Executive Summary

Solid quarter with revenue growth and strong cash generation: Q2 FY2025 sales were $208.3M (+4.5% YoY), gross margin 26.8% (down 40 bps YoY), operating income $15.8M, and record operating cash flow $43.3M . Backlog normalized to $236.0M (vs. $267.2M in Q1 and $306.9M a year ago) as supply chains and delivery lead times continue to normalize .
Versus consensus: Management had guided to results “approximately in line” with consensus; actuals exceeded FactSet consensus on revenue ($208.3M vs $200.0M), gross profit ($55.9M vs $49.7M), and operating income ($15.8M vs $11.6M). S&P Global consensus was unavailable at the time of this analysis due to API limits; FactSet figures per company disclosure .
Quality of earnings nuance: GAAP net income of $21.4M benefited from a $10.3M non‑cash gain from the change in fair value of the convertible note; adjusted net income was $13.9M after excluding consulting fees and non‑cash items .
Execution and catalysts: Value‑based pricing, mix shift, and manufacturing efficiencies supported margins; transformation initiatives and new service/software launches are progressing. Capital allocation actions (forced conversion of Alta Fox note and planned share repurchases) are intended to optimize the balance sheet and mitigate dilution—potential stock catalysts alongside improving order momentum and digital transformation milestones .

What Went Well and What Went Wrong

What Went Well
- Orders and cash strength: “Record cash flows from operations of $43.3 million” in Q2; year‑to‑date $62.8M . “We delivered strong second fiscal quarter results and made steady progress on our… transformation initiatives” .
- Margin execution and mix: Gross profit margin held 26.8% (down slightly YoY) on value‑based pricing, efficiencies, and higher‑margin product mix .
- Strategic progress: “We… made significant progress… including enterprise management tools, new show control capability, and upgrades to service and systems maintenance solutions… set to go live in the second half of the fiscal year” .
What Went Wrong
- Orders softness YoY and backlog normalization: Q2 orders fell 3.3% YoY to $177.6M; backlog decreased to $236.0M as lead times normalized (lower than Q1 and prior year) .
- Operating expense pressure: OpEx rose to $40.1M (vs. $34.8M YoY) driven by staffing and $3.3M in consulting for transformation, compressing operating margin to 7.6% (9.2% adjusted) .
- Non‑cash items affecting comparability: GAAP net benefited from a $10.3M favorable fair value change on the convertible note; management continues to convert the note and plans buybacks to offset dilution .

Financial Results

Overall P&L vs prior periods (units: $USD Millions, EPS in $)

Metric	Q2 FY2024 (Oct 28, 2023)	Q1 FY2025 (Jul 27, 2024)	Q2 FY2025 (Oct 26, 2024)
Revenue	199.37	226.09	208.33
Gross Profit	54.20	59.70	55.86
Gross Margin %	27.2%	26.4%	26.8%
Operating Income	19.44	22.72	15.77
Operating Margin %	9.7%	10.0%	7.6%
Net Income	2.17	(4.95)	21.41
Diluted EPS	0.05	(0.11)	0.22

Estimates comparison (company‑disclosed FactSet vs Actual; S&P Global data unavailable)

Metric	FactSet Consensus (Q2 FY2025)	Actual Q2 FY2025
Revenue ($M)	200.0	208.33 — bold beat
Gross Profit ($M)	49.7	55.86 — bold beat
Operating Income ($M)	11.6	15.77 — bold beat
Diluted EPS ($)	N/A (S&P Global consensus unavailable)	0.22

Segment net sales (Q2 YoY)

Business Unit	Q2 FY2024 ($M)	Q2 FY2025 ($M)	YoY $ Δ	YoY % Δ
Commercial	42.45	43.44	0.99	2.3%
Live Events	68.21	77.21	8.99	13.2%
High School Park & Rec	48.94	48.07	(0.87)	(1.8%)
Transportation	20.24	21.48	1.24	6.1%
International	19.52	18.14	(1.39)	(7.1%)
Total	199.37	208.33	8.96	4.5%

Key KPIs and Balance Sheet

KPI	Q2 FY2024	Q1 FY2025	Q2 FY2025
Orders ($M)	183.69	176.17	177.59
Backlog ($M)	306.9	267.2	236.0
Operating Cash Flow ($M)	N/A	19.5	43.3
Cash & Equivalents ($M)	N/A	96.81	134.35
Total Current + LT Debt ($M)	N/A	76.0	65.4
Working Capital Ratio	N/A	2.2:1	2.3:1

Non‑GAAP and notable items (Q2 FY2025)

Adjusted operating income: $19.11M (adds $3.34M consulting) .
Adjusted net income: $13.94M (excludes $10.30M fair value gain on convertible note and adds after‑tax consulting) .
Convertible note fair value change (non‑cash): +$10.30M recognized in the quarter .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Orders (volume)	FY2025	Increase expected YoY (stated Q1)	“Continues to expect order volume to increase for the full fiscal year”	Maintained
Seasonality (sales)	FY2025	Strongest in H1; lower in Q3	Sales expected at normal seasonal levels for the remainder of FY2025	Maintained
Transformation expenses	FY2025	Plan to invest; details evolving	Additional $5–$6M consulting spend in FY2025 for transformation	Clarified magnitude
Capital allocation	FY2025	Board evaluating buyback capacity	Forced conversion of Alta Fox note; plan to use share repurchase authorization to offset dilution	Implementing actions
CFO search	FY2025	Search initiated (10/21)	“Board… continuing to make progress”	Ongoing

Note: Company did not provide numeric revenue/EPS guidance.

Earnings Call Themes & Trends

Topic	Q4 FY2024 (Q‑2)	Q1 FY2025 (Q‑1)	Q2 FY2025 (Current)	Trend
Digital transformation	Announced priorities: modernize service systems, EPM tools, automate quoting/sales	On track for service system releases by FY‑end; EPM tools in Q3–Q4; configure‑price‑quote in FY2026	“Significant progress”; service/system maintenance tools set to go live H2 FY2025	Advancing per plan
Pricing/mix & margins	FY2024 GP% up 710 bps to 27.2% on pricing/efficiency	GP% 26.4% (seq up), value‑based pricing helps	GP% 26.8%, aided by efficiencies and mix	Resilient
Orders/backlog	FY2024 orders +8.7%; backlog normalizing	Backlog $267.2M; orders +11% YoY	Orders ‑3.3% YoY; backlog $236.0M	Normalizing; mix variability
Tariffs/supply chain	Stable vs prior year; improved delivery	Normalization; execution on installs	Tariffs a risk; management cites uncertainty under new administration	Watch risk
Product/market	Live Events strength; NPP launch; services MRR focus	Live Events/Transportation drove volumes	Live Events growth; Commercial steady; Int’l softer	Live Events leading
Capital allocation	Strong cash flow; balance sheet strength	Working capital 2.2x; $97M cash	Record OCF; note conversion; repurchases planned	More active

Management Commentary

“We delivered strong second fiscal quarter results and made steady progress on our recently announced strategic and digital transformation initiatives.”
“We… made significant progress in… enterprise management tools, new show control capability, and upgrades to service and systems maintenance solutions, which are set to go live in the second half of the fiscal year.”
On margin drivers: Q2 gross margin rose due to “efficiencies in manufacturing capacity, value-based pricing, and higher-margin product mix” .
On transformation goals: “Grow revenue faster than the Company’s addressable market, expand operating margins, and generate returns on capital in the mid-to-high-teens” .
On seasonality: Sales strongest H1; expect normal seasonal pattern remainder of FY2025 .

Q&A Highlights

Trajectory and seasonality: Management reiterated lumpiness from large projects and expects full‑year orders and sales “on par or exceed last year’s” .
Gross margin sustainability: Q3 margin pressure is more volume than price; confidence in pricing strategy .
e‑Sales channel: Growing for standardized products; should reduce selling costs while preserving product gross margins .
Transformation costs: Expect $5–$6M additional consulting spend in FY2025; some initiatives continue into FY2026–FY2027 .
Tariffs: Acknowledged uncertainty around new administration; exposure via components and China/Ireland manufacturing; competitors face similar dynamics .

Estimates Context

S&P Global consensus: Not available at time of analysis due to API rate limits.
Company‑disclosed FactSet consensus (as of 10/18/24): Revenue $200.0M, Gross Profit $49.7M, Operating Income $11.6M for Q2 FY2025 . Actuals exceeded all three: Revenue $208.3M, Gross Profit $55.9M, Operating Income $15.8M .
Implication: Street models may need modest upward adjustments to profitability assumptions (mix and execution) while recognizing GAAP EPS benefited from a non‑cash fair value gain; adjusted earnings provide a clearer run‑rate .

Key Takeaways for Investors

Core beat vs consensus (FactSet) on revenue, gross profit, and operating income; cash generation was a standout positive — supports near‑term sentiment even as backlog normalizes .
Mix, pricing, and efficiency gains are holding margins near the mid‑20s despite project variability; Q3 margin risk is volume‑driven rather than price‑driven per management .
Backlog normalization is consistent with shorter lead times and operational improvements; watch orders trajectory in Live Events and International for growth durability .
Transformation is on track with tangible deliverables (service systems, show control) in H2; expect ongoing OpEx from consulting in FY2025 with tail benefits into FY2026 .
Capital allocation is turning more proactive (convertible note conversion; buyback execution plans), which could mitigate dilution and support EPS optics .
Policy risk: Tariff direction under new administration is a key watch item; management highlights industry‑wide exposure and relative competitiveness from U.S. manufacturing base .
For positioning: Favor dips tied to project timing or tariff headlines if order momentum and margin discipline persist; monitor Q3 seasonality and update models for higher adjusted profitability run‑rate .

DAKTRONICS INC /SD/ (DAKT)·Q2 2025 Earnings Summary