Daktronics - Earnings Call - Q1 2018

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Daktronics First Quarter twenty eighteen Financial Results Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Sheila Anderson, Chief Financial Officer. Ms.

Anderson, you may begin.

Speaker 1

Thank you, operator. Good morning, everyone. Thank you for participating in our first 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. 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, fluctuation of margins, the introduction of new products and technology and other important factors as noted and detailed in our 10 ks and 10 Q SEC filings. With that, let me highlight some of the financials. Orders were $175,000,000 as compared to $153,000,000 for the 2018 as compared to 2017. Most of the order fluctuation this quarter is attributable to the volatility in our large project and account based business in the commercial spectacular and billboard niches and in the international business unit. Orders were also impacted by a softer demand in commercial on premise displays this quarter.

As a reminder, both orders and net sales fluctuate due to the impact of the large project based business and account based business that we're in, including displays for professional sports facilities, colleges and universities, spectacular projects and national or global accounts, primarily in our out of home advertising space. Our business also fluctuates seasonally based on the sports markets and construction cycles and is dependent on varied schedules by the varied schedules based on our customers' needs. Sales for the 2018 increased to $173,000,000 as compared to $157,000,000 last year. Sales increased in live events, high school park and recreation and transportation business units, decreased in commercial and international business units all quarter over quarter. Live events contributed to the sales increase as the number of projects for both professional sports and college and university work was up compared to last year.

Continued market demand and delivery timings also contributed to sales increases in the transportation business unit. Other business unit sales declined followed the trends in orders. Looking ahead to the quarter of fiscal twenty second quarter of fiscal twenty eighteen, we are starting with a strong backlog and order pipeline. We currently are estimating our second quarter sales to be comparable to last year based on the current customer demand. Gross profit improved to 25.8% during the 2018 as compared to 24.9% during the 2017.

Gross margin percentages were favorably impacted on improvements on actual delivery costs on our large projects in the sports segments and by improved productivity and higher sales volume over our fixed costs. Total warranty as a percent of sales was 3% during the 2018 as compared to 2.8% last year. Operating expenses increased 1,800,000 or 6% compared to last year to a large degree from the increase in product development expenses. Product development expenses increased by $2,000,000 to speed up our development of display and control solutions through additional resources allocated to our product development functions. Selling and general and administrative expenses remained relatively flat quarter over quarter.

Our overall effective tax rate expense was 29.7% as compared to the expense of 31.2% last year. We forecast the forward looking effective annual tax rate to be approximately 30% to 32%. As we have previously discussed, our effective tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income. Our cash and marketable securities position was $52,000,000 at the end of the quarter. We reported negative free cash flow of $8,900,000 as compared to a positive free cash flow of $4,500,000 for the same period in fiscal twenty seventeen.

This cash usage was primarily due to the timing difference between sales recognition and the outflow of payments for inventory components as compared to the receipts of cash from our customers upon the agreed upon payment terms. Capital expenses increased to $4,100,000 for the quarter as compared to $2,100,000 last year. Primary uses of capital included manufacturing equipment, research and development testing equipment and facilities, demonstration equipment for new products and information technology infrastructure. We made no repurchases of stock during the first quarter. We expect capital expenditures to be less than $20,000,000 for the fiscal year.

At this time, I'd like to introduce Rice Gurtinbach, our Chairman, President and CEO for a few additional comments.

Speaker 2

Thank you, Sheila. Good morning, everyone. We had a positive start to fiscal twenty eighteen. Our teams across the company worked hard to serve our customers, which translated into financial performance for the first quarter. We are historically busy at this time as the first half of our fiscal year has many of our sports customers installing facility upgrades or enhancements.

This is also the construction season in the Northern Hemisphere and much of the world uses this time to install outdoor applications before the winter months. The higher sales levels improved performance in our large project business through improved manufacturing productivity, increasing our gross profit. Operating expenses increased as we invested more in our product development area to accelerate the creation or enhancement of customer solutions, including investments in both display and control technologies. Orders lagged a bit from last year on a first quarter to first quarter basis, but overall, levels across the businesses remain strong. We expect continued success in growing our business over the long term for the following reasons.

We continue to be confident in the expanding global digital marketplace through digital adoption and available market growth across the sectors we serve. We continue to enhance and develop product lines comprehensive solutions for our broad market base and specific customer needs. This allows for success in market up markets during natural ups and downs of each segment. In addition to our comprehensive product lines, we are committed to earning customers for life, driving continued investments in quality, reliability and other performance enhancements to meet our customers' needs today and over the long term. Active support from initial project planning throughout the intended use of the system leads to satisfied customers and repeat business during the natural replacement cycle.

While we are optimistic about our long term future, various geopolitical, economic and competitive factors may impact order growth. Our business will continue to be lumpy. While these areas can impact a specific fiscal period, we continue to pursue long term profitable growth. Our outlook for fiscal twenty eighteen remains unchanged from a quarter ago. Our international business unit continues to be poised for growth through expansion in the use of digital systems and increases in market share in our focus segments of sport, out of home, spectacular and transportation.

We expect continued demand for large orders due to the adoption of video sporting applications in the high school park and recreation market allowing for growth. Transportation has growth opportunities due to continued investment in The U. S. Transportation systems and the stability in federal funding. In our commercial business unit, we see opportunities for growth mainly driven by digital opportunities in the Spectacular segment, both new and replacement systems for our national account based business, expansion of solutions for indoor applications and continued activity in the billboard segment.

We also expect live event sales to maintain order levels of prior years. During fiscal twenty seventeen, we made progress on increasing product development velocity and expect to continue this into fiscal twenty eighteen. While these efforts will increase development expenses as a percent of sales in the near term, we believe this investment is necessary to drive forward new solutions to meet customer needs and to expand our global market share. Rollouts of products, including display and control solutions are expected throughout the coming year. While the path will not always be smooth, we believe the growing market and our industry leading solutions position us to generate long term profitable growth.

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

Speaker 0

Our first question comes from the line of Maurice Adnan from Griffin Securities. Your line is now open.

Speaker 3

Hi, Rich. Hi, Sheila.

Speaker 1

Good morning.

Speaker 3

Live Events, mean, clearly, you're starting to get some good traction here, up modestly the previous quarter and up about 28 this quarter. And then you have on the international side, it's kind of flip flopping. Q4, it was a very strong, I think about 34% of top line with orders down modestly. But yet in Q1, international sales down 90% and the orders are down 41. I understand kind of lumpy there, but just playing out live events in international, obviously, there's other divisions, things happening there too.

But what sort of trends should we expect over the next handful of quarters? Will they continue to be lumpy? Or will we have some sort of progression at least for those two divisions?

Speaker 2

Morris, those both of those two divisions are really our large project based business. So it's a multimillion dollar projects that you win or lose. What we book in one quarter, we tend to deliver in the next quarter or two. And so we expect those businesses will continue to remain lumpy throughout their as long as we're in them, I would say. We do have a much longer track record within the Live Events business, a much bigger installed base.

And so we see maybe even though we know it's lumpy, you've seen it more consistent over the past few years. We believe that if we had thirty years in the international business, we would see an installed base there drive maybe more predictable or more consistency in that business.

Speaker 3

And switching gears and then I'll get back in queue here. Gross margins north of 25%, which I think is to find some traction 25.8%. Yet surprisingly, you're able to reach that level of warranty expense still being 3%. How sustainable are those gross margins over the ensuing quarters? You're looking at flattish revenues I think you're guiding for Q2.

Can we keep gross margins above 25% going forward?

Speaker 2

On a project by project basis, the gross margins have been stable. We haven't seen that being constricted. What we do see is if the volume goes up in any one quarter, our operating expenses don't go up at the same level. So we get some traction there. So it will depend somewhat on volume, but the gross profit has been relatively stable.

Speaker 1

And then we also have the historical Q3 that's like Rice mentioned that really highlights the volume differences.

Speaker 3

I'm sorry, any comment on warranty expense being 3%?

Speaker 1

It was a little bit of mix of our projects this quarter. So I think it was a little bit higher, but we are still maintaining and working on our quality and reliability throughout our organization and hope that comes down over time as we've talked.

Speaker 3

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Jayant Ishwar from Singular Research. Your line is now open.

Speaker 4

Thank you. Great quarter. I have a question on your pipeline. See that the order the bookings compared to last year are down. But how strong is the pipeline at this point as compared to the same time last year?

Speaker 2

The quoting activity is very strong and we feel we have a very active pipeline. As far as a quarter over quarter, I'm not sure if we have those numbers available for you today, but I would say it's comparable.

Speaker 4

I don't know the gross margin, is that sustainable over the rest of the year except for Q3?

Speaker 1

It depends on mix, like Rice mentioned, as well as the volume. So it all goes together.

Speaker 4

Okay. Thank you.

Speaker 0

Thank you. I'm showing no further questions at this time.

Speaker 2

I would like to thank everybody for attending today's call. As a reminder, our shareholders meeting is August 30, next Wednesday, and details of the meeting can be located in the proxy. I hope you have a happy rest of your summer and fall, and we'll talk to you next quarter.

Speaker 0

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