Daktronics Inc (DAKT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fiscal-year 2015 first-quarter earnings results conference call. As a reminder, this conference is being recorded today, Tuesday, August 26, 2014, and is available on the Company's website at www.daktronics.com. (Operator Instructions).

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

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 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, fluctuation of margin, the introduction of new products and technology, and other important factors as noted and detailed in our 10-K and 10-Q SEC filings.

As a reminder, fiscal 2015 is a 53-week year, and fiscal 2014 was a 52-week year. The extra week of fiscal 2015 fell within the first quarter, resulting in a 14-week quarter versus a 13-week quarter comparison.

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 first quarter, with significant increases in revenues, even with the extra week factored in. Orders were also strong, and we are entering the second quarter with a solid backlog and pipeline of opportunities.

Overall, we are projecting reasonable growth during the remainder of fiscal 2015. While we are pleased with our performance during the first quarter of fiscal 2015, we continue to strive to increase gross profit and operating income through continued focus on process improvements across the entire value stream.

As we have mentioned before, our business is cyclical, with the summer months tending to be our busiest. Large projects in our various business segments can also have significant impact, as these tend to be more competitive and can have significant general contracting, which tends to be at lower margins.

Many of our customers that invest in these systems have purchased this type of product before, from either Daktronics or one of our competitors. We are successful in winning when our customers have a positive experience with our people and our products, and individual interactions which accumulate over time. This has created a positive brand for Daktronics in the marketplace.

I would like to thank the entire Daktronics team for their hard work over the years, which has driven much of our success during the first quarter of fiscal 2015, and it has put us in a favorable position as we enter the remainder of fiscal 2015.

We continue to see strong activity in our different market segments in North America, as well as other regions of the world. Our large sports business has done well over the last six months, both in new venue construction and refurbishment of existing facilities. We have seen significant projects at professional, college, and high school levels, as these organizations seek to build a memorable game day experience for their fans.

We have also seen the interest in large video spectacular projects, such as in Times Square and Las Vegas, continue to grow. Billboard business remains stable, with orders for new locations; as well as, increasingly, refurbishment or replacement of existing displays.

We continue to have a positive outlook for our commercial on-premise and transportation segments as well. In our international business, we continue to see strong interest in sports, spectaculars, and third-party advertising, sometimes referred to as digital out-of-home.

You also likely saw the announcement of our purchase of a Data Display, a company in Ireland focused on the transportation business. We expect that this acquisition will give us a presence in the transportation segment outside of the US, as well as strengthen our transportation business within the US, specifically in the area of mass transit.

Also, this acquisition will give us a larger manufacturing capacity in the region, which will be advantageous as our European business continues to grow. We are currently working hard to integrate this group into the larger Daktronics team.

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 will continue our strategy of the creation of product platforms for both display and control systems.

We subscribe to the Lean principles of continuous improvement of 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.

We believe we are well positioned as we continue with our fiscal year 2015.

With that, I will ask Sheila to give more detail on our fiscal performance.

Thank you, Reece. Sales increased by 20.1% from last year's first quarter to $166.6 million, which is an $11.9 million run rate per week, as compared to $10.7 million for the first quarter of fiscal 2014. This sales level is the highest first-quarter revenue in the Company's history.

Live event sales contributed to the increase for the quarter, as we produced and began installation on the NFL stadium orders we had previously discussed. Commercial sales were up due to increased digital billboard, large customer video contracts, and national account orders, offset by a decrease in the on-premise advertising sales as compared to the same period last year.

High school park and rec, formerly our schools and theaters business unit, sales increased primarily due to a higher order volume of larger systems, which have larger selling values; and sales increase due to a change in the timing of order placement. Many projects booked later this spring as compared to last year, moving more orders and sales into the first quarter.

Transportation sales were relatively flat. However, we were able to maintain sales volume comparable to last year, even without the nonrecurring LAX International project we worked on that contributed $2.3 million of sales last year.

International sales decreased as compared to same quarter last year, primarily due to projects continuing to move out or be delayed into fiscal 2015.

With our current backlog and estimated customer delivery schedules, we predict sales in the second quarter will be up slightly compared to last year's second quarter.

Gross profit was 26% in the first quarter as compared to 25.6% in the first quarter of last year. This increase is primarily due to a decrease in warranties as a percent of sales, a gain on the sale of our rigging division assets of $1.3 million; offset by sales mix, which was included as a greater portion of large video projects and subcontracted installation work.

As discussed in previous calls, large video projects typically have lower margins than standard video displays and scoring systems, due to the competitive environment as well as to the amount of installation and other contracted work included in those types of projects, which generally yield a more of a contracted gross margin rate.

For the second quarter of fiscal 2015, we anticipate gross profit to be up from the first quarter, and similar to last year's second quarter gross profit, based on our current known sales mix.

Operating expenses were 17.9% of sales during the quarter compared to 19.4% of sales in the first quarter of fiscal 2014. In dollars, operating expenses increased primarily as a result of the first quarter of fiscal 2015 including 14 weeks as opposed to the 13 weeks. And we also incurred around $300,000 of additional expenses due to the acquisition and the divestiture activities in general and administrative area for the quarter.

For the remainder of fiscal 2015, we predict an increase in operating expense dollars to support business growth, but are continuing to work to hold these expenses flat or down as a percent of total sales for the year.

We continually work on all fronts to improve profitability. Company initiatives include focus on reducing warranty expenses by investing in supplier quality programs, investment in quality and reliability equipment, and manufacturing process control techniques.

Our product development team continues to focus on robust product design, while lowering overall cost of them. In addition, we continue to work on operational efficiencies throughout all areas of the business to reduce cost and improve our service to customers.

Our effective tax rate was 36.1% for the first quarter as compared to 32.2% last year. The higher rate is primarily due to not having the research and development credit available in the United States this year. We are forecasting our effective tax rate to be in the 36% area for fiscal 2015; however, that rate can fluctuate depending on changes in tax legislation, and the location of sales and the related tax breaks in those jurisdictions.

Our cash and marketable securities position is at $87 million at the end of the quarter. And as discussed in previous calls, our capital expenditure estimate of $25 million for fiscal 2015 is higher than we typically average during a fiscal year. The Redwood Falls expansion of approximately $4 million is substantially complete, and will be available for production starting in September.

The remaining investment will be made in manufacturing areas to add new module line production capabilities for new or enhanced product offerings, which are being introduced in fiscal 2015. We will also be spending for quality and reliability equipment to be used in our design and manufacturing process, which aligns our continued quality strategic initiatives to lower warranty costs. And updating other machinery and equipment brings enhanced efficiencies.

We are also currently planning to invest in our IT infrastructure in hardware and software at higher rates than prior years. Finally, we have some demonstration equipment for our sales initiatives also planned. We expect future years' capital spending to return to historical rates.

With that, I will turn it back to Reece for additional comments on our outlook.

Thanks, Sheila. Looking forward, we are seeing increased activity in our major segments of sports, commercial and transportation business worldwide, and we are optimistic on our future business. Some comments about some specific segments: in our commercial business, which is on-premise or third-party advertising, we have seen orders in billboard and spectaculars continue to perform well, as digital displays are increasingly accepted in the industry, and even expected in many markets.

We also have a strong pipeline in the large projects area of our commercial business, and see this as a continued area to grow, as well; as well as an increase in our third-party advertising applications, as we continue into the next quarters of our fiscal year.

We're expecting reasonable year-over-year growth in commercial in FY 2015 overall.

In live events, we continue to see ongoing interest from venues at all levels to increase the size and capability of their display systems. The ongoing 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.

Our largest growth during the first quarter of fiscal 2015 was in our live events business segment, and we believe this business will sustain the fiscal 2014 sales levels in this fiscal year, due to the continued interest in large video systems in this marketplace.

The trends in commercial and live events drive our high school business, as these customers purchase systems to place outside of their schools as well as in their sports venues. The desire for larger systems is seen in this market, as well.

Both sales and orders increased from the first quarter of fiscal 2015 compared to the first quarter of 2014, and we see modest growth year-over-year in our high school parks and rec business during 2015.

Our transportation business is still strong, and we see the core business continue to grow even though the year-over-year comparison in sales was relatively flat, and orders were down primarily due to project cycles. The Highway Trust Fund, a primary funding mechanism for state Departments of Transportation, was extended at the current level for eight months for funding of traditional transportation projects.

Public/private partnerships are becoming more commonplace in the market for transportation, as well. We continue to believe infrastructure investment will continue, and we are expecting modest growth in this business segment during 2015.

Our international business built on all the areas listed above in geographic regions where we have much lower market share. We're optimistic that this segment will be our highest percent growth during fiscal year 2015. International business is mainly in large sports products, large commercial video projects, and third-party advertising.

In the coming year, however, we see growth in the transportation business, as well, through the acquisition of Data Display. In general, we believe there is room for growth in our international business.

Overall, we're optimistic about the future. We continue to focus on our internal goals of improving operating margin and increasing revenue, and we believe we have a plan in place to be successful. 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 through 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 will maintain our focus on cost reduction and bottom-line performance as we go forward.

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

(Operator Instructions). Morris Ajzenman, Griffin Securities.

First question on live events, clearly very strong first quarter. And I understand the lumpiness of the business, with the orders we have gotten $10 million year-over-year, but just looking at optimistic outlook. Can you just put a little more clarity to that, following through the orders? Have any different comparison, but nonetheless the positive outlook for the remainder of the year?

We had a strong fiscal 2014 in live events, a lot of growth in that business unit. And as we move into 2015, we are seeing a continued interest in the refurbishment, as well as when there are new systems being -- new facilities being built.

And it goes back, Morris, to the timing of orders. We had a large order last first quarter, multi-million dollars. Didn't reoccur this quarter, but we still see those types of projects out there that fill up the full year.

Okay, and this question for you, Sheila, looking at the -- this quarter you had revenues of $167 million; and selling expense was $15 million; G&A was $8 million. Looking back last year, the second quarter last year, revenues were not that far away -- $162 million. But selling was $13.3 million, $1.7 million less; and G&A was $6.8 million, about $1.2 million less. Just trying to get a handle of the run rate. Looks like it picked up over the last three quarters, from the second quarter last year to first quarter this year. Again, it's not the same quarter within the same year, but are we running at a higher spending ratio for selling than G&A expense? Is that stepping up?

For each of those unit or areas, we do have a bit higher run rate as -- not as more people, just a little more pay -- so with raises over the year. We also implemented a new system in our selling department to assist with the opportunity pipeline, attracting those type pipeline projects, which has increased our overall run rate for the year.

And G&A is primarily just a little bit of increase for payroll. And then take into account, we did spend a little bit more this quarter for the acquisitions and divestiture.

I think, Morris, you would also need to apply the 14 weeks of this quarter versus the 13 weeks of our Q2 last year, and that will have a significant impact as well.

Thank you. Thank you.

Jim Ricchiuti, Needham & Company.

Maybe just following up on that question. Last year, we also saw -- it looks like sequential declines in both selling and G&A from Q1 to Q2. So, I'm just wondering, is there any kind of seasonality also, as it relates to OpEx that we need to think about in Q2?

There is a little bit of seasonality for some of the season tickets we hold for the sporting events for our meeting with our clients. But I think what Reece pointed out is just remember to take out the 14-week [faster] as well, and that will help get to a better rate.

Sure. Sheila, would you anticipate that live events revenues would be up year-over-year in the current quarter, just based on where you stand in terms of project work?

We are really estimating that live events will stay even to last year. There may be some small vagaries from quarter to quarter based on project timing, but relatively flat year-over-year.

Okay, and, Reece, that is with respect for the full year?

The full fiscal year, yes.

Got it. And if I may, just on Data Display, can you talk a little bit about them? You are acquiring some manufacturing capacity in Ireland. Can you give us a sense as to what additional benefits that might bring you, over and above the access to some of the transportation business in Europe and elsewhere?

We do not have a transportation business in Europe today. And so, Data Display has got an active business, with a historical customer list within that area. It have had some activity in the US, but relatively complementary to what Daktronics has done. Their focus in the US has been really in mass transit, platform displays in stations. The major part of our transportation business in the US is over-the-road signage and DOT sort of work.

We see that are areas are quite complementary. Also, as our business in Europe continues to grow, they have an electronic assembly business that we believe would help us deliver projects into Europe.

Reece, is there any sense as to whether you can provide any color on the revenues for this business?

Sure. Historically, Data Display has done $15 million to $20 million or so per year. We are thinking, for the fiscal year, we will start out may be around $10 million as we get started and work through the transition.

Got it. And one final question, I will jump back in the queue. You clearly had a nice quarter in the high school and recreation market from a shipment standpoint, but I was a little confused. It seemed -- you seem to be suggesting that there was also some orders that you saw in fiscal Q4 that allowed you to ship in fiscal Q1. But on the other hand, you had a very strong -- it looks like a very strong bookings quarter as well. So, it would appear that that business is running at a higher level, and I'm just wondering what might be going on there.

Our standard business there was still very strong. And we were successful at booking at a number of large video projects, large for the high school market, and more of those than we actually had anticipated coming into the quarter. So, that really helped the high school business in this fiscal quarter. But that tends to be seasonal business, and to say that that is going to continue over the year, we wouldn't say that that is the right model.

Got it. And that will shift largely in the current quarter for seasonal business.

Yes, we would say that most of those systems by the end of Q2 would have shipped, and then possibly in Q4 we might see more activity there.

Got it. Okay, thanks very much.

Steve Altebrando, Sidoti & Company.

Could you clarify a little bit how the rigging asset sales ran through the P&L?

There is a gain on the sale included as a deduction of cost of goods sold; or another way to say it is increase in gross margin.

Okay, so there is no revenue attributed to it?

Correct.

Was there -- okay. And the $1.3 million, is that pre-tax are after-tax?

That is pre-tax.

Okay. And then just getting back to the Data Display acquisition, is there any recurring revenue as part of that business? And if you could give just a little bit of color on the thought process of buying versus building, knowing that you are historically not that acquisitive of a company.

I think Sheila mentioned the revenue that we think somewhere in this $15 million. But this year, we are more in this $10 million to $11 million range, three quarters, and we are going through a number of integration activities.

As far as the methodology behind why we would purchase Data Display, certainly the products that ship into Europe are different than the products that we would have in the US. And so there is that product mix, as well as the factory that exists over there would help us deliver to those customers. But I think, also with that is the customer list, and the fact that they have ongoing relationships and customers. That can be a hard thing to replace as you try to break into a market.

Okay, that's very helpful. The $15 million to $20 million in revenue; and you are saying, looking forward, $10 million, is that -- is there something specific that is going on that is causing that decline? Or is that just the -- in terms of when it closes -- when the deal closes for you guys?

That $10 million was really about this fiscal year, because it closed at the start of our 2Q when we had that activity.

Okay, that's helpful. Thank you.

(Operator Instructions). Miles Henderson, Private Investor.

Congratulations on the quarter. Really, I just had a comment. I noticed that your sales for the quarter came in about -- well, nearly 10% greater than consensus estimates. And I know last quarterly report, on the conference call, there was some discussion about concern about the overall growth rate of sales, especially over the last two fiscal years, where it was like 6% or 7% per annum.

What frustrated me, and I guess my comment to everyone is, during that last four quarters ending the fourth quarter of 2014 -- during that period, there was a big growth in orders, and sales did not keep up. As a result, backlog increased.

There was a lot of catch up this last quarter. And so, although sales for the trailing 12 months for the fiscal year ending 2014 was only 6% or 7%, if you now look at trailing 12 month sales growth year-over-year, sales growth now is 11% year-over-year. So, that backlog got caught up on, and now it is more in parity.

And I think my comment is that the sales growth, the 11%, and that trailing 12-month growth in orders of 12%, I think is more indicative of where the Company is at today. And your comments about your good sense as to potential orders down the road is pretty encouraging to me. So, I will just leave it at that, and say congratulations to you and your team.

Appreciate your comments.

Morris Ajzenman, Griffin Securities.

Reece, just on the previous question, I want to make sure I heard it correctly. Did you say live events for fiscal 2015 will be unchanged, or was that for the second quarter of fiscal 2015?

We are saying for fiscal 2015, we believe we will have similar revenues as in fiscal 2014. What happens in a quarter-to-quarter basis, there may be small -- I mean, some vagaries, as project work is done.

The reason I am asking is because the first quarter, you were up $20 million, $55 million, $75 million. So you would then deduce from that that you would be down $20 million over the next nine quarters, year-over-year. I mean, over the next three quarters.

We had a strong end of our fiscal 2014, as we shipped some of these large football scoreboards. And baseball is yet to weigh in with how many of those teams will replace systems in the spring, and how the win rate goes on the systems.

Okay. And one last follow-up. Not a follow-up, but, Sheila, can you give us a handle on warranty expense this quarter, because that's always been an issue in the past? I think in the previous quarter was better under control. Where was it this quarter, and what's the outlook?

Sure. We ran at 2.9% of sales for the warranty expense for the first quarter. And, as mentioned, we are working on product reliability, and we feel like we are shipping more reliable products today than we were a year ago, even further beyond that. So, we continue --.

And what is that compared to last year, the 2.9%?

Last year, it was at 3.4%.

Thank you.

Jim Ricchiuti, Needham & Company.

Sheila, could you give the bookings and revenues in the quarter for the billboard business?

Sure. Our revenue for the quarter in billboard was $15 million, for the first quarter, compared to $9 million --

Did you say $16 million? I am sorry.

I am sorry, $15 million.

$15 million, sorry.

And then $9 million last year, same quarter. Bookings, we were at about $10 million for the first quarter. And (multiple speakers).

Got it. (multiple speakers). What was the year-ago in bookings?

$9 million.

$9 million. And I guess with respect to the billboard business, we have talked a lot about the upgrade business potential in that business. And I wonder, Reece, maybe you can comment a little bit on that, and maybe more broadly, because it seems to really touch on your business in the other market segments.

Maybe the level of upgrade business that you are seeing -- I don't know if you guys measure that, but it seems like it really plays into all of your markets.

I think you are right, Jim. The product that we ship has a lifetime of about 10 years. And we see almost all of our customers, at that point, replacing their product at that 10-year timeframe. Sometimes it is a few more years; sometimes it is a few less, depending on the customer and what's going on at that point in time.

In the sports and spectacular markets, they are almost always replacing it with something larger, more pixels, better quality measured in some way. In the billboard business, they have standard size and often permitted at that size; and, so, going larger isn't always an option in that area, or is much less frequently an option in that area. And so they typically replace with a similar product.

Is that helpful?

It's helpful. I am just curious, I don't know if you have this at your fingertips. You may not. But if we look at -- say, your bookings number for this quarter, do you have any sense as to what -- how much of that is represented by this upgrade business?

In the large sports business, it is almost all of those customers have a type of product that they use today that we replacing in some way. In the high school market, that might be new business. In the billboard business, I don't know, Sheila, if you have a ratio of --?

I don't have it available.

So, I'm sorry, Jim. We don't have it specifically.

That's fine. But I would say, it's clearly something that it sounds like it's growing, just given the big influx of equipment you've put into the market over the last 5 to 10 years.

Yes. Once a system has gone digital, it rarely goes back to static. And we've seen more and more static installations go to digital, as that's almost expected in many of our markets.

Okay, thanks very much.

Thank you. I am not showing any further questions.

I would now like to turn the call back to Reece Kurtenbach for any further remarks.

Thank you. We appreciate everybody's time and attention on the call today. We like the comments and the feedback. And so, we wish you a happy fall, and look forward to talking to you again in three months.

Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.