Daktronics Inc (DAKT) 2025 Q2 法說會逐字稿

Good day, ladies and gentlemen, and. Thank you for standing by. Welcome to the Daktronics second quarter, fiscal year 2025 financial results conference call. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Carla Gatzke, you may begin.

Thank you, Howard. Good morning, everyone. Thank you for participating in our second 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 our future financial performance and future business opportunities.

These forward-looking statements reflect the company's expectations or beliefs concerning future events all forward-looking statements involve risk and uncertainties which could cause actual results to differ materially from our expectations.

Such risks include but are not limited to changes in economic and market conditions, management of growth, timing and magnitude of future contracts and orders fluctuations in margins. The introduction of new products and technology availability and costs of raw materials, components and shipping services, geopolitical and governmental actions and other important factors.

These identified factors could cause actual results to differ materially from those discussed in this call. In the company's second quarter, 2025 quarterly earnings release and its most recent annual report on Form 10-K

our second quarter, 2025 earnings release contain certain non-GAAP financial measures and was furnished to the SEC, the Securities and Exchange Commission on a Form 8-K this morning. We also made slides available for today's call and all of these documents are available on the Investors section at Daktronics website, www.daktronics.com.

I'll turn the call over to our CEO, Reece Kurtenbach.

Thank you, Carla. Good morning, everyone. I appreciate all you joining us today, we demonstrated our continued strong execution towards driving growth and returns above our cost of capital, again this quarter, we achieved sales growth in the first half of our fiscal year, typically the highest seasonal period and a record in a quarter for cash generation which illustrates our disciplined management of working capital on the quarter sales growth and further strengthens our balance sheet positioning U.S. to well as

we look into the future, as you can see on our slide presentation on page 3 fiscal second quarter -- 2025 highlights we delivered great value to our customers with tight efficiencies and cost reductions in our manufacturing areas and consistently meeting project deadlines during the quarter all while driving forward our strategic and digital transformations.

During the quarter, we completed innovative and visually striking installations at the L.A. Clippers' Intuit Dome, the Miami Heat's Kaseya Center, numerous college and high school sporting facilities and upgraded many commercial locations to the latest digital technologies.

Our sales growth and careful working capital management drove cash flows from operations of $43.3 million for the fiscal second quarter and $62.8 million for the first half of the year.

Additionally, we made strong progress along our stated digital transformation road map with work toward the launch of our enterprise performance management tools and upgrades of our service and systems maintenance solutions set to go live as planned in the second half of the fiscal year.

In addition, we are working to enhance and add new show control capabilities. Our show control software solution provides dynamic seamless and fully immersive game day and event production.

It is really exciting to see the first ever flame ball center hung installation at the Miami Heat Building. First of its kind creations using LED technology is something that drives our company forward and excites our employees bringing this iconic sculpture to life for the Miami Heat.

The Kaseya Center and their audiences is a great engineering feat that we are proud to have accomplished we look forward to providing other customers, similar types of creations to amaze their fans and audiences.

In addition to the record generation of cash, we delivered a solid quarter and first half year of financial performance growing revenue 4.5% to $208 million at 26.8% gross margins and earning a 9.2% adjusted operating margin for the quarter backlog is at $236 million declining as planned as we move into our seasonally lower volume, third quarter.

As you will recall, our third quarter is historically lower because fall sports installations have been completed. There is a natural slowdown of outdoor construction projects, and we have two major holidays in the period, reducing the overall days of production because of these dynamics and the reality, many of our costs are more fixed in the near-term operating margins are often lower in our fiscal third quarter.

The management team activates different mitigation strategies to reduce costs during this time such as reduction in shifts and utilizers capacity to focus teams on revenue generation and overall improvement activities.

Sheila will further discuss financial results later in the call but first, please turn to slide 4 market vertical FQ two review for more details in live events. In addition to the installations already highlighted, we completed delivery for several large projects which included center hung video ribbon boards and other cutting-edge displays to provide innovative great game day experiences in various arenas and stadiums.

Customers in Trusting Electronics included University of Connecticut, University of Kansas, the LA Lakers crypto.com Arena, Van Handel Boston Convention Center, Philadelphia Phillies, Baylor University and the AAA Charlotte Knights.

Our outlook for this segment remains similar to our last call. We expect live events demand to remain strong as venues, enhance facilities to entertain fans and attract athletes. Orders in this market are large, and installations can be lengthy and complex and therefore creates variability in period-to-period order and sales volumes.

As we plan each for each season, we like in each to a graduating class with each year having a certain number of new systems and potential upgrades or replacements. Some class sizes are larger or smaller with individual owners or customers determining when their projects will move forward.

As we evaluate the current class of available projects in the near term, we now expect spring baseball project orders to be a smaller class as a number of potential upgrades have moved out to future seasons.

As we look ahead, we continue to expect healthy demand for in the bowl applications and expansion into outside the bowl as more focus is being placed on entertainment areas, spaces like entryways, atriums, concourses and adjacent entertainment zones.

Our narrow pixel pitch line of products matches the needs of customers for many of these locations and continues to be in demand.

Our commercial business primarily consists of sales through resellers, mainly sign companies to many types of customers and applications including military utilities, transportation, national retailers, quick serve restaurants, casinos, shopping centers, cruise ships, commercial building owners, petroleum retailers and other on premise. Customers also included in this segment are out of home advertising companies and larger advertising displays called spectaculars. Orders can vary in this market also because of the larger size orders in these two segments.

During the quarter, we secured a large project for the center formerly known as the CNN Center in Atlanta which drove the order volume increases. In addition, out of home orders increased as a result of our continued strategies to promote to independent out of home operators and serve the large national out of home advertisers winning us additional orders.

Our focus for this market is to grow our core areas and continue to build out our AV integrator network to market our narrow pixel pitch product lines especially in control room applications used by military utility and transportation agencies.

As an example during the quarter, we were successful in a sale of an NPP product through an AV channel for use at the George H.W. Bush library. This slide also includes a picture of an installation at Quantico Marine Base.

A testament to our focus on the military AV channel and use of NPP products for multiple applications in our transportation market. Variability in orders versus prior periods is natural in this segment which is a large project business and therefore lumpy.

Despite the down order comparison, our financial performance for this segment was solid as we fulfilled a backlog of orders from long time repeat customers including one at our Sioux Falls Regional Airport, we continue to see a trend in upgrades in and around airports for digital signage.

Our teams are focused on winning projects for intelligent transportation systems including traffic management centers, airport projects and other mass transit system projects. The outlook for this segment remains solid and is poised to take advantage of selling our full line of video displays systems from our NPP products to our pre-qualified and trusted ITS systems used by state and city governments

International. During the quarter, we were awarded a number of contracts in the out of home space in Saudi Arabia and Australia. While orders continue to be slow as compared to prior years which we believe continues to reflect economic and geopolitical uncertainty.

We are actively quoting opportunities to additional out of home customers and for several midsize sports products and continue to see signs of converting more quotes into orders with our existing customer base and a focus on these types of new orders from a Broadway array of customers. We are laying the groundwork for future repeat and upgrade types of orders in the future.

The picture displayed on this slide is for an MPP product installation in Singapore. In addition, customers value our product designs tailored specifically to their unique needs as evidenced by a strong response to our Eco-Smart energy savings product which is desired by our energy sensitive customers.

In, High Schools, the market continues to convert to full video usage which drove the increase in orders for the quarter.

We began deliveries of our new higher margin product to not only support our customers but further bolster our contribution margin for this segment.

The pictured installation at Warren Harding High School in Ohio is one example of the number of high schools upgrading outdoor installations to video displays and increasingly demand has grown for full video usage indoors as well as mentioned a moment ago. With respect to our show control software, we continue to make progress on.

Our major enhancements of control systems to enhance the live event experience and improve workflow efficiencies. These enhancements will empower our customers to deliver dynamic presentations using cutting edge scoring and timing software, 3D data visualizations, real-time rendering and integrated data through sports specific applications.

The addressable market for our new solution is broad, including anyone supporting Live Events, entertainment and sports, even if they're not using, Daktronics displays and is slated for release by fiscal year end.

Additionally, we are introducing cloud access, allowing customers to schedule, store and manage their content and data sources from anywhere.

The work that we are doing here success of nicely to increase our recurring revenue streams, which we intend to be a driver for gross margin expansion over time as, Sheila will detail in a moment during the second half of the year, we are set for two major internal technology launches at the core of our digital transformation road map.

These launches are the building blocks of the future foundation for which we will service our customers, measure our performance and manage the overall business. We'll also continue to develop our overall comprehensive transformation efforts through the rest of the fiscal year.

Refining our transformation initiatives and making selected investments in transformational actions designed to drive future years, revenue growth, profitability, and sustainable returns in the mid to upper teams, for ROIC, I will discuss this more after a bit but first for additional details on the financial results for the quarter and the year,

I'll turn it over to Sheila.

Thank you, Reece. I invite you to turn to slide 5 and 6 titled fiscal quarter two and year-to-date fiscal 2025.

Financial Highlights to follow the second quarter and first half of the year's financial outcomes.

The quarter-over-quarter, comparisons in this slide and related discussion are as of and for the quarters ended October 26, 2024, July 27, 2024, and October 28, 2023. Unless otherwise stated order volume for the quarter declined primarily due to the order decreases in live Events, transportation and international business units.

Variability in orders comparatively is natural in these large project business areas and the time of year for sports projects, these declines were offset by large project bookings in the spectacular area and ended calendar year purchases by our out of home customers in the commercial business unit and were offset by solid growth in the High School parks and recreation business unit.

Because of the market's adoption towards the use of video displays.

Orders for the first half of the year increased 3.3% based on the strong return to more normal seasonal trends. As compared to prior years. Product backlog level was $236 million. At the end of the quarter, quoting activity remains active across all segments.

The quarter sales increase was a result of comparatively higher volumes in live Events and Transportation business units offset by lower sales levels in the international business unit. Sales in our commercial and High School Park and Recreation business units were relatively flat.

This mixed difference is the result of variability of orders, as describes with the higher levels of sales In Q2 2025 we generated similar sales to last year's record level on a year-to-date comparison, gross profit percentage of net sales decreased slightly to 26.8% for the second quarter of fiscal 2025, as compared to 27.2% a year ago.

This solid gross profit level is a reflection of volume mix some price improvement and careful management of manufacturing and service fulfillment costs on a year-to-date basis. Gross profit of 26.6% as compared to 29% is attributable to the sales mix. Differences between periods.

We continue to generate operating income consistently through the last five quarters. In the high single digits, operating income was 7.6% of sales in Q2. And as adjusted for one time consulting related expenses was 9.2% on a year-to-date basis was 8.8% or 9.8%. As adjusted operating expense increases reflected the investments in staffing to support our digital transformation and future sales growth initiatives and salary and wages increases.

During the second quarter, we also incurred $3.2 million in non-recurring consulting services to help us implement and accelerate our strategies to grow and drive efficiencies and consistent profitability levels. We expect to invest up to 5 to $6 million more during fiscal 2025. For the business and digital transformation initiatives.

Our sales growth in careful working capital management drove record cash flows from operations of $43.3 million for the second quarter and $62.8 million for the first half of the year, cash restricted cash and marketable securities totaled $134.4 million at the end of the quarter. And our working capital grown to $243.7 million with a working capital ratio of 2.3:1.

Management's focus remains on maintaining the strong balance sheet and on managing working capital through the expected growth of the company.

As previously announced, we have delivered also fax the notice of conversion of the initial $7 million in face value of the $25 million senior secured line promissory note on November 11, 2024. With the conversion date of yesterday, December 3, 2024, we intend to convert the remainder of the convertible note over the next several months in tranches of up to $7 million in face value every 30 days.

As provided for in the convertible note, the company will deliver shares when also fax certifies, the delivery of shares will not cause its ownership to exceed the maximum percentage currently at 3% and will increase to 14.99% in late January.

The conversion when completed will save $5.4 million of interest over the remaining term to offset the share dilution that will result from the conversion of this note into common stock. We intend to execute on our existing share repurchase authorization as soon as practical.

Given our financial performance, our view of market growth and our strong positioning in the market and with the strategic initiatives we're undertaking, we are well positioned to drive profitability and cash flow generation through the remainder of fiscal 2025 and beyond.

Now, please turn to slide 7 titled fiscal Year 2025 Digital Transformation and strategic priorities on the digital transformation front. As we previously discussed, we're investing in foundational enterprise performance management tools that will strengthen our management systems and improve data availability to guide capital allocation decisions and focus our investments in the most profitable business areas.

We are on track for our phased implementation of these integrated business planning tools and processes and to achieve the value these tools provide first up is our consolidation and reporting tools. Implementation, testing and training has started.

In addition, we made progress on design and data collection of information needed for integrated business planning. This configuration data gathering and testing is set to be completed by the end of the fiscal year and utilized beginning fiscal '26 to better align our strategic operational and financial planning.

We also made substantial progress in testing and creating deployment plans for the launch of our modernized service systems and management tools. These tools will both improve our internal operations and customer experiences as we expect this application to go live.

By the end of our fiscal year, we started planning for the automation in our front end quoting and sales processes which we planned to launch in phases. Beginning in fiscal '26.

These investments in digital transformation are expected to improve customer experiences, drive operational excellence and help us leverage our operations as we grow the business and grow our profitability.

With that. I'll turn it back to Reece to provide an overview for the other areas of strategic focus.

Thank you, Sheila.

We're also making investments to drive profitable growth and accelerate the lowering of our overall structural and product costs to increase market competitiveness. Not only do we see the digital transformation efforts as foundational to lowering our structural costs, but we're also investing in people capabilities and working with consultants to accelerate those strategies.

Finally, we continue to execute on strategies to both grow and capture greater share of our SAM.

These strategies include advancing our control system capabilities as I previously mentioned and adding professional services and other content to drive MRR ensuring we are delivering enhanced returns as we help our customers achieve success in their investment offerings.

Turning to slide 8 titled FY'2025 strategic priorities, we continued execute on our business transformation plan. The goal of which is to grow revenue faster than the company's addressable market, expand operating margins and generate returns on capital in the mid high teams and consistently above the company's cost of capital.

During the quarter. We made significant progress in a number of areas including new show control capabilities, enterprise management tools and upgrades to service and system maintenance solutions which are set to go live in the second half of the fiscal year.

Key components of this program include executing on our digital transformation initiatives carefully allocating resources to end market segments, prioritizing investments in areas which tectronics clear advantages and opportunities for market for above market growth.

At acceptable margins, aligning product delivery with differing customer needs through a tiered product offering strategy with pricing aligned with the value delivered, achieving higher profit by reducing product input costs and focusing on efficiency, improvements in manufacturing and other operations, maximizing balance sheet efficiencies and refining our critical business and financial management practices including product pricing, business planning and incentive compensation to fully support our performance objectives.

In terms of our process. During the first quarter, we conducted a data driven analysis to identify numerous actionable opportunities to accelerate our profitable growth.

In the second quarter, we launched a deeper initiative to further analyze plan, prioritize and road map specific initiatives. We are nearing the conclusion of this planning and this planning and choosing phase and can highlight some early learnings and initiatives

Today, we have gained insights on our customer relationships and perceptions in the market, these insights confirmed we are aligning to the trends and needs of customers with our concentration quality service, on quality service and control system capabilities.

We will continue to identify and adapt to market trends and buying behaviours and product needs to focus on product, quality and reliability services and support and control system capabilities. We have also found areas of opportunity for improved performance and are planning to reinvigorate our lean management practices and supplier management.

We have identified opportunities in portfolio and management approaches, to the market pricing strategies, product and production costs. Our teams are examining the breadth and complexity of our offerings and are evaluating ways to reduce cost to produce and install.

Our teams are doing a great job in using data driven strategy and proven methodologies to plan and prioritize value enabling initiatives. We will continue our digital transformation initiatives including our enterprise performance management system implementation and modernized service tools.

And we'll begin executing our back end and customer facing road map. During the back half of the fiscal year, these initiatives are expecting to add more resilience to our operations in reacting to changing operating environments and more over result in above's revenue growth and mid to high teams' return on capital.

We're refining our forward-looking plans with the intention to report on actions no later than our Q3 call.

We expect to capture the quickly realize the benefit of this effort in the second half of FY'2025 with additional benefits to be realized as we complete implementation by the end of FY'2026.

In conclusion, our summary on slide 8 recaps our key highlights our consistent performance serves as evidence we are on a sustainable trajectory of growth and increasing profitability.

Our multiyear transformational strategies and near-term progress on these goals. Demonstrates our commitment to improve and consistently earn returns above the cost of capital.

And in the top range of our industry, we are focused on the right allocation of resources and capturing growth in existing profitables and developing growth in additional areas we are focused on accelerating digital transformations and other initiatives to lower structural and product costs.

We are a global industry leader in best-in-class video communication displays and control systems, and we continue to focus on bringing value to our customers. We are the only US manufacturer of scale with a global footprint servicing by geographic market and consistently demonstrate world leading technology leadership, high-quality solutions and world-class service.

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

(Operator Instructions)

Our first question or comment comes from the line of Anja Soderstrom from Sidoti your line is open.

Hi and, thank you for taking my question and congrats on the great quarter here. So given that the second quarter was a lot better than we had expected, and your given your prior commentary about you expecting to be in line with consensus on the full year.

Do you expect a more steeper decline in revenue for the second half than we had before or, how should we think about that seasonality?

Once again, Anja we have a large project business, so revenue can be lumpy from quarter-to-quarter. But we do expect overall for the fiscal year that our orders and sales will be on par or exceed last year's.

Okay. Thank you. And in terms of the gross margins, they have held up pretty nicely over the last couple of quarters. I understand. Now, when we're going into a more a softer season in the second half, they might be coming down. But how should we think about those gross margins for next year?

I think we're winning our fair share of orders, and so the at the pricing that we set in the marketplace, so I think in third quarter it's more of a volume situation than a price compression on certain projects.

Okay. Thank you, and you also mentioned the e-sales channel that you have launched and, how do you see that trending and how do you expect that to affect margins as that grow?

That's a great question. We have continued to grow our e-sales channel, but it's really on small standard, very standard types of orders. You might think of shot clocks that are in a high school basketball facility and we intend to continue to grow that in the back half of this fiscal year as well as in future fiscal years that should bring the selling cost down on every one of those orders and allow the sales teams that we have to focus on, higher value, more complex sales. So we believe that overall revenue will continue to grow the gross margins on those products. Will we will be able to maintain those and the selling costs overall for a unit like that should become more efficient.

Okay. Thank you. And it seems like your operating expenses are going to be a bit inflated this year by the consulting fees you're spending on the digital transformation. So, are those, do you expect to contain paying consulting fees in next year? or should we expect margins maybe to have a positive effect from that falling off?

Yes, we have two major initiatives, a business transformation initiative and a digital transformation. The business transformation should be contained this year and much of our digital transformation will be in this year. But some of the initiatives, such as our configure price quoting and sales efficiency initiatives we believe will start in fiscal '26 Q1 and continue through fiscal '26 possibly even in FY'27. And those might have some consulting fees and other costs associated with them as we work through those really exciting but can be challenging initiatives?

Okay. Thank you. And the last one for me before I get back in the queue with a new administration. Coming in and their sort of approach to the tariffs, how do you think that might affect Daktronics?

Well, that's a great question. I wish I had better insight into what the new administration is going to do. But obviously we source a lot of semiconductors. And a lot of semiconductors, and related materials, such as printed circuit cards, are sourced outside the U.S. and we bring into either our U.S. factories or one of our factories outside the US, and then bring the finished product in. And so tariffs will impact those products.

How much depends on the specific actions taken and it is difficult to predict.

Okay, I understand, thank you. That was all for me.

Well, thank you. I appreciate you on the call today.

Thank you. Our next question or comment comes from the line of Mac Furst from Singular research, Mr. Frust, your line is open.

Thank you. This is Mac first with Singular Research. Congratulations on the quarter and thank you for taking my question.

Yes, no worries. appreciate you on the call today.

Yeah. So with the new administration taking office in January, what other changes do you expect following kind of the question that the previous was raised?

Yeah, once again, lots of activity in that front right now, it appears that there'll be changes in the tariffs potentially in different regulations or the regulation environment or the regulatory environment. But too soon to really predict or to make a estimate on what, what we might change in our operations to account for that.

Yeah, you produce in China, but you do not sell it in China. So you basically import from China. with a large tariff expense of maybe even 35% on anything coming out of China, that would obviously depress your margin, right? Is that a fair statement?

I think I understood most. You broke up a little bit there, Mac, but let me try. We do have a factory in Shanghai, China and we produce really some nice products there, some of which come into the US, but much of which goes to countries outside the US, we also have another factory in Ireland where we produce products that sometimes come to the US and once again to many countries outside the US.

And we have our major production in the kind of the South Dakota, Central Minnesota area of the US, of which we source many semiconductor items like LEDs, the ICs to turn those LEDs on and off, power supplies and other components.

And we source some of those through China and some from other companies outside of China. But China is a huge player in the semiconductor market. And so there's they have some influence on the overall pricing and availability of many components. And those will be impacted by tariffs, certainly from China and possibly from other countries, depending on how broadly tariffs are applied by the next administration.

Yeah. Thank you very much. Thank you. Thanks for answering my question.

I may point out Mac, that most of our competition produces outside the US, and in you know, China, the south, Southern China, so it won't be necessarily a competitive disadvantage because they will be in the same sort of environment.

And we do have an advantage that we can bring in components and add value in the US. Which is unusual in our industry, we're have the largest and, and really the biggest manufacturing facility in the US.

Okay. Thank you for pointing that out. Thank you very much.

Thanks Mac.

Thank you again. The current relations on the quarter.

I appreciate that.

Thank you. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

I appreciate everybody attending today's call and the nice words from Mac and Anju about the quarter. We do have investor outreach activities planned for the next quarter, including here in December, there's a benchmark discovery conference and a singular conference and we'll be attending both of those and we'll, we'll also of course host the next earning call at the end of our Q3 when we release results.

Appreciate all you joining us today. I hope you have a great holiday season, and I look forward to seeing you in February. Thanks everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect everyone. Have a wonderful day.