Daktronics, Inc.
Q1 2010 Earnings Call Transcript

Published: 25 Aug 2009

[Operator:]

Good morning ladies and gentlemen. At this time I would like to welcome everyone to the Daktronics’ First Quarter Fiscal Year 2010 Earnings Results Conference Call (Operator Instructions). I would now like to turn the call over to Mr. Bill Retterath, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, sir.

[Bill Retterath:]

Thank you. Good morning everyone, we appreciate your participation in our first quarter conference call. We intend to make some comments about the quarter and the future after which we'll open it up for a limited timeframe for questions. I'd like to first offer our disclosure cautioning investors and participants that in addition to the statements of historical facts, this call and our year-end News Release contain forward-looking statements reflecting our expectations and beliefs concerning future events, which could materially affect our performance in the future. We caution you that these and similar statements involve risks and uncertainties, including changes in economic and market conditions, management of growth, timing and magnitude of future orders and other risks as noted in our SEC filings, which may cause actual results to differ materially. Forward-looking statements are made in the context of information available to us as of the date of this call. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. With that, I'd like to turn it over to Jim Morgan, our Chief Executive Officer, for some highlights on the quarter.

[Jim Morgan:]

Thanks Bill, good morning everyone. Needless to say the declining top line we have realized certainly creates a challenge. The good news is we were able to keep the bottom line positive despite the top line declines. I want to first of all thank all the Daktronics’ employees for their conscientious efforts toward reducing costs over the past quarter and of course this is an ongoing effort. This is the beginning of the football season, so I thought I might note a few of the stadiums that open the football season under new Daktronics displays. The University of Florida Gators are a long time customer of ours

[Bill Retterath:]

Thank you, Jim. I will start with a few comments on gross profit which was better than expected for the quarter. In spite of some of the competitive issues we talked about last quarter, and as Jim alluded to they are still going on. There are a few large projects that came together nicely during the quarter which caused our gross profit margin to increase. We are still in a competitive environment, as Jim stated, and it is currently hard to say how this will affect us for the next quarter, but we are certainly headed in the right direction on internal performance. The margin on the contracts in our backlog suggests that we can be close to maintaining that contract margin. As noted our warranty costs improved for the quarter and we are down from both the fourth quarter of fiscal ’09 and the first quarter of ’09 by almost $2 million. It is going to take another few quarters before we start assuming that we have things under control. We have talked about the finishing issue we had in prior quarters and it was generally insignificant in this first quarter, and hopefully as we move through the football season openers we can conclude that we have the issue in check. On cost control within manufacturing we decreased our labor payroll costs consistently during this downturn, but still have more to go. For the quarter we are down an additional 5% full time personnel. Total costs of manufacturing for the quarter, which excludes raw materials, we have reduced more than $3 million from the second quarter of fiscal ’09. We are just below the cost base of approximately $16 million which includes a fair amount of non-payroll related fixed costs. Manufacturing costs are still higher than we would like and as we move in to the next two quarters of sequential revenue declines we know we still have a ways to go and we will keep showing improvement. On operating expenses, Jim talked a little bit on product development costs; we see those rising in fiscal 2010 over 2009. Given these initiatives and depending on sales it will likely exceed 5% of sales. In other areas like G&A and selling we should continue to see reductions, but the rate of reductions may not be the same. G&A and selling is now down almost 10% from the level of the second quarter of fiscal ’09 when this downturn hit us. G&A is down almost 14% from the second quarter and selling 8%. We will keep working on it though. We continue to focus on cash flow and still believe we can continue on this pass as we move forward. For the quarter our cash positions grew by approximately $3 million which included the dividend to shareholders of almost $4 million. CapEx is all about maintenance with some strategic purchases in there. We didn’t get closed on that building for almost $3 million due to some issues, but we are expecting and hoping that closes this quarter. Also, with the product development we are looking at some CapEx there, so overall for CapEx we are looking at the $15 to $17 million range this year. Our income tax effective rate increased again for this quarter. This results primarily from the impact of losses in foreign jurisdictions and the smaller tax benefit being created by those losses. Our hope is that through out the year the income internationally does improve and the effective rate goes down. With that I will turn it over to the operator and open up the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from Steve Dyer of Craig-Hallum.

[Steve Dyer:]

Jim, you alluded in the press release to some large sports opportunities that could create a pick up in the fourth quarter. Would that be in the backlog of the fourth quarter, or already recognized as revenue in the fourth quarter? Also, if there is any more color you can give on the nature of those that would be great.

[Jim Morgan:]

There are just some large sports opportunities. Some in the baseball world; some could be revenue in fourth quarter.

[Steve Dyer:]

Okay and then your competitors have announced a couple of wins lately and I am thinking, I guess, of the Dallas Mavericks arena and the Pittsburgh Penguins arena. How has your win rate that has evolved over time, is that more or less competitive than it has been?

[Jim Morgan:]

Our win rate, I mentioned there has been some aggressive pricing and that is indicative of those projects that are setting an example there. In general our win rate overall is just down slightly maybe from what it has been. It is not down dramatically, but we are seeing some of this very aggressive pricing.

[Steve Dyer:]

Is it kind of the typical players, or have you seen anyone new enter the market?

[Jim Morgan:]

It is some of both. In one case a company that hasn’t been in the US market for some time is making an effort to get back in. In other cases it is players that have been here.

[Steve Dyer:]

Okay. How do the sort of biddable opportunities over the next three or four quarters look to you relative to the last three or four? Obviously you expect revenue to sort of trend down over the next couple of quarters, but what about backlog? Is there a scenario where that grows or is that pretty tough to for now?

[Jim Morgan:]

Well for the next couple of quarters we see it declining. There are a lot of variables. When you get out to the fourth quarter it is harder to predict. What the economy is going to do and what else is all going on in the world is one of the variables there, but generally we would see backlog in the near term going down. Bill, do you want to add something to that?

[Bill Retterath:]

Yes, just to clarify, our hope is it is hard to see given what is going on to the fourth quarter, but the end of third quarter back log, depending on the timing of these orders Jim talks about, could affect third quarter back log. You could see that rising. There is a lot of uncertainty there, obviously, but…

[Jim Morgan:]

That is true. Some of those orders could be booked in the third quarter, by late third quarter possibly.

[Bill Retterath:]

Yes, so we will have to see how the timing turns out and [interposing].

[Jim Morgan:]

Predicting things out that far is an uncertain science at best.

[Steve Dyer:]

Sure, okay. Then in terms of the size of some of these sports deals, is it safe to kind of assume that the days of the $20+ million deal are over for a little while? Can you give us any color on maybe the magnitude of some of these?

[Jim Morgan:]

The $20+ I don’t think we see any on the horizon. There is some in the $10+.

[Steve Dyer:]

Okay and then Bill any other color you can give us just on how to think about gross margin going forward? I mean is this a decent level to use or did should it be a little lower with some revenues, or how should we think about that the next couple of quarters?

[Bill Retterath:]

I think the warranty costs are uncertain, that is the big factor

[Steve Dyer:]

Okay and from a headcount perspective, any color you can give us on that, and has it been primarily attrition as you have talked about before?

[Jim Morgan:]

Primarily it has been attrition that is correct.

[Steve Dyer:]

Can you give us any sense as to how headcount has trended over the last couple of quarters?

[Jim Morgan:]

I will give you just round numbers. We are probably down about 100 in the last quarter.

[Steve Dyer:]

Okay, thanks guys.

[Operator:]

Your next question comes from Jim Ricchiuti of Needham & Company.

[Jim Ricchiuti:]

I was wondering if you could comment again, give us a little bit more color, on the potential for order activity in the sports market

[Jim Morgan:]

The reason we are saying that we believe there is an opportunity for pick up is the projects that we have listed out there in our pipeline, we believe there is a good chance that they will go forward. To your second question, have we seen some pull back, there has been some cases where we have seen the college/universities decide that even if they have the money maybe they don’t want to do it right now, or they don’t want to do it quite as big as they were thinking just because of maybe the perception that it might be involved. So there is some of that that we are seeing in some cases. There are still a lot of things that are going forward as well.

[Jim Ricchiuti:]

Okay and I think you made some comments on the commercial market and the competitive environment and potentially some shifts there with customers. Can you elaborate on that and talk in terms of which product launch, is this something related to Galaxy, is it to billboard markets?

[Jim Morgan:]

It is the Galaxy in terms of the competitors that I mentioned that maybe you would see some changes there; that would be in the Galaxy side.

[Jim Ricchiuti:]

Okay, Jim this business, the transportation business tends to be very lumpy. I was a little surprising that the orders look like they came down sequentially. What is the outlook for the transportation business just given the level of the governments funding relating to the stimulus?

[Jim Morgan:]

Well we are seeing some activity that we believe has been freed up because of the stimulus money that has been made available. How long that will last or how that will go in the long term remains to be seen, but there are things happening out there. Transportation is another case where we are seeing some new competitors come with some very low pricing and that has caused a little bit of at least short-term disruption. We believe that is not sustainable, but we are seeing some of that on that niche as well.

[Jim Ricchiuti:]

As you look at the revenue opportunity for the year and you think about potential upsides to business do you see that coming from the internet market, do you see it from the professional market, or the commercial market? I am sure a little bit of all.

[Jim Morgan:]

The question is kind of what the aggregate of everything. We mentioned that there is some opportunity for pick up potentially in Q4 with live events. International, again we are seeing some good quoting activity in international. I mentioned the order for the Mall of Australia. There is at least some indications that that customer may want to move on with some additional things there, for example. Commercial, I think we have talked about that. The resaler with the sign companies, we are still seeing activity out there. It is not as fast as it was a year or two ago, but there are still things happening there. Our high school market, we alluded to that in the press release. For the quarter it was down, but interestingly enough toward the end of the quarter we ended fairly strong and almost as strong of orders in July as we had last year. So, again, month by month comparisons don’t tell the whole story, but it was encouraging to see that the orders came in pretty decent in July. That is kind of a quick recap around the quarter, if that helps.

[Operator:]

Your next question comes from Dick Ryan of Dougherty & Company, LLC.

[Dick Ryan:]

Bill, I didn’t catch your commentary on the tax rate. How should we think of that going forward?

[Bill Retterath:]

I would expect overall we will finish up at a lower overall effective rate for the year, but it is dependant

[Dick Ryan:]

Okay. On the redesign what kind of will be the total impact from product development? How much will you be spending on the redesign of the product line?

[Jim Morgan:]

To have a number just what is on that, I guess we tend to think of it more as far as our run rate of product development. There are phases to that project, so kind of what accounts as the whole project we are redesigning a number of different modules and there is the cabinetry, the installation phase and all of that, so it is millions of dollars for sure. Part of it also includes things like CapEx for things like tooling. I think we have potentially $1 or $2 million within CapEx for the tooling that we end up having to purchase once it goes online

[Dick Ryan:]

Okay, thank you.

[Operator:]

Your last question comes from David Levine of Dialectic Capital Partners LP.

[David Levine:]

Can you speak a little bit more about the pricing pressure in each individual segment? Is that a function of a larger conglomerate coming in to the market just essentially trying to gain market share? My second question is regarding backlog, have you seen a lot of cancellations out of backlog, and if so how does that compare to historical backlog trends?

[Jim Morgan:]

First of all, on the pricing no I would not describe it as a corporate conglomerate coming in. It is just a number of different instances and it is just an array of different companies, but I certainly not describe them as corporate conglomerates. It is not huge companies coming in. Regarding backlog cancellations, we haven’t had much of that at all. We don’t put an order in our backlog and consider it in backlog until it is signed and sealed. In some cases, if there are down payments required we don’t put it in until we have the down payment. So, we don’t typically have that situation.

[David Levine:]

Thank you.

[Jim Morgan:]

Thank you all for your questions, I appreciate that and I appreciate your time this morning. I will just note that this evening is our annual shareholders meeting and we certainly invite anyone who is in the area to participate and join us here. We will have an open house before that and have tours available, so we are looking forward to that event. With that, again, thank you for being with us and we hope to talk to you in the future.

[Operator:]

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. (Operator Instructions)