Daktronics Inc (DAKT) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fiscal year 2014 second quarter earnings results conference call. As a reminder, this conference is being recorded today, Tuesday, November 19, 2013, and is available on the Company's website at www.daktronics.com.

(Operator Instructions)

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

Thank you, Kevin. Good morning, everyone. Thank you for participating in our second quarter and earnings conference call.

I would like to review our disclosures cautioning investors and participants that in addition to statements of historical facts, we will be discussing forward-looking statements reflecting our expectation and plans about our future financial performance and future business opportunities. All forward-looking statements involve risks 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 the competitive and market landscape, management of growth, timing and magnitude of future contracts, fluctuations of margins, the introduction of new products 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 Reece Kurtenbach, our President and CEO, for a few comments.

Thanks, Sheila, and welcome, everyone, to the call.

Overall we had a great second quarter, with quarter-over-quarter increases in both orders and revenues. While our top line was higher, our gross profit as a percent of revenue was lower than last year at this time. Most of the differences in gross profit were due to project mix. We had a higher percentage of large video projects which tend to have a lower margin. However, warranty can still be a challenge, and we remain committed to reducing these expenses over the long-term, by continued investment in reliability and quality in both our product designs and our production processes.

Our business tends to be cyclical, and the summer months are our busiest. Our teams did a great job in handling this peak volume again this year. I would like to thank all of our employees, suppliers, and service partners for their hard work over the last quarter. We were successful due to their efforts. As I said, our business is cyclical, and our third quarter is typically our lowest in revenue. This year our backlog entering the period is slightly higher than last year, and our pipeline continues to be strong. Because of this, we believe we will see year-over-year growth in the second half of fiscal 2014, and we continue to have a positive outlook for the year as a whole.

Increases in order volume were mainly in our large video projects. We had significant orders in both the Sports and Commercial segments worldwide, however, we continue to see strong activity in our Billboard and Transportation businesses as well. We are receiving billboard orders for new locations, as well as refurbishment or replacement of existing displays, and the release of our full-color product for Transportation use is a significant factor in our increases in this business segment. I would once again point out, that the year-over-year comparison for Transportation is down because of a significant order in FY 2013 for the new Tom Bradley Terminal in LA, even though the core business of what we call Transportation continues to grow.

Our markets are still very dynamic and competitive. We believe we will need to keep a strong focus on both product development and process improvement to be successful over the long-term. In product development, we remain focused on leveraging our investment through the creation of product platforms for both display and control systems. As an example, in Q1 we released our new design of 15-millimeter outdoor display system using surface mount LEDs. And in Q2, we shipped our first derivative of this design, a 10-millimeter product, and we are working on higher resolutions as well. On the process side, we continue to follow lean principles of continuous improvement for our production and business processes.

Looking forward, we are seeing increased activity in our major segments of Sports, Commercial, and Transportation business worldwide, and we are optimistic of our future business. Some comments on specific segments, in our Commercial business we see orders in billboard picking up as we move through this calendar year, and we now feel this will extend into calendar 2014. We also have a strong pipeline in large projects area of this business, and we see this area continuing to grow through the fiscal year. Overall, we are expecting modest year-over-year growth in Commercial in our 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. These customers tend to upgrade after about 10 years, and the trend is to install larger systems capable of high-definition video, as well as dynamic digital advertising. The largest systems are for the major league stadiums and arenas in the US, but this drives interest through all other areas of sports and entertainment, both in the US and internationally. This holds true in our high school sports business as well, even though we saw order and revenue decline for this specific market in the year-over-year comparison. We believe this is due to timing of large video systems and not a long-term trend. We see continued growth opportunities in each of these markets.

Our third-party advertising business continues to be strong internationally. We see an increasing shift to digital as technology prices have come down. And the expansion of our product line through the acquisition in Belgium that we completed in Q1 has increased our ability to deliver a complete solution to these customers, and we continue to win orders and install projects worldwide. In general, we believe there is a lot of growth potential in our International business. Our Transportation business is still strong and we see the core business to continue to grow, even though year-over-year comparison will be skewed due to the LAX project mentioned earlier.

Overall, we are optimistic about our future. We continue to focus on our internal goals of improving operating margin. We are the world leader in many of our markets. We have great products, great people, and we continue to make progress in reducing costs through eliminating waste and improving our processes, and this work is 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.

I will turn it over to Sheila.

Thank you, Reece.

We were pleased to reach a level of sales that is the highest for our quarter since our fiscal year 2009. Our plants, processes, service partners and suppliers and people helped us to convert $161 million of sales from the $167 million of backlog we had going into this quarter. This equated to a sales increase of 7.9% for the second quarter of fiscal 2014, as compared to the second quarter of fiscal 2013. International, Commercial, and Live Event sales all increased, primarily due to the increase in the large video project orders we were able to secure, build, and deliver. Transportation and Schools and Theater sales decreased, as compared to the same quarter last year. Transportation sales reduction is the result of approximately $5 million of revenue we realized last year to finish up a procurement contract during the same time frame without a similar type of project this quarter. Schools and Theater sales declined as some large video project displays slipped into calendar 2014, and the projects we won were smaller projects compared to last year, and therefore lower average sales prices were realized per order.

We continue to estimate a modest growth rate overall for fiscal 2014. While our second half has historically been lower in sales and profitability than the first half of the year because of the sports and construction seasonality, we do have more optimism in this year's second half than last year. We continue to see strong interest from our customers in large projects in the marketplace and Live Events, International and Commercial business units as Reece mentioned. With the increase in backlog as compared to last year, the current booked project delivery schedule and potential new orders in the third quarter, which we anticipate some converting into sales, we estimate revenues to trend modestly higher as compared to last year's third quarter. Last year we recognized $111 million of sales during that quarter.

Gross profit in the second quarter was 26.8%, compared to 28.2% of the second quarter of last year. We anticipated a decrease in gross margin percent compared to last year, due to the sales mix we had going into the quarter. As we work on larger $1 million-plus contracts, the margin earned as a percent of sales is lower than our standard video displays and scoring systems. That is due to the competitive environment, as well as the amount of installation work that is included in these type of projects. Last year's second quarter had a higher volume of standard orders, as compared to this year's second quarter where we had more larger contracts worked on. Warranty was 3.3% of sales, which is slightly higher than the same period last year of 3%. We continue to focus on lowering warranty issues, by investing in quality through process improvement, supply-chain management and product design.

Looking ahead, gross profit for the third quarter is expected to be similar to that of the third quarter of last year, and less than the second quarter of this year. During this third quarter, we have a number of holidays, and utilize the plant and infrastructure less, causing the projected decline in margin. Operating expenses were 16% of sales, compared to 17% of sales in the second quarter of fiscal 2013. In dollars, operating expenses increased 1% from last year during the same quarter. We plan to continue to make necessary investments in product development, process improvements and our IT infrastructure, while managing costs to allow us to continue to grow profitably.

For fiscal 2014, we predict a slight increase in operating expenses in dollars to support business growth, but are working to hold expenses flat to down as a percentage of sales for the total year. Our tax rate for the quarter was 34.1%, compared to 35% last year. This lower rate is reflective of the benefits we received from the Research and Development Credit which had not been reinstated last year at this same time. We are forecasting our effective tax rate for the fiscal 2014 to be approximately in the 35% range. However, that rate can fluctuate, depending on which tax jurisdiction sales are procured in the world.

With that operator, could you please open the line for questions?

(Operator Instructions)

Our first question comes from Morris Ajzenman with Griffin Securities.

Good morning.

Good morning.

Hi. Just a follow-up, Sheila, on your guidance for the third quarter. Revenues up modestly, I think you said year over year, and down sequentially which is not a surprise, being second quarter is seasonally high quarter. But your comment on gross margins, I am looking at the third quarter last year, I think you said 24.4%. And I think you said it would be similar to last year. I am just curious, shouldn't we see some leveraging with modest top-line growth rate, there is better control of warranty expense that come to play here, but shouldn't there still be an improvement in the gross margins going forward? Into this current quarter?

As discussed there -- it has to do with mix, as well as in our utilization of the factories. So, yes, we will have some uptick because of the revenue uptick, but conservatively we feel we will be in that area because of the sales mix going into the quarter.

All right. And you said utilization, is there any reason to believe utilization this third quarter is going to be significantly different than last year's third quarter?

It shouldn't be significantly different.

Okay. And just give a little more color on the warranty expense, 3.3% in this most recent quarter, can you just refresh what it was the previous quarter? And are you still targeting getting it down to 150 to 200 basis points?

We do, and are working towards reducing our warranty as a percent of sales, and our target is that 2% or so. I don't have last quarter's rate with me here. But we have, and want to reduce that from the 3.3% that we experienced this quarter.

All right. I will jump back in queue.

(Operator Instructions)

Our next question comes from [Brad Mas] with Needham

I am filling in for Jim. Good morning. Just regarding the billboard portion of the Commercial segment, I was wondering if you could provide any revenue or bookings numbers?

For the quarter in revenue, we had about $12 million of sales.

Okay. And then orders?

Orders were -- one moment -- were about $11 million.

Okay, thank you. And then with the International segment, there is obviously good growth. Do you think it is sustainable going forward, and where -- like what segments were you seeing the strength coming from internationally?

We believe that the growth is sustainable internationally, and that the biggest segments that we see interest in is the large sports venues, these large commercial spectaculars, and third-party advertising or billboard.

Okay, thanks. An then just lastly, Transportation. We obviously saw a decent order activity. Do you have any visibility into the pipeline or any opportunities in the Transportation segment?

We do believe that our Transportation segment, the core business will continue to grow. And so, we are optimistic as we go into this second half, that order and revenue would increase.

Okay. Thank you very much.

Our next question comes from Steve Altebrando with Sidoti & Company.

In the Schools and Theaters, the release mentions ASPs being down a bit. Is that a function of mix or pricing -- competitive pricing?

We believe it is a part of just the mix. We feel we were selling smaller display units compared to last year.

Okay. And then the Live Events segment mentioned -- I think maybe, I think it was five orders for $9 million or so. Sounds like a relatively small order -- a dollar amount per order. Are those non-professional arenas or ancillary products?

What we see in the Live Events business is that orders in Q2 and maybe even part of Q3 tend to be add-ons, not complete system orders. And what we find is that in the spring months as we move into baseball, and then the fall season is where we get the larger full system orders.

Okay. That's helpful. And then just lastly, and I know you touched on it in the script a bit, but if you could expand on the bidding activity you are seeing in the Live Events segment, just the general interest that you are seeing, whether it feels like it is picking up as we go into fiscal 2015?

We have seen a much higher activity this year, especially in large outdoor stadiums than in the previous, I would say two years. And we believe that that will continue into the fall certainly.

Okay. Thank you very much.

Our next question comes from Morris Ajzenman with Griffin Securities.

Sheila, you had mentioned in your prepared remarks, and you kind of ran through it quickly, I am not sure if I got it right, Transportation, I -- did you say $17.6 million last year, $5 million was from the LAX, or did I misread you on that?

Actually, $5 million was from another procurement project. LAX contributed to our orders through the second quarter of last year, and we had some revenue realized in the second quarter from LAX. But we had a large procurement project that we finished up during the first half of last year, which we didn't have a repeat type project this first half of the year.

Okay. So those -- okay, thank you.

You're welcome.

Our next question comes from Robert Hoffman with Princeton Opportunity Partners.

It seems, especially for those of us who are on the East Coast, that the proliferation of transportation signs -- and it is nice we see the Vanguard label on all these things and especially here in New Jersey -- do you have any sense -- I get the impression that the highways who put them on start with X, and then end up with three times X over the period of a number of years.

Do you have any sense of the market opportunity? I mean, are there big competitors that are taking share in other places? Or is it something that you see, if you have 5 to 10 years of pretty dramatic growth opportunity, when you can see the results of what good signage does for traffic flow? In other words, can you give us any sense of long-term market opportunity in Transportation?

So in the traffic business, especially the over-the-road signage that I think you are referencing in New Jersey and in some of the other states, I believe as you are mentioning the core technology is seen as beneficial. It's expensive to build highways, and putting in signage like we provide helps make the usage of your existing highways more efficient. So we see that that is a continuing part of a highway project going forward.

However, the procurement process is done through either a state or maybe a county or city level, and there is a heavy influence of federal dollars that often greenlight these projects. And it is difficult to project from year to year how the Federal Government will choose to release or not certain funds, which puts a difficulty in estimating future business in the Transportation area.

How about internationally? Are you seeing the same sort of interest in international areas?

As I said before, currently our focus in International is in these other segments, and we haven't -- the selling cycle in Transportation tends to be quite long, as you need to work to get qualified by different governmental agencies, and we haven't taken that approach yet in our International business. Not to say that we haven't done some transportation type of projects, but not these large procurement type of projects for over-the-road signage.

But are there -- are they being -- so other people are out there doing those, or is the international market -- ?

Yes, there are definitely companies internationally that are participating in those markets. And you will see similar types of displays, if you travel to the major cities and highways around the world.

Okay. Thank you.

I am not showing any further questions at this time. I would like to turn the conference back to our host for closing remarks.

I will answer Morris' question earlier about warranty as a percentage of sales for the first quarter. We also were at about 3.3% for the first quarter of this fiscal year, so we have trended that way throughout the whole first half.

Thank you, Sheila. I think that concludes our comments. We appreciate everybody's time and attention this morning, and we hope you have a great Thanksgiving holiday.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.