would like to review our disclosure cautioning investors and participants that in addition to statements of historical fact, we will be discussing forward-looking statements reflecting our expectations and plans about our future financial performance and future business opportunities. All forward-looking statements involve risk and uncertainties which may be out of our control, and may cause actual results to differ materially. Such risks include changes in economic conditions, changes in competitive and market landscape, management of growth, timing and magnitude of future contracts, fluctuations of margin, introduction of new product and technology and other important factors as noted and detailed in our 10-K and 10-Q SEC filings.

At this time, I would like to introduce Jim Morgan, our President and CEO for a few comments.

Thanks, Sheila. Good morning, everyone. Thank you for joining us this morning. In addition to Sheila and myself, we have Reece Kurtenbach with us this morning. As many of you know, Reece will be taking over as CEO on September 1. And since Reece will be leading the charge here shortly, I will be turning most of this call over to him and Sheila.

But before I do that, just a couple quick comments on the quarter. Overall, it was a good quarter. Orders were strong, and we have started with a healthy backlog. Since we had plenty of work to do, our people did a great job of executing, serving our customers, and meeting critical and sometimes challenging deadlines. And so, I want to take this opportunity, opportunity to thank all of our employees, and our suppliers, and our service partners for their great efforts and their commitment in serving our customers well.

With that, I will turn it over to Reece.

Thanks, Jim. Good morning, everyone.

Overall, we were pleased with orders and revenue for the quarter. Order volume in our first quarter of 2014 was the second-highest we had ever achieved, only exceeded by Q1 of last year. Also, our revenues for the quarter were up year-over-year. And as Jim said, all of our people involved in delivering products and services to our customers executed well.

While our revenue was higher, gross profit did decrease. Some of this was driven by the mix of large projects we worked in the quarter, and the fact that our warranty is still higher than we would like. Our goal is to continue to reduce warranty expense, and drive an increase in our overall gross profit. As you may know, our first-quarter is often busy with sports projects, and this year we worked on more than 20 video systems for colleges and universities. May be of interest, there were three of these to football stadiums in the Big Ten, Iowa, Wisconsin and Illinois. These teams are good examples of following the trend of replacing their systems at about 10 years with larger higher resolution displays. Denver has also been a hot spot, with two new systems from Daktronics. The Pepsi Center and the Broncos will both have a new look for this fall.

As we mentioned in our news release, orders in billboard, and our large video markets in commercial were lower than expected in Q1. However, overall activity in these markets is still strong, and we really believe this difference is due to natural variability and the timing of orders. [One area of the] commercial business has continued to be strong, as regional venues and shopping malls. These customers are installing what we call hanging banners in the walking areas, as well as large spectaculars on the exterior facades. We have had such recent installations in Chicago, Orlando, Time Square and elsewhere.

Our markets are still very dynamic and competitive, and we believe continued investment in our products, services and processes will be essential for our long-term success. We continue to invest at least 4% of our revenue in product development, mainly in the displays and control systems. One of our large ongoing developments was a new design for surface-mount LED product on a 15-millimeter pitch that we released this summer. This product incorporates a number of quality and visual improvements, and we have been very pleased with the early success of this design. In the remainder of the year, we will release higher resolution derivatives based on this platform, as is consistent with our product strategy to leverage our investment through the development of product platforms.

Products are certainly important, as are the systems and processes that support our sales, production and service activities. We have made significant improvements in previous quarters in this process improvement, and have planned a number of critical projects in these areas that we believe will allow us to better serve our customers with less waste in future quarters. We feel that this is important, as we focus on our internal goals of improving overall operating margin.

With that, I will turn it over to Sheila for her comments.

Thank you, Reece.

[Builds] increase 4.4% from the first quarter of fiscal 2013 at 11.4%, compared to the fourth quarter of fiscal '13. As Reece mentioned, this increase was driven by our [Live Events] business unit as we manufactured and installed a number of college and university systems and other professional sporting venue systems during the quarter. In addition, sales in our international business unit grew. Sales declined in our commercial business unit, due to the timing of orders and related timing differences of the revenue recognition as compared to last year. Transportation sales decreased from the first quarter of fiscal 2013, as last year we were finishing up a couple of larger procurement contracts during the same period. We continue to estimate a modest growth rate for sales in fiscal 2014. We continue to see interest from our customers in large projects in the marketplace in the Live Events, international commercial business areas.

With a 2% increase in backlog and our current project schedule, we estimate revenues to trend up modestly as compared to last year for the second quarter. Gross profit for the first quarter was 25.6%, compared to 22.6% in the fourth quarter, and 27.4% in the first quarter of last year. We had anticipated an increase in gross margin percent from the fourth quarter, because of the sales mix, and the volume, and utilization of our fixed cost infrastructure. We also had anticipated lower warranty costs as a percentage of sales. Our sales mix impacts each quarter's gross profit. For example, during the first quarter of 2014, we did have one contract that impacted our margins negatively by approximately 0.7%. And as you will remember in fiscal 2013 last year, we had an uptick on a couple of projects that help increase gross profit by over 1%. So mix was a big factor in our gross profit mix.

Warranty as a percent of sales, as comparable first quarter to first quarter was approximately 3.4%. As Reece mentioned, that is one area we continue to work on to reduce. It did decrease from the fourth quarter of fiscal 2013, which was at 5.6%. Looking ahead, gross profit for the second-quarter is expected to be up from our first-quarter, but less than our second-quarter of last year. Operating expenses were 19.4% of sales, as compared to 19.3% of sales quarter-over-quarter for the first-quarter. In dollars, operating expenses increased 4%, some of which is due to costs which we don't expect to recur at the same level in the remaining quarters of this year. We are projecting operating expenses for the next few quarters to be slightly less than our first-quarter.

We continued to make necessary investments in product development, process improvements in our IT infrastructure, where managing costs will allow us to continue to grow profitably. For fiscal -- total fiscal 2014, we predict a slight increase in operating expenses and dollars to support the business, but are working to hold these expenses flat as a percentage of total sales for the year. Our tax rate for the quarter was 32.2%, compared to 38% -- 38.6% last year. This lower rate is reflective of the benefits we received for the Research and Development credit which had not been reinstated last year at the same time. We are forecasting our effective tax rate for the full fiscal 2014 to be approximately 34% to 35%. However, this rate can fluctuate depending on which tax jurisdiction sales are procured in around the world.

We had some notable changes in our balance sheet this quarter. At the end of July, we had $46.7 million in cash and investments, which is down $18 million from April. This reduction in cash since April is partially due to $5.1 million of dividend payments during the quarter. In addition, we completed the acquisition of our OPEN Out of Home business in Belgium, and used approximately $5 million of cash to make the down payment and payoff their debt after closing. Accounts receivable and costs and profits in excess of billings increased, which is attributable to the number of large value contracts in process, that were being installed during and towards the end of our first-quarter, which created an increase in these balances. These balances can be quite variable with our large project business. We anticipate collection of these receivables during the second quarter.

Inventory levels are up from the end of this year, and 5% from last -- from July of last year. This is to both support our backlog going into the second quarter, and it also includes $2 million of inventory held at our new Belgium (inaudible) factory. Finally, we invested $4 million into our capital investments during the quarter. And we estimate our total capital investments for the year to total $16 million. Our plan is to invest in manufacturing equipment and tooling for our new outdoor product platforms, manufacturing equipment to enhance and improve production capabilities, and in our information technology infrastructure, to keep it reliable and optimized.

With that, I will turn the call back to Reece for additional comments.

Thanks, Sheila.

Looking forward at the business, we are still excited about the third-party advertising business worldwide, with the continued shift to digital as prices drop. As we discussed on the last call, we feel the acquisition of OPEN Out of Home in Belgium positions us to provide a more complete set of cost-effective and reliable solutions for this market. We continue to install projects in Europe, the Middle East, Africa, North and South America, as well as Australia. And in general, we believe there is a lot of growth overall in our international business. In our commercial business, we see orders in billboard picking up as we move through the calendar year, and we have a strong pipeline in the large projects area of this business as well. We are expecting modest growth in our commercial business in FY 2014.

In Live Events, we continue to see ongoing interest from venues at all levels to increase the size and capability of their display systems. This trend drives interest in video for our high school sports business as well. However, we saw order and revenue decline in this market in the year-over-year comparison. We believe this is due to timing of large video systems and not a long-term trend, and we see continued growth opportunity in both of these markets. Our transportation business is still strong, even though the year-over-year comparison will be skewed due to the large project that we delivered in FY 2013. Because of this, we expect revenues in transportation to be down year-over-year. Again, this is not an indication of weakness in that market, but that we had a great year in FY 2013.

Overall, as a Company we are optimistic about the future. We are the world leader in many of our markets. We have great products, great people, and we have made great progress in reducing costs, through eliminating waste and improving our processes, and these efforts are still ongoing. We feel we are positioned well to continue to achieve some top line growth, and we will maintain our focus on cost reduction and bottom line performance as we go forward.

With that, I would ask the operator to open it up for questions.

(Operator Instructions)

Our first question comes from the line of Jim Ricchiuti from Needham & Company. Your question please?

Hi, thank you. Good morning. First off, Jim, I wish you the best of luck.

Thanks, Jim. I appreciate it.

And just -- if I may, a couple of questions. First off, I wonder if you could talk a little bit about the pricing environment that you are seeing in some of the major markets?

So we continue to have competitive pressure worldwide. And the larger, more visible projects tend to have greater numbers of people at the table, and see that -- a hotter competitive environment. If I look at this year compared to other years, there hasn't been a significant shift, so to speak. So I think that the pricing or the competitive environment is similar this year as to last year.

Okay. Reece, you gave some good color on a couple of segments of the business, in terms of what you are expecting. I may have missed it. But did you give any -- was there any commentary with respect to what you anticipate for the Live Events business in fiscal '14?

As we have discussed, we see this interest in video in these venues that have systems that are between 8 and 12 years old, they will replace those systems. And we have yet to see somebody say we want something smaller and less. They want something bigger, and competitive in the environment that they are in. And that is what we see going on in live events, continued growth in that area, as interest in high-resolution video continues to be maintained.

So there is potential you think for growth, year-over-year in live events versus last year?

Yes.

Okay. And education? Is that -- it looks like that could be a more challenging year for you? Do you -- is that -- do you see that business as being flat to up? Or what is your sense on that part of the business?

And so, what we would call the schools are HSPR. There is two aspects of that business. There is the, in the bowl, the sport ap business, and then there is outside the, the bricks and mortar, to communicate the traffic. Really, the growth in that HSPR business is in the bowl, as they invest in video in a high school or a small college venue. And we see that that is still a growing area, but it is really based on timing of when they choose to invest in those projects. How we end up the year, we don't see as much top end in HSPR schools market, as we do in live events.

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

Thank you. Our next question comes from the line of Morris Ajzenman from Griffin Securities. Your question please?

Morning.

Good morning, Morris.

Just curious, the previous question, the Live Events being up for the year, fiscal '14 versus fiscal '13. If you take out the first quarter, we clearly had a healthy rebound. Still confident that we could have good trends for the remaining three quarters, top line year-over-year live events?

Yes. We still have a large pipeline of projects in our live events business, and we believe there is growth in that business year-over-year.

Okay. And on the commercial side, I think you stated you still see modest growth in fiscal '14. But then -- you gave further color on visual billboards that you see some improvement in the remaining three quarters of the year. I know we spoke on a previous call, this year, looking at overall I think flattish year, you were previously -- correct me if I am wrong on that -- a flattish year in digital billboards. Is that changing, a little more to the positive, looking out the remainder of the year in digital billboards?

Yes. Maybe that is the difference between calendar and fiscal year. We see that the Billboard business invests on a calendar year. And we see it strong for the rest of this calendar year. And then we will continue to monitor going into what is calendar FY '14.

Okay. And just, I want to clarify I think, Sheila, I think you said G&A will be slightly down from the first quarter? I mean, are you talking as a percent of sales? Or are you talking about total dollars?

For dollars, for the total operating expense pool, we are predicting the next three quarters to be down in dollars for the next -- for the rest of the year.

Okay. And last question, again, just -- it wasn't very clear on my line -- end here. Gross margins, did you say up sequentially from the first quarter to the second quarter, but down year-over-year?

We will be -- we are predicting that we will be up from the first quarter for gross margins, but we may not quite get to where we were at, last quarter Q.

Last year second quarter?

Last year second quarter.

Okay. I missed that. Thank you. I will get back in the queue.

(Operator Instructions)

Our next question comes from the line of Steve Altebrando from Sidoti & Company. Your question please?

How should we think about gross margin for the full year, particularly do you still expect warranty to be a bit of an issue? And if the mix in business -- I guess, you will probably see with live events, I suspect being a larger part, whether that plays -- has an impact on gross margin?

We do see gross margin, and are predicting similar levels to slightly higher, from the last full fiscal year.

Okay. And, I am sorry --

As I mentioned earlier, it does -- like you also pointed out, it does matter that sales mix, and large projects can sway that.

Okay. But expecting it could be up year-over-year?

Just slightly, slightly up.

Okay. And then do you have the Billboard revenue for the quarter? And that's it.

Yes. Billboard revenue for the quarter was $8.7 million.

Okay. Thank you.

Thank you. And our next question comes from the line of Dick Ryan from Dougherty. Your question please?

Yes, thank you. Say, on the -- in the Billboard space, Reece, have we seen any replacement discussions there? When do you think that cycle can start?

That cycle has begun already. Some of the first-quarter business that Sheila referenced was for replacement displays.

Did you give a percentage how much of that was replacement? I didn't catch this.

We did not, and I apologize. I don't think we have that information here.

Okay.

It is a lifetime curve. And so, if you would go back in time, the Billboard transition to digital was just beginning back 10 years ago. So it's not as big a volume as our new business.

Is the replacement business coming from a couple of the customers? Or is that centered on one? How would you describe that pipeline?

It's really a function of the lifetime of the product, that 7 to 10 years. And so, it comes from anybody who invested back at that time.

So -- (Multiple Speakers).

Back at that time, are the ones who are buying the most replacement. So they are tied together, as we said.

Yes. Yes. You talked about some excitement in the third-party advertising. Was there contribution from OPEN Out-of-Home Solutions in the quarter, and what -- can you give a little more color on that pipeline?

From the quarterly operating results, it was -- OPEN had less than $2 million of sales for the quarter. So not a large or material impact -- on our pipeline and outlook.

Yes, it has been helpful to have the OPEN Out-of-Home Solutions as part of our product mix. It gets us into some good conversations with third-party advertising companies, especially those outside of North America.

Okay. Thank you.

Thank you. Our next question is a follow-up question from the line of Morris Ajzenman from Griffin Securities. Your question please?

Yes, the digital Billboard, $8.7 million of revenues in this current quarter. What was that versus the previous quarter and the quarter of last year?

So last year, same quarter, we were at $11.7 million, and quarter four, we were at nearly $10 million in revenue.

Okay. And just a, one last follow-up on this warranty as percent of sales. Clearly improvement from the fourth quarter, 5.6% to 3.4% currently. I think you, [open] the target of anywhere between 1.5% and 2%. Again, correct me if I am wrong on that number. And what do you think that can be, as we exit fiscal '14 as a percent of sales?

I think you have listed our target correctly. But I would say, that we wouldn't get to that point in FY 2014.

I am just trying to get some color. Do you expect to see, maybe not a 2%, but a material improvement to [2.4]%? Could it be 2.5% or 3% or so as we exit the year? Just to get some color on the run rate or improvement?

I would say that, to get below 3% would be a good target.

Okay. Thank you.

Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to management for any further remarks.

Yes, this is Jim Morgan again. Thanks, everyone, for your questions. As this is my last conference call as CEO, I would like to thank all those in the investment and financial world for your interest in and support of Daktronics over the years. It has been a privilege to work with all of you. We have been working through the transition here the past six months, and the planning of the transition, and moving some leadership around, and preparing for Reece to succeed me. And Reece is ready to step into the role, and I know he will do a great job. So I am looking forward to a change of pace here for myself.

And just a reminder. Tonight is our annual shareholder meeting at 7 o'clock -- I am sorry, tomorrow -- jumped the [clog] there. Just tomorrow at 7 o'clock, and with an open house prior to the shareholder meeting at 5 o'clock. So we hope to see some of you there. And thanks again for being with us this morning. Reece, do you need any more comments?

Jim, it has been a pleasure working with you for the last 20 some years, and I hope you don't fail retirement. I hope you are successful in that goal. (Multiple Speakers). Everybody in the line, I look forward to talking to you in future calls.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.