Daktronics Inc (DAKT) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fiscal year 2015 third-quarter earnings results conference call.

As a reminder, this call is being recorded today, Tuesday, February 24, 2015, and is available on the Company's website at www.daktronics.com.

Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

I would now 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, operator.

Good morning, everyone.

Thank you for participating in our third-quarter earnings conference call.

I would like to review our disclosure, 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 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 technologies, and other important factors as noted and detailed in our Form 10-K and Form 10-Q SEC filings.

Fiscal 2015 is a 53-week year and fiscal 2014 was a 52-week year.

The extra week of fiscal 2015 fell within our first quarter, resulting in a 14-week quarter versus a 13-week quarter comparison.

Year-to-date figures for the third quarter include 40 weeks of business versus 39 weeks year-to-date comparison.

At this time, I would like to introduce Reece Kurtenbach, our Chairman, President, and CEO, for a few comments.

Thank you, Sheila.

Good morning, everyone out there on the line.

As discussed in the release, the third quarter of the fiscal year is historically a slower quarter in profitability due to the seasonal nature of many of our businesses.

While we plan for lower revenue and profitability in our Q3, it is not our intention to have an operating loss for the quarter, and obviously, we are not pleased with these results.

We do believe that our -- overall, our business is growing and in the quarter, we continued our work to position Daktronics for ongoing success.

In response to our Q2, we enhanced our forecasting tools and planning structures and made progress to be better positioned to match our demand to our capacity to optimize revenue and profit levels during our peak seasons.

We also laid the foundation to increase our overall module production capacity and this work will carry through Q4 to begin operation early in our Q1.

We believe these two changes as well as other improvements will set us up for future success.

Finally, while the projects did not book in the third quarter, we have been awarded two significant orders and are working through the detailed contract negotiation and project schedules.

We expect both will book orders during our fourth quarter.

The first project is for the Atlanta Falcons.

We were selected to provide the systems for their new premier stadium, including a unique feature called the halo display.

This stadium is open for the 2017 season.

Therefore, we won't recognize sales until likely late in our FY2016 and early FY2017.

The second project is for SBB, our Swiss rail.

We will be providing a series of displays in their railway stations across Switzerland for use in both wayfinding and advertising applications.

These systems would be delivered through a framework agreement with a rollout over the next 6 to 12 months.

Orders and revenue are recognized on a station-by-station basis.

Both projects are a testament of the trust our customers have that we will meet their needs through our engineering, production, and delivery capabilities.

For more details on the quarterly financial results, I will turn it back to Sheila.

Thank you, Reece.

Sales for the third quarter of fiscal 2015 increased slightly to $118 million as compared to $115 million last year during the same quarter.

The makeup within the business units reflect the variability of the sales mix from quarter to quarter, as I will further describe.

International sales slowed the increase, as sales in that unit were up $8 million.

This increase is due to our prior order success in the Australian market as we realize sales in both the sports and Out-of-Home areas.

For reference, Out-of-Home, or OOH, is an advertising industry term for advertising mediums that reach consumers outside of their home.

We include our digital billboard, on-premise digital, and street furniture solutions when we use this term.

We saw success in other Out-of-Home applications in other global regions as well during this last quarter.

Transportation sales were down for the quarter as compared to last year by about $4 million because of a general lag in the timing of orders and lower backlog going into the third quarter as compared to last year at the same time.

We were pleased with order performance during the third quarter and see this as evidence of opening market opportunities in the transportation unit.

Commercial sales were down in our on-premise and spectacular applications, offset by an increase in sales in our digital billboard segment as compared to last year's third quarter.

High school park and recreation and light event sales were relatively flat quarter over quarter.

Gross profit for the third quarter of fiscal 2015 was 21.2% as compared to 25.2% in the third quarter of last year.

Gross profit decreased as compared to last year's third quarter for increases in salaries and benefits in our manufacturing and service delivery areas and for the additional cost of the data display operations.

While Data Display has negatively impacted our operating margin a little over $1 million on a year-to-date basis, we believe the integration is going well and that this acquisition will set ourselves up for long-term success in the transportation marketplace.

We will continue this integration work for the coming couple of quarters, but likely at a slower pace.

Operating expenses for the quarter were $26.6 million as compared to $25.5 million last year.

Increases in operating expenses are primarily due to personnel-related expenses and the additional cost infrastructure of the acquisition.

Looking ahead to the remaining fiscal year, with our current backlog, estimated customer delivery schedules, and predicted order bookings, we estimate sales in the fourth quarter to be up as compared to last year.

Gross profit is expected to be lower than last year's fourth quarter due to current projected sales mix and estimated fixed operational costs.

We anticipate operating expenses to be higher as compared to the fourth quarter of fiscal 2014 for the increases in salaries and related costs, but comparable to the ratio of expense to sales as the last -- last year's fourth quarter.

We benefited from the United States research and development credits reinstatement during the third quarter, which allowed for a tax benefit this third quarter.

The research and development credit was reinstated only for calendar year 2014 at this point, so we will forecast an effective tax rate of approximately 36% for future periods.

As we have previously discussed, our tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income.

Our balance sheet remains strong and we have generated free cash flow this fiscal year to date.

Our cash and marketable securities position was up $68 million at the end of the quarter.

We are projecting capital expenditures to be $23 million for fiscal 2015, down a bit from our previous estimate of $25 million.

Looking a bit into our early estimates for fiscal 2016, we believe we will have similar capital needs for continued plant equipment, for new or replacement product production, and for capacity.

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

Thanks, Sheila.

While our third quarter was not profitable, we believe this to be of short-term nature.

We have been successful in the professional baseball stadium market and are working this spring on delivering these systems.

This has been the highest activity level in this market in the past 5 or 6 years.

To date, we have booked over $30 million of orders this fiscal year relating to baseball alone.

That is up from under just $10 million for all of fiscal 2014.

We continue to see opportunities in the large sports business and all sales segments of college, university, and professional sports.

While it is a bit early in the order cycle for our high schools, as we are just entering the selling season for this market, we see indications of strong demand for larger video display systems.

In addition, we continue to provide our customers with on-premise messaging center solutions to assist with the schools in communication to students and parents.

We believe both of these trends will continue.

A number of large video spectacular projects, such as in Times Square and Las Vegas, are being quoted in our commercial segment.

Digital billboards business also remain strong for new locations, with both our existing as well as new customers, and the replacement of existing digital displays in our customers' inventories.

We continue to have a positive outlook for our commercial Out-of-Home and on-premise businesses, even while orders on a year-to-date basis have been down from last year.

Order timing, once again, has an impact here.

In our international business, we continue to see strong interest in sports, spectaculars, and third-party advertising or digital Out-of-Home, as Sheila mentioned.

We believe this will continue to be a growth area for Daktronics.

With this said, however, the current strengthening of the US dollar is a trend we continue to watch closely, as it impacts the near-term competitive pricing of our products.

While we have had the headwinds of the operating structure in Ireland this past quarter and we may experience this for another quarter or two, we are pleased with our integration work to date.

As with most acquisitions, there is a period of time when the staff focuses on transition-related activity, which can distract from selling efforts.

We are seeing a number of opportunities and strong activity in the transportation segment in Europe and the Middle East areas.

With the infrastructure we acquired, we are positioned to capture and deliver on this work in the coming year and beyond.

As discussed in the past, our year-over-year comparisons in sales were relatively flat in the transportation business unit, but we see the core businesses continuing to grow.

Temporary funding for state departments and transportation and the general feeling that federal funding will pass Congress in May seems to have provided some movement of projects in this market and we expect modest pickup in the coming quarters for orders.

We are experiencing some cost pressure in wages and benefits that has and will have impact on our cost in the coming quarters.

While there is some regional and role variations, this is a general trend in South Dakota, in the US, and many international areas.

We continue to make selected capital investments to support manufacturing operations for new product lines and automation as we size our capacity to the overall market.

And we expect we will continue selected investments through fiscal 2016.

Work also continues on forecasting and planning tools for the upcoming busy season over the summer and fall to maximize profitability as we continue to grow volumes and revenue.

We continue to see ways to improve future profitability, although we do not believe it will be a smooth path as we focus on improving operating margin year over year.

Seasonal variability, along with the influence of long -- large projects, will continue to affect individual quarters in fiscal years.

The good news is our markets are growing and we have products and solutions to meet industry demand.

On the cost side, we focus on continuous improvement methodologies in our manufacturing and services area to improve efficiencies, which drive cost savings and improved experience for our customers.

We prioritize our improvement in growth strategies as well as our product development initiatives to focus on the areas we feel will bring the highest value to the market.

We continue our strategy for the creation and maintenance of product platforms for both display and control systems to achieve continued production improvements while enhancing value for our customer.

We have a broad range of product offerings and are bringing to market higher resolution surface mount and through-hole LED products.

Overall, our markets are dynamic and strong.

While we continue to live in a competitive marketplace, we remain optimistic about the future of sales opportunities and expansion in our business.

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

(Operator Instructions) Brad Mas, Needham and Company.

This is Brad in for Jim.

Just first, can you give the contribution from data display?

Sure.

For the year to date, we have had a loss of a little over $1 million for Data Display, but we have seen about $3 million of sales -- $4 million of sales for the year since we acquired that in August of 2014.

Okay.

And then with the Swiss rail order with SBB, can you give any more information -- size and significance?

And was that leveraging the Data Display acquisition?

That order was worked on and awarded before we actually completed the acquisition for Data Display.

And so the utilization of that factory will be minimal to deliver on that order.

The overall size of the project could exceed even $8 million US.

Okay.

Switching to live events, is it too early to get a read on the fall sports order pipeline for college and professionally?

In last years that [we had signed], some of those orders book in January and maybe even February, but it appears that the cycle is a little later in the year.

And so while we see a lot of activity, the awards are not at the same level.

So that will continue through Q4 and possibly even into May.

Okay.

And then with the upgrade at City Field that was announced, I mean, it is kind of surprising, just because the Field was built, I guess, five years ago, I think.

Is that unusual or are you guys starting to see some compressed upgrade cycles in these big arenas?

That kind of flaked in.

Are you talking about City Field, the Mets upgrade?

Yes.

Yes.

We have seen a number of our customers that even though the system is still running, they have gone in and make targeted improvements to different areas within their stadium.

And so while the Mets has, as you said, installed five years ago, it is not unusual to see an equipment upgrade midway through the useful life.

In this case, they combine that with some things outside of the stadium as well.

Okay.

And then digital billboard.

Can you guys give revenues and orders?

Sure.

For the third quarter, orders were $16.3 million versus $20.9 million last year.

Billboard revenue was $15.6 million versus $14.9 million last year for the third quarter.

And then can you -- do you guys -- are you able to size that between upgrades and new installations?

We don't have that information at this point.

But there is a combination.

Okay.

And then just last one for me.

Can you talk a little bit about pricing across the major segments and if you are seeing an impact from your competitors overseas due to the stronger dollar?

Certainly, the pricing continues to be a competitive marketplace.

And we haven't seen maybe a lot of relief in pricing, but we haven't seen drastic changes, either.

I think it is possible that pricing might be impacted by the current strong dollar, but we maybe are kind of early in that cycle to see what the indication of how significant and what the magnitude of that would be.

Okay, great.

Thanks, guys.

(Operator Instructions) Morris Ajzenman, Griffin Securities.

You gave us a round number on that Swiss railroad backlog number.

Can you give us some sort of a range of what the Atlanta Falcons backlog number would look like?

We believe that will be over $30 million in size.

And has any of that been recognized in the backlog in the past?

Or is this all going forward?

None of that -- neither order is recognized in our backlog.

Okay.

So again, that Atlanta Falcons order, will it be recognized over time or it will be recognized in this current fourth quarter?

We will recognize the order at the time it books and then the revenue will be recognized likely late in our 2016 and very early in our 2017.

For the Falcons.

For the Falcons.

For SBB, that is a framework agreement, so it would be a order and revenue on a station-by-station basis.

We think with the current timing, it would be complete within the next 12 months, but that is somewhat determined by the customer as well.

And getting back to gross margins.

Again, having difficulty, I guess, the last couple quarters; this quarter being 21.2%, I think is the number.

Do you envision getting back to 25.7% sometime over the next handful of quarters?

I guess the next quarter -- obviously, this current quarter -- this is me just being difficult, but do you see a rebound in the nearest quarters beyond this current quarter, getting back to 25%, 27%?

We certainly think it is possible to bring -- we fully expect our gross profit will go up.

Will it achieve the 25%?

We are very hopeful.

There is a number of factors.

You have got the US dollar.

You have got the response to competitive pressures.

We also have a number of cost saving product and process initiatives coming into play.

So it is difficult to predict that exact number, Morris.

No.

I understand.

And the cost pressures have been there, unless they are magnify themselves.

But the FX I understand, but looking back -- not the second quarter, but looking back to the previous five quarters -- first fiscal quarter this year and the four fiscal quarters in the previous year, I am looking here: four out of five quarters were north of 25%.

Some as high as 27%.

So has the competitive landscape of pricing intensified or is it the part -- I [truly] parse the FX, but what is it has changed that looks at -- you are hesitating to say you can get back to that level?

We look at Q2 and Q3.

I am kind of just setting those aside as an anomaly and looking back at Q1 of last year and trying to predict what would be different about this coming Q1.

And the competitive pressures, they are still there.

They were there last year and the year before that.

And we have got some measures in place to help take those into account and then improve our gross margins.

But we have got this strong US dollar and that throws a wildcard into, especially what Q1 and Q2 might be in pricing.

Can you give us an idea in this quarter that just ended how much FX impacted gross margins?

I would say for this quarter, there hasn't been a lot, since we quote ahead of the game.

But like Reece mentioned, we are -- it is difficult to predict, but there will be some impact going forward.

Thank you.

Thank you.

There are no further questions in queue at this time.

I will turn the call back over for closing remarks.

We appreciate everybody joining us this morning.

We hope the call was informative and we wish you a very good day and a good week.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.

Good day.