Daktronics Inc (DAKT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fiscal year 2016 second-quarter earnings results conference call. As a reminder this conference is being recorded today, Tuesday, November 24, 2015, and is available on the Company's website at www.daktronics.com.

Following the speakers' remarks, we will host a question-and-answer session and instructions will follow at that time. Should you need assistance during the call (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 second-quarter end earnings conference call. I would like to review our disclosure cautioning investors and participants that, in addition to the 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 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.

Fiscal 2016 is a 52-week year and fiscal 2015 was a 53 week year. The extra week in fiscal 2015 fell within the first quarter, resulting in year-to-date result comparisons to be 26 weeks versus 27 weeks.

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

Thanks, Sheila. Good morning, everyone.

Our Q2 FY 2016 sales were down from Q2 of last year, primarily in the Live Events and Spectacular segments of our business. This highlights how the volatility and timing of large projects in our various business segments can create difficulties in predicting sales levels on a quarterly basis.

During this quarter, we decided to delay the building of certain long lead time projects in order to take advantage of new product enhancements in our module designs. This affected timing and revenue recognition for these projects and we will see sales for this work later in the fiscal year and possibly early FY 2017.

While Live Events had lower sales on a quarterly comparison the gross profit has improved for the quarter. The mix of business in Live Events is substantially different this year to last, as last year we had a number of outdoor installations which included lower margin subcontracted services.

As you will remember, we also had a capacity challenge last year which created additional cost as we expedited schedules to meet customer commitments. Since that time, we have enhanced our planning tools and increased capacity to give better awareness and flexibility to meet market demand.

Within Commercial, our sales declined in contrast to last fiscal year, based on the timing of large projects in Spectaculars. We continue to see difficulty in predicting when orders in this segment will book, due to the complexities in design, permitting and other processes. Sales in our billboard niche were also down approximately 14% to the same quarter last year and are also down overall for the year to date.

This lag in orders will affect of the sales for this segment in the third quarter.

We continue to have strong relationships with key national billboard companies and expect demand to pick up again early next calendar year as these outdoor companies evaluate market needs and employment activities pick up in the spring.

We continue to find success in the Transportation business unit segment. At this time there is legislation moving its way through Congress to provide long-term federal funding for transportation projects. We are hopeful this will be enacted in the near future, bringing greater predictability to this business.

On the International front, sales were slightly lower, but we still see strong interest from the market, which is reflected in our project pipeline. We have successfully delivered multiple projects in sports, out-of-home and spectaculars. We continue to see growth in our Transportation segment in our International business. For example the deployment of our solution at Swiss Railway continued in the second quarter and we have received great recognition from the industry for this project.

Our profitability this quarter was impacted by a warranty adjustment we made for an issue that primarily affects our out-of-home product line. We believe that we are taking appropriate preventative measures to deliver to our customers the quality experience we promised by deploying various corrective actions.

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

Thank you, Reece. Sales for the second quarter of fiscal 2016 decreased to $158 million as compared to $173 million last year. Reece mentioned the primary factors for the decreases in Live Events and Commercial. For the second quarter, gross profit was 22.5% this year as compared to 23.6% last year.

The warranty impact was approximately $2 million, which was a decrease in gross profit percentage by 1.7%. Total warranty as a percent of sales for the quarter was 3.9%. While we continually monitor our warranty claims and provide a reserve for estimated costs upon initial sales recognition, we determined with the experience of those types of claims we needed to increase the reserves in this quarter.

Gross profit improved in the Live Events business unit from 16% to 20% quarter over quarter for factors mentioned by Reece. The Transportation business gross profit improved through increased sales and factory utilization. International gross profit remained relatively flat.

Commercial and High School Park and Rec creation business sales gross margins decreased due to a mix of project pace and some pricing pressures in the marketplace.

Operating expenses for the second quarter were $29.9 million as compared to $28.6 million last year. The increases relate to personnel-related costs and increased product development activities.

Our third quarter is historically a lighter quarter for sales and profits, due to the seasonality of our business in sports and due to the decline of outdoor construction work in the winter months in the Northern Hemisphere. The third quarter also has two major US holidays, reducing the number of workdays available.

We are entering the quarter with a $184 million backlog, but as previously discussed, some of this relates to larger football projects we expect to convert to sales beyond fiscal 2016 into fiscal 2017. We have converted some projects to the enhanced module production design, but timing of the conversion of these sales continues to be dynamic.

While still dynamic, we have scheduled our factories at higher production rates as compared to last year's third quarter. Gross profit predictions there also remain dynamic, pending the conversion of sales this coming quarter.

We anticipate operating expenses in dollars to be up as compared to the third quarter of fiscal 2015 for general increases in personnel costs, information technology, maintenance costs, and increased design and development activity.

Our overall effective tax rate for the second quarter was 44% and is higher than forecasted effective annual tax rate of approximately 36% because of the lower income, and related impact of permanent nondeductible items. As we have previously discussed our tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income.

We reported negative free cash flow of $20 million for the first six months of fiscal 2016 compared to the positive free cash flow of $28 million for the same period in 2015. The cash and usage primarily was due to the lower revenue and timing of inventory receipt and production of subassemblies in preparation for upcoming projects.

Cash flow was also impacted by the timing of cash receipts from projects in process compared to timing in prior quarters. Our cash and marketable securities positions remain positive at $53 million at the end of the quarter. We expect our capital usage to be approximately $23 million for fiscal 2016.

Use of capital expenses is for manufacturing equipment for new or enhanced product production, expanded capacity, investments in quality and reliability equipment, demonstration equipment for new products and continued information infrastructure investments.

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

Thanks, Sheila. Our backlog is solid and we're going into the third quarter with higher book demand than last year's third quarter. Our orders for the year are down to date; we continue to have a strong pipeline of high confidence opportunities going into the third and fourth quarters.

We are seeing a general lag in the timing of orders and sales in our Billboard segment and believe that trend is short-term in nature.

Orders in our International business are also lagging and will have an impact on sales realization in the short term. This business, however, has high variability as it is predominantly large project-based and we expect these markets will continue to trend upwards over time.

We have materials and manufacturing capacity to achieve our customers' schedules and we do not anticipate additional costs for fulfillment as we experienced last year during our busy season. We continue to see ways to improve profitability, although we do not believe it will be a smooth path. Seasonal variability and the influence of large projects on our business will continue to affect individual quarters [and] fiscal years.

The good news continues that our markets are growing and we have products and solutions that are perceived well within the marketplace. We have a good reputation. We were pleased to announce our first ultra-high resolution display installation for the New England Patriots this past quarter. Industry demand for this product line is increasing and is being deployed at concourses and professional and college stadiums, and control rooms for transportation and in corporate boardrooms.

During the past year we have also developed a family of outdoor products that provides a more competitive price with different performance levels. This type of product is desired by some of our customers. An example would be out-of-home advertisers that have operating permits for three to five years and have similar expectations of product lifetime.

We have sold and installed our first displays in this family and feel this brings opportunities to expand our business, especially in developing markets in parts of Asia and other regions. We plan to continue to invest in our suite of multiple resolution products for our different applications for both indoor and outdoor use.

With the opportunities seen in the digital marketplace, competitive forces continue to be dynamic. Over the last year there have been mergers, acquisitions and investments by our competitors. We continue to evaluate the marketplace dynamics and adjust our strategies as needed.

Global economics and currencies may also have an impact on our business, especially our international regions. As of today we continue to focus on our strategies to serve our customers well with quality and reliable solutions which meet their business needs over the long term.

Our market outlook over the coming years is positive. We see continued adoption of our products in all of our major markets. Our on-premise and out-of-home customers continue to turn to digital messaging solutions to advertise or communicate information to their audiences.

Unique projects such as seen in Times Square or Las Vegas continue to be considered by developers and new owners to help attract large, sustained audiences. Our solutions in these markets have natural replacement cycles as the products have a known end-of-life.

The trend for larger, more capable video systems continues in our sports businesses in the high schools, through college and on to professional sport venues. Transportation will benefit from innovation in roadway usage and ongoing federal funding.

International is a combination of all these markets with political, cultural or economic influences impacting specific market potential by region or country.

These factors, combined with generally positive economic conditions, are conducive to modest growth on into the future.

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

(Operator Instructions). Jim Ricchiuti, Needham & Company.

Good morning. I want to go back to the commentary that you made around the Live Events business. So, maybe you could be a little more specific. You talked about delaying certain long leadtime projects. Are those outside of the sports business?

My impression was some of the projects in the sports business needed to be completed just because of the timing of the various fall sports seasons. So, maybe you could just talk a little bit about some of these longer leadtime projects that were delayed.

Thanks for the question, Jim. In our sports business, we were fortunate to win orders with a large new stadium construction -- the Falcons, the Vikings are examples of those, as well as some deliveries for next fall. We have available capacity within Q2 and we could have chosen to reduce those orders; however, with product design changes we felt there would be advantages to wait until later this fiscal year and even early next fiscal year for some of those projects.

It won't impact our commitments to those customers as it falls in line with their -- our committed delivery dates for their projects.

So, Reece, these are outdoor projects? These are outdoor football projects you are referring to? Is that right?

Yes, exactly.

Okay, so, is there a way to size that, the revenue impact from these?

I could say our backlog is as high as it has ever been in Live Events. These are multimillion dollar projects, so we did move some of that outside of third quarter and into fourth -- I'm sorry. Out of second quarter into third and fourth quarter and beyond.

You know, I guess what I'm getting to is originally you were talking about revenues being roughly flat year over year. So, if we look at where the revenues came in, is the variance due to specifically these larger football deals that you thought you were going to see some revenues from or are there other contributing factors to this?

I think there's maybe a couple things. As we mentioned last conference call there weren't -- there is a higher predominance of indoor arena work this year and not as much outdoor football work for this last fall's delivery. But we did have these large orders that are longer lead time in nature and that's part of the revenue picture within our Live Events business unit.

Is that helpful?

Okay, yes. Just a couple of other questions.

So, I wasn't -- you were fading in a little bit -- in and out -- at least what I was hearing and I think you talked about gross margins. And I want to make sure I got this. Are you saying that the warranty expense on the out-of-home projects -- and Sheila, I think you may have mentioned this -- was it about 1.7 basis points -- 170 basis points? So, is the margin excluding that your margins were around 24.2%?

Correct.

So, how -- obviously we're in a seasonally weak quarter, but in terms of the way we should think about gross margins, perhaps later in the year in Q4, which is seasonally a better quarter. Is that 24% gross margin, do you feel it's achievable?

We do think it is achievable.

Okay.

We do have the work built up like we mentioned. We do have backlog that helps support utilizing our underlying cost structure.

Got it. And then one final question, then I will jump back in the queue. Obviously, you are off to a tough start through the first half of the year. Are you anticipating that your revenues can still grow for this year? For the full year?

That is difficult to predict with the timing of the conversion of orders to sales.

Okay, thank you.

Tristan Thomas, Sidoti & Company.

A follow-up to Jim's question. Are the Falcons and the Vikings stadium, is that comparable in terms of revenue-wise to what you did for the Jaguars display?

(multiple speakers).

On (multiple speakers).

Vikings would be less than the Jaguars and the Falcons would be greater than the Jaguars in overall revenue.

Okay, and then how much of those contracts are in the backlog now? 100%, 75%?

Almost all of that is backlog, both of those projects. The Vikings has a nearer horizon than the Falcons.

Okay, so then --.

Due to their project on-site schedule.

Okay, so then you figure what, 75% of the backlog should most likely be recognized in the balance of the year? Is that fair --?

Most of the Vikings and a good portion of the Falcons will be recognized this fiscal year.

Okay. Can you -- and I think I may have misheard you when you cut out a little bit, in terms of the billboard Commercial business when you mentioned the third-quarter impact, so we are waiting for when you said the government regulations, so it is really more realistic to expect a rebound in that in fourth fiscal quarter?

We believe in the Billboard business they have a calendar year planning, so we would start to see orders after the early next calendar year, and so sales would lag that by eight weeks to 12 weeks.

I know you mentioned sales route displays. Could you maybe provide an update more so on what you're doing to try to capture market share overseas?

Certainly in our Transportation business the acquisition we made in Ireland last year, which closed last August, has improved our Transportation business -- our position in Transportation all through Europe and other countries in the region.

We continue to work with that team and invest in what they're doing, and are active throughout Europe, the Middle East and other countries.

Okay. Sorry, I apologize for jumping around. One final question; I'll get back in queue. With the warranty reserve as displays become more complicated, more advanced, is it likely that we might see an increase in either the frequency or the amount of warranty reserves as displays get more complicated?

We believe that we've invested more into reliability and process technology than ever before, and we continue to understand more and more about how to improve the ongoing reliability of these products. If there is an area as new technology is released, we might see an uptick in warranty reserves, but in general it is our belief that ongoing warranty expenses would trend down.

Okay, thank you.

Morris Ajzenman, Griffin Securities.

Question. We now have four consecutive quarters where either there is disappointment in the top line, either a disappointment in gross margins or a disappointment in EPS. Understand business is lumpy and there is a lot of demand by customers and you have push out at times [where there are], but do you believe we are at an inflection point where starting on next couple of quarters we will see better trends than what we have seen on the past four quarters?

Yes, certainly, as we reflect on the past four quarters, the last 12 months, Morris, we believe there were different factors at play in each one of those, and as an organization we continue to learn and develop and take this knowledge and feed that back into how we are responding to the market and how we are producing products. And we believe there will be a general uptrend in our business, both in the top line and in the operating margin.

Will that happen in the next two quarters? We certainly would love to see that, and we're putting things in place to make them better. How fast those changes come into play and whether we can recover for the first two quarters of this fiscal year remain uncertain.

And let me ask Sheila, I wasn't sure if you gave us some guidance for the third fiscal quarter? Sometimes you give us some sort of [view], you give us some feeling versus the previous year's quarter. I might have missed it. Did you give us any sort of guidance as far as the topline or gross margins into this third quarter?

Our current data, as any other third quarter, we do have a couple of years major holidays, which always impacts our third quarter along with our seasonality in sports and such, we are going into the quarter with a good backlog, and currently our factories are scheduled at a higher capacity than in past quarters. So we expect it to be a little bit of an uptick on the sales side.

Last question, and I will get back in queue here. Warranty expense, we know this has been an ongoing issue as far as getting down into probably close to 2% level, and again there has been a lot of one-offs happening over a number of quarters now running.

Again, similar question to previous question, are we at an inflection point where we are going to be seeing warranty expense run closer to 2% level or so, rather than the 3%, 4% level?

Yes, we believe -- as we mentioned we are rolling out some new module designs -- not only will there be visual performance enhancements with those new module designs, but we also have built into those things that we have learned on product reliability and overall technical performance in the field. And we believe changes like that will help drive our overall warranty costs down over time.

I understand over time, but do you believe that is going to -- we will see some material improvement over the next two quarters?

Certainly we have -- when we encountered a special issue in the field, we work diligently to uncover why that is and then we reserve at that time for what we think it will take to remedy the situation. And, so, we feel that the impact of this issue in Q3 and Q4 will be greatly mitigated.

Thank you.

(Operator Instructions). Jim Ricchiuti, Needham & Company.

It sounds like you are still anticipating a pickup in order activity in the International business, and I am just wondering what kind of visibility you have there. Just given the level of decline that you saw in orders in this past quarter.

Yes, we of course have a sales pipeline and an order pipeline I guess and are able to monitor that. That appears to be very strong, but it is a large project business, so you're talking multimillion dollar orders. Whether you win them or lose them or whether they choose to push them out a quarter or not, those are what makes it difficult to understand what next quarter will be.

But, overall, we are seeing a strong interest for our International markets and believe they will continue to grow.

Okay, so, clearly -- I guess you had a tough, relatively tough, year-over-year comparison versus year ago. But at less than $12 million of orders, is it fair to say that that is a bit of an aberration just because of -- it just seems like a very low level.

Yes, we had some nice orders last year and we didn't see those repeat this fiscal year. But I don't -- right now, we don't have the opinion that we will have a lower level than last year, so we believe that business is still growing.

Okay, and Sheila, if I go back to last few years the fiscal third quarter is seasonally your weakest. In the past, we have seen your revenues decline sequentially 25% to 30%.

So, it sounds like you are assuming modest year-over-year growth, but if we think about the pattern that we have seen in recent years, is it still reasonable to assume that kind of sequential decline? Or is it -- could it be a little better just given the weakness you saw in the October quarter?

I think a little bit of sequential decline is appropriate to think about, but yes, a little bit higher than past third quarters that we have been able to achieve on.

Okay, thank you.

That does conclude our question-and-answer session for today. I would now like to hand the call back to Reece Kurtenbach for any closing remarks.

Thank you. Thanks, everybody, for your participation on the call, and the good questions. I wish all of you a happy Thanksgiving and a nice holiday season. Thank you.

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