Daktronics Inc (DAKT) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fiscal year 2014 third quarter earnings results conference call. As a reminder, the conference is being recorded today, Tuesday, February 18, 2014, and is available on the Company's website at www.Daktronics.com.

I would now like to turn the conference over to our host for today, Ms. Sheila Anderson, Chief Financial Officer for Daktronics, for introductory remarks. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone. Thank you for participating in our third-quarter 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 expectations 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 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.

Thank you, Sheila. Good morning, everyone. We had a positive third quarter with quarter-over-quarter increases in both orders and revenues. It was nice to see the continued upward trend in our topline, but we were really pleased to see the strong order performance. This backlog will set us up for a positive Q4 and, we believe, modest growth for the fiscal year overall.

With this said, our gross profit is lower this fiscal year, mainly due to project mix as much as the work this year has been with large video projects, which tend to have lower margins. We continue to focus on reducing our costs to fulfill on our project and standard order work through ongoing investment and reliability, quality, and process improvement through the entire value stream.

Our business is cyclical, with our Q3 typically being our weakest quarter for sales, influenced by the holiday season in most of our markets as well as natural variations in our different businesses. We are positioned for a strong Q4 as our backlog is almost $170 million or about a 13% increase over last year.

Our orders in Q3 were mainly from our large sports businesses as well as our third-party advertising business, sometimes referred to as out of home. Many of these orders are from existing customers and we receive repeat business when these customers have a positive experience with our people, our products, and individual interactions which accumulate over time. I would like to thank the entire Daktronics team for their hard work over the years, which put us in a position for these recent successes.

We continue to see strong activity in our different market segments in North America as well as other regions of the world. The strongest segments are our large sports venues, third-party advertising, and spectaculars.

While new stadium construction is down from five years ago, the equipment in many existing facilities was installed about 10 years ago, which is the typical point when our customers choose to upgrade their systems. As an example, the three NFL orders in Q3 or from the Cleveland Browns, Carolina Panthers, and Jacksonville Jaguars, all upgrades of existing systems.

This replacement trend also exists in our billboard business, with continued orders for new locations as well as increasingly refurbishment of or replacement of existing digital displays. While these are the strongest segments, we continue to have a positive outlook for our transportation, on premise, and sports businesses.

Overall, 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. On the process side, we continue to follow lean principles of continuous improvement for both our production and business processes. We believe it is important to prioritize our activities on the highest value areas through knowledge and understanding of our markets, and careful planning between our teams.

As an example, with the order activity and strong backlog, we are making targeted investments in factory capacity and flexibility to put us in a position to be successful in our fiscal year 2015. With that, I will turn it back to Sheila for some detailed financial comments.

During the quarter, we converted $115 million of sales from some of the third quarter orders and from the $132 million backlog going into the quarter. This equated to a sales increase of about 4% for the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013.

International, commercial, and live event sales all increased, primarily due to the increase in 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 a result of approximately $10 million of revenue realized last year as we were building and starting the installation of the Los Angeles airport project we have discussed in the past. A great project for us in the business unit, but difficult to find a repeat order in the transportation market.

Schools and theaters sales declined as some large video display projects continue to move out or be delayed into calendar year -- calendar 2014. The sales also have been concentrated on smaller projects as compared to last year and, therefore, lower average sales price per order were realized during the quarter.

Our order volume for the third quarter is the highest Daktronics has reached in the same quarter -- the third quarter. Overall, order volume year to date is up by 14%. As Reece mentioned, the order increase was driven by our multimillion dollar orders in three NFL stadiums, an increase in order volume in our third-party advertising segment, and increased orders on our spectacular projects in the commercial unit.

This order volume will help us finish the year with a modest sales growth rate overall for fiscal 2014. While our second half of the fiscal year has historically been lower in sales and profitability than the first half of the year because of the sports and construction seasonality in our business, we were able to increase operating margin in the third quarter of fiscal 2014 as compared to last year by $2.5 million.

With the increase in backlog as compared to last year and the current production and delivery schedule, we estimate revenues to be higher than last year's fourth quarter of $124 million. We continue to see strong interest from our customers in large projects in the marketplace in the business units of live events, international and commercial. And transportation, schools, and theater demand appears to be flat to slightly increases.

Gross profit in the third quarter was 25.2% compared to 24.4% in the third quarter of last year. The increase is primarily due to increased manufacturing utilization and sales mix.

In the fourth quarter, we anticipate gross profits to increase a couple of margin points as compared to last year's fourth quarter because of volume, sales mix, and a warranty issue that occurred in last year's fourth quarter we don't expect to reoccur this year. Larger, multimillion dollar contracts generally have lower margins than standard video displays and scoring systems due to the competitive environment, as well as the amount of installation contracted work included in these types of projects. This will be offset by manufacturing utilization as we are able to produce more through our plant's cost infrastructure over the coming quarters.

Warranty expense year to date as a percentage of sales was 2.9%, which is slightly higher than the same period last year at 2.7%. We continue to focus on lowering warranty issues by investing in quality initiatives, including manufacturing process improvement, supply chain management, and robust product design efforts.

Operating expenses were 22% of sales during the quarter, compared to 23.5% of sales in the third quarter of fiscal 2013. In dollars, operating expenses decreased slightly from last year during the same quarter, primarily due to the timing of third-party commissions paid last year on an international order. We have, from time to time, used third-party parties on various locations around the world to expand sales opportunities.

For fiscal 2014, we predict a slight increase in operating expense dollars to support business growth, but are working to hold these expenses flat or down as a percentage of total sales for the year. We continue to work internally on all fronts to improve operating profitability. Company initiatives include continued focus on reducing warranty expenses by investing in supplier quality programs, quality and reliability equipment, and manufacturing process control techniques.

In addition, we continue to work on operational efficiencies throughout all areas of the business to reduce costs and improve services to our customers.

Our tax rate for the quarter was 19.3% compared to a benefit last year of 119.6%. Last year we received a benefit during the third quarter for a retroactive restatement of the research and developing credits, and for a tax deduction for a special dividend paid during last year's third quarter. During the third quarter of fiscal 2014, we received benefits from stock option deductions and a return to provision true-up.

We are forecasting our respective tax rate for fiscal 2014 to be in the 34% to 35% rate -- range overall. However, that rate can fluctuate depending on the tax jurisdiction sales are realized in around the world. We continue to invest in manufacturing equipment for new product introductions and efficiency improvements.

We invested in our IT infrastructure to maintain our systems and we invested in demo equipment for our sales initiatives. As the news release stated, we have committed to expand a manufacturing facility by 30,000 square feet and estimate the expansion to cost approximately $4 million. Most of this capital will be part of our fiscal 2015 capital expenditures. For fiscal 2014, we estimate about $16 million in capital expenditures to support our business growth and initiatives.

Reece, do you have further comments?

Looking forward, we are seeing increased activity in our major segments of sports, commercial, and transportation businesses worldwide and are optimistic on our future business. Maybe some comments about these specific segments.

Our commercial business, we have seen orders in billboard pick up as we move through calendar year 2013, and we feel this will continue through calendar year 2014. We also have a strong pipeline and the large projects area of our commercial business and see this as a continued growth area as we move into next fiscal year. Overall, we are expecting modest year-over-year growth in commercial in FY 2015.

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 in video 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 our current fiscal year, we believe this is due to the timing of large video systems and not a long-term trend.

Our third-party advertising business continues to be strong internationally. We see an increasing shift to digital as prices have come down. The expansion of our product line through the acquisition in Belgium that we completed in Q1 of 2014 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 continue to grow, even though the year-over-year comparison is down due to the LAX project Sheila mentioned earlier.

Overall, we are optimistic about the 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 and great people, and we continue to make progress in reducing costs to eliminating waste and process improvement. And this work is still ongoing.

We feel we are positioned well to continue to achieve some topline growth, and we will maintain our focus on cost reduction and bottom-line performance as we go forward. And, with that, I would ask the operator to open up the line for any questions.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

First question, just with respect to the NFL projects, my understanding is that the NFL -- the league -- has some sort of a CapEx plan called G4, which, I guess, supports upgrades of video and audio projects. And I am just wondering, are you seeing any activity associated with this, for instance with the Cleveland Browns project? And how do you see that going forward?

Well, we see that each one of these venues tends to be different. In some venues the government agency is the owner of the facility, while the team is lessor of the facility, and sometimes that relationship is different. The blend of venue owner money that goes into these projects versus team money can be different, based on the project and the location.

So I don't believe there is a hard rule of whether it is the NFL CapEx money that goes into these projects or not. And most of this work is a blend of display upgrade as well as further stadium improvements. So I don't believe there is many instances of finances drawn just for -- or financing done just for the display system.

Got it. And just maybe staying on topic on live events, can you talk a little bit about the activity you are seeing for the upcoming MLB season in terms of the activity?

Most of the activity we saw in major-league has been in the NFL. And MLB has been a little quieter this year, even though the same trends exist that they -- when they go to replace, they are really upgrading the overall features and capacity of their system.

Okay. And maybe one final question and I will jump back in the queue. If we think about Q4, and the kind of sequential increase we might see in revenues, would it be more in line with what we saw last year, kind of low double-digit? Is there any color you can provide on that?

I think we are estimating a low double-digit increase over the $124 million we had last year, similar to the FY 2012 to FY 2013 year.

Got it. Thanks very much.

Morris Ajzenman, Griffin Securities.

Can you give us a little color on digital billboards during this quarter as far as the revenue number versus last year? And just all -- what else you can -- spin you can put on that?

I have order numbers available. For the year, we are up in digital billboards. We are at about $41 million of orders compared to $36 million last year at the same time.

Okay. And you mentioned a couple of new locations. I know previously -- previous quarters, you were talking about this year being more of a replacement cycle. Is the majority of the business again replacement, or is the new site location picking up some steam?

I would say, Morris, that the majority of the business is still new locations, but we are seeing that the amount of spend on replacement or refurbishing of existing sites continues to grow. And we believe that is a function of the ramp up 7 to 10 years ago of digital billboards, that it started slower and then moved more quickly over time.

Can you give us an approximation of that $41 million, that -- what percent would be new location versus refurbishing, just roughly?

I don't have that number unless, Sheila, you have got an indication.

And I don't have that available either.

Okay. And, last thing, on the transportation LAX, [I had the impression] fiscal fourth quarter last year, was LAX still a large contributor, and if so, by how much?

It was. We were (multiple speakers) about another $10 million-ish or so. That was about a $20 million project so we were finishing it up in the fourth and a little bit in the first quarter of this fiscal year.

Okay. So we have another difficult $10 million comparison fourth quarter year-over-year.

For transportation; yes.

For transportation; yes. And, very last thing and I will hop back in queue. Anything you can say about what's going on with LED?

In LED in general, we see that as the go-to technology for outdoor and high ambient light environments. The LED manufacturers are all chasing the general purpose lighting market and various lighting niches, so they have continued to invest in the base technology, of which we are a beneficiary as the products that we use continue to get better and brighter.

And was there any additional traction in this most recent quarter or with this coming quarter with LED for you guys?

When you are saying additional traction, you mean in the base technology, or could you give some clarification?

Well, I am just trying to get a handle on, is this contributing more revenues year-over-year on an ongoing basis now?

Our technology has been all LED that -- or all LED for, I would say, at least four years now, maybe longer.

Yes. Actually, I am confusing -- actually, what I am referring to when I said LED, I meant to say on the outside of -- in Vegas in the casinos you have the --

Oh, like architectural lighting?

I'm sorry. That is what I meant to say. I meant to say architectural lighting and I said LED. I take that back. I am specifically referring to architectural lighting. I was brain-dead there for a moment. I apologize.

No. That's helpful. It provides more clarification. We see that as an ongoing growth area for Daktronics.

An example of a project we did recently is Wembley Stadium over in London. They have the Wembley Wave, where the main tube station comes out and people walk up to the stadium. We did a large atrium display that targets that audience as it comes in.

I saw it in January. It looks beautiful. It's very nice. And we see projects like that -- continued interest in projects like that in our pipeline.

I guess what I really wanted to ask, on architectural lighting, can you bring out revenues for the first nine months versus last year? Did you break that out at all?

We don't break that out, currently, Morris.

(Operator Instructions) Steve Altebrando, Sidoti & Company.

It doesn't sound like the backlog includes anything material in the baseball market. Can you characterize how activity was this year? Is there some projects out there that you suspect some kind of slipped into next year?

Yes, Steve. Any facility that their equipment starts to age, if they choose to not upgrade in this current year, for this current season, they become a candidate for next season. And so it wasn't that there were a number of MLB projects that we just didn't win or were there, it was just a quiet year for MLB.

Okay. When does the activity start getting underway for next year's NFL? In other words, you hit your backlog this year at this time.

Yes. The closer you get to a 120-day window, the less likely it is that they will be successful on really the size of the systems that they are putting into the NFL. So as you get four months before the preseason games, that is when that window starts to close.

Okay. Thank you.

Operator: (Operator Instructions). Steve Altebrando, Sidoti & Company.

It doesn't sound like the backlog includes anything material in the baseball market. Can you characterize how activity was this year? Is there some projects out there that you suspect some kind of slipped into next year?

Yes, Steve. Any facility that, if their equipment starts to age, if they choose to not upgrade in this current year, for this current season, they become a candidate for next season. And so it wasn't that there were a number of MLB projects that we just didn't win or were there, it was just a quiet year for MLB.

Okay. When does the activity start getting underway for next year's NFL? In other words, what hit -- you hit your backlog this year at this time.

Yes. The closer you get to a 120-day window, the less likely it is that they will be successful on really the size of the systems that they are putting into the NFL. So as you get four months before the preseason games, that is when that window starts to close.

Okay. And, it sounds like the warranty -- the release mentions warranty coming down in the quarter. How material was that and is there further upside for you guys there?

We continue to work on warranty through the initiatives I mentioned earlier. Our warranty through the quarter was 1.8% compared to year to date, we are at about 2.5%. So it was helpful for the quarter on the margin side.

Okay. And then, lastly, excluding the mix factors, if you could characterize what you think of the margin of the backlog would be helpful.

We don't have that necessarily. But our large projects do, as we have talked about historically, have a lower gross margin due to the installation factors and just the competitive nature of those projects. And we have the large projects, like Reece mentioned, in our backlog and we will be working through those in Q4 and through the summer months.

Okay. Maybe I should clarify a bit. If you could maybe characterize the pricing or the competitive environment.

Well, these markets still are competitive. We are not seeing a dramatic shift in pricing from last year, if that is where you are -- if that is closer to the mark of your question.

Yes, okay. Thank you.

And, presenters, at this time, it looks like there are no additional questioners in the queue. I'd like to turn the program back over to management for any additional or closing remarks.

We thank everybody for attending the call today and we appreciate the questions. And, if there are no further questions, we wish you all a good day and a happy spring.

Thank you, presenters. And, thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation and have a wonderful day. Attendees, you may now all disconnect.