Daktronics Inc (DAKT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fourth-quarter and FY15 earnings results conference call. As a reminder, this conference is being recorded today, Tuesday, June 2, 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 year-end and fourth-quarter end 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 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.

As a reminder, FY15 was a 53-week year and FY14 was a 52-week year. The extra week of FY15 fell within the first quarter, resulting in a 14-week quarter versus 13-week quarter 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. Overall we had a successful FY15. Our sales exceeded $615 million in this 53-week fiscal year, surpassing pre-economic downturn years and setting a record sales level for the Company. This sales volume reflects the health of digital systems solutions in the global marketplace.

Our international business earned over $100 million in sales, a first for this unit, a result of our ongoing strategy and investment in growing our international market share. In August of 2014, we acquired a Company in Ireland focused on the transportation market in Europe and the United States. While international sales for this entity approximated only $5 million of our international sales in FY15, the knowledge, capabilities, and product platforms acquired will be leveraged to further grow our transportation sales outside of the US.

Live event sales remain strong, reflecting the continued trend of professional and college sports arenas upgrading to new, larger, and higher resolution systems in order to attract, entertain, and inform their fans. Sales also increased in the commercial business unit relating to digital billboard and spectacular solutions.

During this FY15, we changed our name of the schools and theaters business unit to high school, park, and recreation, HSPR, due the sale of the rigging and theatrical portion of this business unit. HSPR sales improved year over year due to the inclusion of video systems in the sports side of this business and the increased size of many of these projects.

HSPR on-premises message centers sales remained strong. These systems are used by the schools to communicate with students, parents, and the public.

Sales in the transportation business unit were down, mainly due to project timing and uncertainty in the federal transportation highway bill. This is a key funding source for state projects that include intelligent transportation in display and control systems.

The acquired business in the US from the Ireland entity contributed nearly $4 million of sales for the year. While sales level improved, our overall operating margin, while positive, declined year over year. This decrease was caused by many factors, including our overall mix of business. FY15 had a significantly higher amount of large project work, and this work had increased amounts of subcontracting, which is done at a lower gross margin than our product work.

Another factor was the capacity constraints experienced during our fiscal Q2. We were fortunate to win more orders than expected, but then needed to spend more to fulfill these orders to meet critical customer deadlines. And finally, we had increased operating cost as well as the continued competitiveness within our businesses.

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

Thank you, Reece. Sales for the fourth quarter of FY15 increased to $158 million, as compared to $136 million last year. Live events contributed to the sales increase, as the number of projects for both Major League and Minor League baseball stadiums were up as compared to last year.

We were also successful in our commercial business units, due to projects in our spectacular and billboard segment. But still saw some softness in our on-premise and national accounts segments.

International also had a nice increase in projects when compared to last year, primarily due to the timing of business, due to the lumpy nature of the large project business in international.

Looking at the full year, sales were up by over 11% due to increases in international; commercial; live events; and high school, park, and recreation. A portion of the sales increases relate to the additional week in the year. The increases were also due to continued demand in the marketplace, as many of our customer segments have increased, as Reece mentioned.

We also broke $100 million in international, as we continued to execute on our international expansion strategy. On the other hand, transportation sales were down for the year by over $6 million, due to the general lag and the timing of orders.

For the fourth quarter, gross profit was 22.3% as compared to 24.8% in the fourth quarter of last year. This decrease for the quarter was primarily impacted by the mix of business.

We had more larger projects, which puts pressure on margins due to the competitive nature and the inherent subcontracting work within those projects. Gross profit for the year decreased to 23.5% from 25.7% for similar reasons, and which were mentioned in Reece's commentary.

Operating expenses for the quarter were $28.2 million, as compared to $26.9 million last year. Increases in operating expenses are primarily due to personnel-related expenses and the additional cost infrastructure of the acquisition. For the year, operating expenses increased for the same reasons and were $113.3 million compared to $105.2 million.

Overall, while sales increased a little over 11% for the year, operating expenses [came to] 7.7%, which caused the decrease as a percent of sales from 19.1% to 18%. While we enter the year with a record $191-million backlog, I would like to point out that a little over $30 million of this backlog is not expected to be realized until late FY16 and mostly into FY17, because of the large project for the new Atlanta stadium.

As we look into the first quarter of FY16's buildable backlog, estimated customer delivery schedules, and predicted order bookings, we estimate sales in the first quarter to be comparable to slightly up from last year. And as a reminder, our first quarter of last year included that extra week.

Gross profit percent is expected to be lower than after year's first quarter and comparable to the fourth quarter, due to the current projected sales mix and estimated fixed operational costs. We anticipate operating expenses in dollars to be comparable to slightly less to the first quarter of FY15 for increases in salaries and related costs and additional costs for the Daktronics Ireland Company we acquired in the second quarter of last year, offset by the additional week of FY15 and slightly better as comparable to the ratio of operating expense to sales.

Our overall effective tax rate for FY15 was 34.1%, slightly less than our FY16 forecasted rate of 36%, as research and development credit was reinstated in FY15. 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 at $83 million at the end of the year.

We are projecting capital expenditures for next year to be $25 million for continued plant equipment for newer replacement product production, for capacity, and for investments in quality and reliability in-line production equipment. We also will continue on expending some of that CapEx for IT infrastructure costs.

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

Thank you, Sheila. As we enter our new FY16, we are confident in the global digital marketplace and the opportunities available across the sectors we serve.

Domestically, many companies continue to turn to digital messaging solutions to advertise or communicate information in the on-premise and out-of-home marketplaces. They use our solutions on local, regional, and national levels to create higher levels of engagement, greater relevancy in their messaging, and better brand consistency. You will see our systems at main street businesses, at schools, at regional and national chains, major retail centers and by major roadways and transportation hubs.

We also see the number of opportunities increasing in the commercial spectacular segment. These are unique projects you might see in Times Square or the Las Vegas area or other locations attracting large, sustained audiences.

While our on-premise solution sales were down for FY15, we are optimistic for new product-line releases in FY16 and positive economic conditions will create continued opportunities for expansion. The trend is continuing in the sports to add larger video systems from the local schools and colleges to the larger universities and professional sports stadiums. We expect this level of sales to continue in the near term.

Our transportation unit is seeing a number of projects move ahead, giving us confidence this market continues to grow with opportunities for digital messaging systems. In addition, the acquisition we made this past year in Ireland has opened up additional opportunities in the United States because of the new product line acquired.

Internationally, we are focused on continuing to leverage the acquired knowledge and our now combined product offerings to expand our transportation business in the Europe and in Middle East markets. In addition, internationally, we have focused on sports, spectacular, and out-of-home application projects, all of which have continued opportunity for expansion.

In all our business areas, we have natural replacement cycles as these products have a known end of life. This, combined with the general economic conditions, are conducive for continued modest growth in demand from the marketplace.

We match this demand with a broad range of applications, services, and solutions, offering our customers high degrees of reliability and performance. We also bring technical expertise to intricate designs and logistically complex installations. We work with our customers to offer them cost-effective solutions to meet their objectives.

While the market is set for growth, we understand we need sustained profitability to capitalize on this opportunity. We've continued to focus on improving our operating margins and growing profitably over the long term. We have a number of initiatives in place to work towards these improvements; however, the benefits will take some time to realize.

With this said, we are not alone in seeing the opportunities and we live in a competitive marketplace. Many others are seeing a positive demand picture and continue to compete aggressively in this business.

Our competitive field has been stable, but in the last fiscal year there have been some consolidations in acquisitions which may have some impact on us. Also, as our international business increases, we are influenced to a greater degree by economic conditions across the globe.

We're also experiencing some cost pressure in wages and benefits that has and will have impact on our costs in the coming quarters. While there are some regional and role variations, this is the general trend in South Dakota, in the US, and many international markets.

We did increase our US manufacturing production employees' pay at the beginning of FY16 to remain competitive in the marketplace. These economic conditions are a reality, but we believe our market reputation, product portfolio, and internal capabilities put us in a strong, enviable position. We are focused on succeeding in this business, and we have initiatives targeted at continued improvement in our world leading solutions and operational excellence.

We have a number of product introductions coming this next year to serve the demand for transportation solutions, higher resolution video systems, and specific customer requests, through our ongoing investment in product and control system platforms. We are focused on continuous improvement methodologies in our manufacturing and services areas to create efficiencies, which drive cost savings and improve the experience for our customers.

To support our initiatives, we continue to make selected capital investments to support new product lines and automation as we size our capacity to the overall market. Work also continues on forecasting and planning tools to maximize profitability, as we continue to grow volumes and revenue.

We see ways to improve future profitability, although we do not believe it will be a smooth path. While we are focused on improving operating margin year over year, we believe that seasonal variability, along with the influence of 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.

Overall, our markets are dynamic and the underlying fundamentals are strong. While the market is competitive, we remain optimistic about the future of sales opportunities and expansions in our business.

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

Thank you.

(Operator Instructions)

And our first question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open.

Hi, good morning. Reece, I wanted to ask you about the live events business. Just, in light of the bookings you saw in Q4, and what I think appears to be guidance for flattish revenues for the full-year FY16, were there orders that were -- you were anticipating in Q1 that were pulled into Q4? And generally, how does the pipeline look for Q1 orders in live events?

Our live events marketplace continues to be a great spot for Daktronics, as these systems get bigger and more complex. And we think our winning ratio is similar to previous years. However, depending on the timing of the projects and the orders, what we can deliver within a certain quarter can vary.

There are still projects that are on that are still in the decision-making process that are for our Q2 and the first half of the year. So, we'll see how those play out, as the next months unfold. Is that helpful, Jim?

Yes. Was the level of bookings in line with your expectations or a little stronger for Q4? It seems to be about the strongest bookings we've seen in this segment of the Business in a while, and I know there's seasonality to it.

I think, the bookings are good. I would say that we're very happy to have the Atlanta Falcons contract and the Vikings, but those are not for fall delivery. They're for later on in this fiscal year and into next fiscal year, as Sheila said.

Many of the big projects for this fall happen to be in indoor arenas, which was different than last year at this time when we had a lot higher mix of football. With that said, it's not that there was some big projects in football that we missed out on; it's just, they didn't happen this year at the same extent as last year.

Okay. And just moving to the topic of gross margins, which is obviously I think what people are focusing on as well, you're assuming -- I think you're guiding to flattish gross margins in Q1. But you're trying to, I think, make a number of -- take a number of actions to, I think, improve margins. How should we think about when you're going to see some benefits from this playing out over the course of FY16?

I think we've given guidance or some indication of what we could see based on how we view the market in the first two quarters. As we roll out some of these product enhancements, we'll see how that impacts the second half of this fiscal year.

Reece, I'm not completely clear on that. Should we assume that, with modest growth in revenues this year, that you would see a more meaningful improvement in gross margins, or do you see flattish gross margins for the year with modest revenue growth?

I'm personally hoping that we can see an impact of our changes, and see some increase in gross margins.

Okay, thanks very much.

Thank you.

(Operator Instructions)

And I am showing no further questions at this time. I'd like to turn the call back over to Reece Kurtenbach for closing remarks.

It looks like we do have a question from the line of Morris Ajzenman with Griffin Securities. Your line is now open.

Hi, guys. Continuing on the gross margins, I know about a year or so ago, I think it was a warranty expense, I'm not exactly sure, that had a big negative impact on gross margins. And you've always talked about the competitive pressures. Yet the last three quarters, again, gross margins have been pretty far south of 25%.

What is it that's changing? I know you have initiatives that is costing near term, but is there any specific things that have really changed, or is it competitiveness, whatever that has really put pressures on gross margins most of this year? And I understand next year you're saying bye to your investments; that's [going to give up] pressure. But has anything changed materially over this past year to impact gross margins?

As we tried to indicate in our conference call, it's maybe a collection of things. We had this -- our last fiscal year, we had this issue in our Q2 of last year where we had capacity constraints. We are seeing increased competitive pressures in the marketplace.

There have been a few minor changes -- minor acquisitions and consolidations in our industry. We'll see how that plays out in our FY16.

As far as a real dramatic thing I could point to, Morris, I'm not finding a real silver bullet there. I will say warranty, as you mentioned, continues to decline as a percent of sales for us. And we're continuing to focus on our quality and reliability to make sure that continues to trend in a favorable direction.

I know we don't project out this far, but should we believe that the FY17 gross margins can be north of 25% again, after all the initiatives have played out?

Yes, that's further out than I project, Morris. We continue to focus on improving our internal processes and the performance of our products, both performance our customers see, and then the performance it takes for us to build and the cost to build. And so, we continue to drive in that direction. I think it's early for me to make a prediction on that.

And a question for Sheila: Was there any FX impact? I know internationally, you have $100 million in revenues this past year or thereabouts. Any FX hit in this quarter, or year?

There is some impact to us because of the strong dollar. It's hard to maybe see in our financials; it's more on the quoting side, where we become a little less competitive in, say, Europe and those sort of areas. But I would say there was some impact, but not a material amount. But we did see some impact because of it.

Okay, and can you just give us, for this quarter, what billboards year-over-year comparison was in fourth quarter?

Sure. For the billboard revenue for the quarter, we had a little over $17 million of sales, as compared to about $14 million last year.

Thank you.

Thank you. And our next question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open.

Just on the subject of billboards, I was wondering, and maybe it's a little too early, but are you seeing any change in the competitive dynamics with the consolidation there of one of your major competitors?

That competitor's presence in the billboard market hadn't been at the same level as in previous years. And so, with that consolidation, it hasn't really impacted our billboard market, as we sit today.

Reece, maybe you could just touch on the competitive environment, where you're seeing perhaps a little bit more pricing pressure? Is it in other segments of the commercial market, or is it in the live events, which I guess is also -- tends to be more competitive with some of your larger competition?

In the display products, we're seeing continued competitive pressures really across the board, but that is similar to previous years. And then, in our live events or this large project business, we have the products that we manufacture, as well as the site works and what we would call subcontracting work that we do. And the projects that were available last year had a bigger percentage of subcontracting than the previous year. All of those blend together to create the overall gross profit for the Company.

Is there any way to look at backlog, and give us any sense whether that backlog will have similar dynamics with respect to subcontracting work?

As far as firm backlog, we, of course, have visibility to that, but it doesn't go out in time. We generally book in this -- what we book in this quarter, we would ship next quarter. So, our visibility on that is in three- to six-month range, and doesn't go out over the long term.

But looking at that backlog and the various projects that are involved, would you -- you've had more subcontracting work in these projects. Do you expect a similar profile with the backlog that you have right now?

I would say, looking into the first quarter, it's similar to our mix from fourth quarter. So, there is a level of subcontracted work yet to be performed.

Got it, thanks. And one final question from me: Just in general, in the commercial market, showed very nice order growth there. Can you talk about where that's coming from? Is it fairly broad-based? Are you seeing any signs of -- we've obviously seen some weakness in GDP growth here in this -- in the US. But just in general, where are you seeing the strength coming from in commercial?

We had a nice year of sales and orders in our billboard marketplace. And that can be somewhat of a timing when our large customers place large orders to us, but we continue to have optimism there.

And then, we talked about our spectacular niche and the displays in, say, like a Times Square or in Las Vegas. We've seen a nice uptick there.

But we have seen a softness in the on-premise advertising or for the local businesses that might buy a display. That's been a little bit down this past year.

And then, on the international front, any color you can provide on where the strength is coming from there? Obviously, you've had I think some large orders, but is there any color beyond that on the international side of the Business?

It's been pretty nice in international. We've had some out-of-home advertising. We've had some nice sports orders -- some of these spectaculars. The transportation business, we're doing this nice product -- this nice project in Switzerland, as well as some other work in the European areas. So, I don't think it's maybe any one niche that excelled beyond the rest, but just a blend in the Business.

Doesn't sound like -- (multiple speakers) sorry, go ahead.

As I said in previous calls, we've invested a lot in the years in an international presence. And we're seeing that having people in different offices around the world, they're able to build relationships and be responsive.

It appears at least that you're gaining some market share here. Is that maybe a fair way to characterize the market right now in the international?

Certainly, we're doing better internationally. Understanding the whole market for international, and what our peace of that is, is a pretty complex picture. I don't know if I have good figures to give you there, Jim.

Okay, thanks a lot.

Thank you. And our next question comes from the line of Joe McCallum with Keeley Asset Management. Your line is now open.

Thanks for taking my call. I just had two questions on the topic of gross margin. The first: Last quarter you had mentioned a -- I think, 150-basis-point drag from the data display results. Could you make a similar comparison in this quarter?

Sure. Maybe for the whole year, we've seen around $1 million, $1.5 million of additional costs that weren't covered by additional sales. So, that's maybe the drag we could characterize for the whole year.

Okay. And my next question is: Last quarter, on the topic of gross margins, we talked about the problems you guys had handling the planning process and using your systems effectively, and that the fix for that was improving systems, improving processes. I'm wondering if this quarter's gross margin reflects the problems you had before you took steps to improve things, or if any improvement was offset by some of these other factors?

The planning that we talked about was to really help prevent us from getting into an over-capacity situation. And I think we're in a much better position there, and have better visibility. But we didn't see that situation happen in our Q4, so I don't think it impacted Q4 as much.

Okay, thank you.

Thank you. And I am showing no further questions at this time. I'd like to turn the call back over to Reece Kurtenbach for closing remarks.

Thank you, everyone. I appreciate your time and your candid remarks. I hope you all have a pleasant summer, and we look forward to talking to you again after Labor Day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.