Daktronics - Earnings Call - Q2 2018

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year twenty eighteen Third Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, November 2137, and is available on the company's website at www.daktronics.com. 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,

Speaker 1

Thank you, Candace. 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. 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 the 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 ks and 10 Q SEC filings. With that, let me highlight some of the financials. Orders for the 2018 were $142,000,000 as compared to last year's second quarter of $117,000,000 Most of this order fluctuation is attributable to the volatility in our large project and account based business in Live Events, International and Commercial business units. As a reminder, both orders and net sales fluctuate due to the impact of our large project and account based business. Large projects include multimillion dollar orders of display systems for professional sports facilities, colleges and universities and spectacular projects.

Account based orders can also be multimillion dollars for in size for national or global customers, mostly in our out of home advertising space. Our business also fluctuates seasonally based on the sports market and construction cycle and is dependent on various schedules based on our customers' needs. Orders also for the quarter were impacted by softer demand in the commercial on premise displays. For the year, orders are up slightly by 1.1%. Sales for the 2018 were relatively flat at $169,000,000 as compared to $170,000,000 last year for the second quarter.

Sales increased in Live Events, High School Park and Recreation and Transportation business units and decreased in the Commercial and International business units quarter over quarter. Side events contributed to the sales increase as the number of projects for professional sports and colleges and universities work was up as compared to last year. Continued market demand and delivery timings also contributed to sales increases in the transportation and high school park and recreation business units. Commercial business unit sales declined compared to last year due to the softer demand in the on premise display business, a reduction of shipments and orders in the Spectacular niche, which was partially offset by an increase in our billboard niche due to the timing of deliveries. International business unit sales followed the decline in orders.

Gross profit was 25.2% during the 2018 as compared to 26.1% during the 2017 and remained flat on a year to date basis. Gross margin percentages for the quarter were negatively impacted by the additional warranty expenses mentioned in the release, offset by a positive one time $1,200,000 gain from the sale of our non digital operating business and also due to the improved productivity and sales mix. Total warranty as a percent of sales was 3.9% during the 2018 as compared to 2.7% last year during the same period. Operating expenses increased $1,500,000 or around 4.8% during the 2018 as compared to the same year last same period last year due to the large degree from the increase in product development expenses. Product development expense increased by $1,800,000 for additional resources focused on speeding up the development of display and control solutions out to the market.

Selling expenses decreased quarter over quarter mostly due to lower bad debt expense and commission expenses and general and administrative expenses remained relatively flat quarter over quarter. Our overall effective tax rate was 24.6% as compared to 30.1% last year. The primary factors impacting our effective tax rate is due to our an increase in expected research and development tax credits because of the increased velocity in product development this year as well as utilizing a portion of our foreign valuation allowance against of net operating losses. We forecast the forward looking effective annual rate to be approximately 30%. As we have previously discussed, our effective tax rate can fluctuate depending on tax changes in tax legislation and on the geographic mix of taxable income.

Our cash and marketable securities position was at $61,500,000 at the end of the quarter. We reported a positive free cash flow of $3,600,000 as compared to positive free cash flow of $10,500,000 for the same period in fiscal twenty seventeen. Capital expenses for the first six months of the year were $7,700,000 as compared to $4,600,000 last year. Primary uses of capital include manufacturing equipment, research and development, testing equipment and facilities, demonstration equipment for new products and information technology infrastructure. We expect capital expenditures to be less than $25,000,000 for this fiscal year.

We made no repurchases of stock during the first six months of the year. Looking ahead, our third quarter is historically a lighter quarter for sales and profits due to the seasonality of our business in sports, outdoor construction and the impact of two major holidays in The U. S. We are starting fiscal twenty eighteen third quarter with a higher backlog than last year and an active order pipeline. Based on current estimates of production and deliveries for the quarter, we estimate third quarter sales to be at a level higher than last year's third quarter.

However, sales could change pending project bookings and customer schedule changes. I'll now turn the call over to Rice Kurttenbach, our Chairman, President and CEO, for a commentary on our business.

Speaker 2

Thank you, Sheila. Good morning, everyone. We had a positive financial performance for the 2018, reflected in increases in sales, operating income and net income. Order bookings paced similarly to last year at $342,000,000 overall for Daktronics. Looking deeper into the business units, order bookings on a year to date basis were up in Live Events business unit for continued demand for upgrading or new installations throughout professional sports, including the NFL, NHL and MLB.

We continue to see demand in the marketplace from facilities using our solutions to enhance the fan experience or the entertainment factor using increasing and higher resolution display products. We are seeing this both in upgrades or refurbishments for existing facilities as well as planning for new venues. High school park and recreation orders remained flat for the first six months year over year. This market continues to trend towards more sophisticated video systems, which have higher average selling prices in addition to continued needs outside of the sports venues to communicate with students, parents and visitors. Once again, these trends exist when refurbishing existing systems as well as in new locations.

Commercial business unit orders decreased this year as compared to the same time frame last year. The major factors contributing to this difference were the competitive environment in the on premise niche, fewer national account based on premise opportunities and volatility of large custom projects in the spectacular niche. Digital billboard orders were up slightly year over year. While it was a slower start for orders, the marketplace continues to adopt digital technology for on premise and third party advertising applications, and we see this continuing in the future. The pipeline of opportunity is active in the spectacular area of our business as well.

We have seen strong activity for replacing or refurbishing existing systems as well as the placement of systems in new locations across our commercial segments. Orders in our international business unit are lagging year over year, primarily due to the irregular nature of large projects. This inherent variability affects timing of both orders and sales and sales was also impacted in this period. Transportation business unit orders have decreased on a comparative six month year over year basis, but we believe this decline is due to the general volatility of timing and not an indication of changes in overall market activity or our market share. Opportunities continue to surface due to stabilization of transportation funding and increased customer demand for mass transit systems and advertising applications.

The higher sales level for the year improved gross margins through gains in manufacturing productivity. We also saw improvement in gross margins on large projects and selected price increases in certain markets. In addition, profitability improved by selling our non digital business. Unfortunately, these increases were offset by higher warranty expenses, which made our overall gross profit relatively flat year over year. The increase in warranty cost is not the result of a new issue, but is based on our decision to preserve market leadership by more quickly addressing certain field issues to keep our customer relationships strong.

During fiscal twenty seventeen, we made progress on increasing product development velocity and expect to continue this throughout fiscal twenty eighteen and likely into fiscal twenty nineteen. 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. We expect continued success in growing our business over the long term for the following reasons: We remain confident in the expanding global digital marketplace through adoption of digital systems across the sectors we serve. These products have a known end of life that will drive continued business to replace or refurbish the installed base.

We continue to enhance and develop product lines and comprehensive solutions

Speaker 3

for our

Speaker 2

broad market base as well as specific customer needs. This allows for success in 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. And finally, active support from initial project planning through intended use of the system leads to satisfied customers and repeat business aligned with the natural replacement cycle. While optimistic about our long term future, various geopolitical, economic and competitive factors may impact order growth.

Our business will continue to be lumpy. With these while these areas can impact a specific fiscal period, we continue to pursue long term profitable growth. While the path may 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 any questions.

Speaker 0

And our first question comes from Morris Azeman of Griffin Securities. Your line is now open.

Speaker 3

Guys. Live Events have had some good traction here recently and we understand in the past that it could be kind of lumpy, but have we potentially entered a period here based on what you see going forward that this becomes a little more sustainable?

Speaker 2

I believe our live events marketplace, as far as top line has been sustained over the past three years or possibly more. And I think that continues to be a strong marketplace for Daktronics. It continues to be highly competitive and, it's a different set of customers season by season over even though the marketplace is the same leagues or types of venues. So I would predict Morris that we continue to see good performance by Daktronics in this marketplace and we believe that our reputation in this area remains strong and we have a good chance at continuing our previous performance.

Speaker 3

All right. And switching gears, warranty expense, you've highlighted that over the past handful of years and then you've shown some improvement. What happened this quarter were bumped up 120 basis points year over year to 3.9%? And how long before you think you can really get that under control towards going to be a much lower level?

Speaker 2

We're dealing with not a new issue, but an issue we've talked about maybe more than a year in the past. And we made a conscious decision this quarter to address certain field issues in certain areas more aggressively. That's really to retain customer satisfaction. And we've reserved, we believe, appropriately for that and won't see that as a continued expense in future quarters.

Speaker 3

Last question and I'll get back in queue. What's happening with the softer demand as far as on premise displays? What's causing that to have some sort of weakness here?

Speaker 2

Yes, that's a good question, Morris. We see that, that business continues to adopt the technology. But for some reason, there wasn't as much activity in the first half of this year. We continue to see optimistic optimism from that marketplace. We use a reseller market as well as some direct sales through national accounts.

And we believe that will be an ongoing positive business for us in the future.

Speaker 3

Thank you.

Speaker 0

Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Rice Gurtinbach for any further remarks.

Speaker 2

I appreciate everybody for signing in today, and I hope you have a great holiday season, and we'll talk again, in a few months. Thank you.

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.