Good day, ladies and gentlemen, and welcome to the Daktronics fiscal year 2011 second quarter earnings results conference call. As a reminder, this conference is being recorded today, Tuesday, November 23, 2010, and is available on the company’s Web site at www.daktronics.com. At this time, all participants are in an listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. (Operator Instructions) I would now like to turn the conference over to Mr. Bill Retterath, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, sir.

Thank you, and good morning. We appreciate your participation on our second quarter fiscal 2011 call. We will give some brief updates about the quarter, and then open it up to few questions and answers. I would like to first offer our disclosure in cautioning investors and participants in addition to the statements of historical facts. This call and our 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 mentioned during this call and our press release and 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 will turn it over to Jim Morgan, our Chief Executive Officer, for some comments.

Thanks, Bill, and good morning everyone. Thanks for joining us this morning. We were pleased with our performance and delivering against a strong backlog that we had going into the quarter. We were also pleased with our order performance for the quarter; despite the price pressure in the market we were able to realize an operating margin of just under 8%. We see this as a testimony to the success of our cost-reduction efforts over the past couple years. To provide some perspective on third quarter. Third quarter’s typically our lowest quarter for revenues due to this forced seasonality and a greater number of holidays in the quarter. However, one of the more lower aspects of our current situation is the difference between our outlook for Q3 and Q4 this year compared to last year of this time. In addition to the fact our backlog is significantly greater going into the quarter, the outlook for baseball orders to book yet in third quarter is also much better. In fact, since the quarter end, we’ve already booked three baseball orders totally approximately 10 million and we’ve received the non-binding award on two additional baseball orders totally about 10 million as well. These projects are all work for third and fourth quarter and are not reflected in the end of quarter backlog. We’ve also been awarded a couple of college football orders, totally approximately 8 million, which should book in our third quarter, giving us a start of next fiscal year revenue opportunities. The other significant change from last year at this time is that the outlook for order from our two largest billboard customers for calendar 2011 is very positive, which we see as in turn, indicative of the overall outlook for the outdoor advertising industry. We are actually hiring a…

Thank you, Jim. I’d like to start by giving some background on the increase on sales in the second quarter as compared to the first quarter. Four out of five of the business units exceeded the top end of our internal expectations at the beginning of the quarter, which is great to see. Underlining this were orders that came in for shipments during that quarter being higher than expected. In addition, we also moved up in the schedule some larger orders that our manufacturing schedules allowed for. Finally, we executed well on managing parts concerns. Moving the projects up in the schedule has proven to be beneficial in accommodating the work on these new projects that Jim mentioned for the third and fourth quarter. As mentioned in the release, we had a lower than expected gross profit. Going into the quarter, we said that it should be the same or higher than the first quarter of Fiscal 11. The key factor that kept it from going higher was the warranty cost, which was higher than expected. For the third quarter, Fiscal 2011, we expect gross profit percentage to be down on a sequential basis. This reduction is a result of lower margins on large contracts booked during the second quarter. As the competitive environment continues to be tough, as Jim mentioned, the difference from the first quarter is the inherent volatility in margins in the large contract business. Operating expenses were up slightly as expected. In the third quarter we should continue to see stability here. However, keep in mind that product development costs, which are primarily the cost of our engineering staff, can shift between cost of goods sold and product development, depending on needs. But the total engineering cost should remain consistent. You may have notice that the year-to-date effective rate is close to 38%, which is now more similar to years prior to Fiscal 2010. That return to a more typical rate is a reflection of our increase forecast of earnings for the fiscal year. So hopefully, the noise associated with the impact of tax adjustments compared to pre-tax income goes away. Moving on to capital expenditures, we expect to see a rise in capital expenditures in the second half of Fiscal 2011 compared to the first half. We still expect, as we mentioned on previous calls, to be less than 13 million for the fiscal year. The increase in the second half relates to equipment needs to expand production of our new module designs in other facilities. Finally, for the third quarter, with the lower gross profit that I mentioned and somewhat consistent operating expenses, we expect the third quarter will be marginally profitable. But depending on what we can achieve for revenues and what we end up actually realizing our gross profit, we could see a little upside. With that, I’ll turn it over to the operator and I’ll open it up to questions.

(Operator Instructions) Our first question comes from Steve Dyer with Craig Hallum.

Good morning, guys. Congratulations on a very good quarter. First question that I have as it relates to the billboard market, would you expect your market share in that space to be relatively consistent with what it has been historically, in particular a couple of years ago when they were going fast and furious?

That is our expectations. There’s, you know, no guarantees on that, but we believe that that’s a reasonable expectation.

Okay. And then I guess hopping over to the major sport stadiums, so with the NBA and the NFL both staring down a potential lockup, have you seen any impact in sort of the bidding activity or some of the early discussions you’ve had in either of those two sports?

Well, there’s a discussion about it of course, but to say have we seen anything yet, no we haven’t really seen anything yet. But certainly, that’s an issue that’s out there in a number of the sports, professional sport area and how that might go down. So it certainly is a, you know, it’s a risk that’s out there that could delay some things.

Okay. With respect to international, that’s obviously been a real bright spot here in the last couple of quarters. How do you see that playing out? I mean, do you expect it to be a larger and larger part of your business going forward or do you view some of these kind of larger projects that you’ve had the last quarter or two as more of an anomaly?

Well, the track with international, it’s going to be a lumpy business because we – it’s mostly large projects. So – but that being said, we’ve invested significantly in the last few years in developing the international market and to develop our presence both in the European front and the Asian front. So we certainly, you know, it’s our expectation to build the international market. How it builds as percent of our overall, you know, depends on how domestic grows too. It’s always a little tricky to assess more as a percentage of the total business. But certainly what we saw this quarter is indicative of what the potential is out there and we’re optimistic about the future for international.

Okay. With respect to cost, do you feel as though you’ve sort of run all of the costs you can out of the business, at least in the near term? I mean, are we looking at operating expenses kind of ticking up here going forward or do you think there’s more to come there?

Well, I think – I don’t think you’ll see us decline our operating expenses. We’ve got one event going on in the third quarter where we’re going to take maybe a couple of days, extra days off which will be a one-time help to the third quarter for our staff. But you know, on a long-term basis, I don’t see operating costs declining. It’s stability and then if we can continue to see the recovery go forward, there’s some strategic areas potentially in personnel where we could see some but not enough to be a significant cause of increase in operating expenses.

In terms of – that’s talking about operating expenses. If we look at other – I believe your first question was is there any other opportunities for reducing costs and there definitely is continued opportunities to reduce cost. We think in terms of our product value streams and you know, this gets back to the total material costs in our plants and the actual manufacturing costs in our product, there definitely is opportunity to reduce costs there. Again, we demonstrated success in doing that here in the last couple of years and we have an ongoing effort in that regard and we plan to continue to make progress in that area.

Okay. With all that said, where you envision or where do you hope you can get operating margins back to, and then, you know, in mid – probably in Fiscal ’12 I guess would be a better place to look.

It’s probably a little too far off to talk about more than, you know, we’re not giving any top-line guidance. Our gross profit margin, where it was in the first quarter, you know, we’re definitely headed to that level and higher I would hope, but it’s too early to tell for Fiscal ’12. And operating expenses are going to, you know, to the best of our ability, stay where they’re at generally. I mean, there could be a little bit of a rise. So you know, it depends on how the sales numbers turn out to decide what our operating income is going to be on our margin there.

Okay, thanks. I’ll hop back in the queue. Nice job.

Thanks.

Our next question comes from Steve Altebrando with Sidoti and Company.

Are there any billboards in the backlog, Tier 1 billboards?

Yes, there are. The primary – remember in the first quarter we got that larger order, much of that is still in the backlog and then there’s consistent orders coming from the other player.

For 2011 [inaudible] orders?

Yes. We have orders in the backlog now for delivery in 2011. Is that your question?

Yes. And can you just talk a little bit about pricing in the segment, and also you mentioned pricing was still key I guess segment wise, but have you seen any easing in that over the last few months?

Nothing really changed at all the last few months I would say. Maybe the rate of decline, you know, over the last two years maybe the rate of decline isn’t quite as what it was at one point. Like when it started into a downturn, it seemed like there was kind of a rapid decline in pricing and maybe that’s not quite as bad. You know, bidding big projects, it’s kind of hard to – you have to go back and see where things have been. There’s always a variability from project to project and how things go about. But internal, I think they’re maybe not dropping quite as fast.

How about more specific to the [inaudible] boards?

I think that same applies to them generally.

Okay. And then in operating margin, maybe I’ll attack it a little bit different way. But if you had a revenue at the run rate you’re achieving now for this quarter, in the $500 million range, would this 8% margin be achievable for a full year?

Well, I think the best way to answer that, Steve, is you know, at 500 million, there’d probably be a slight increase in operating expense, not a whole lot but there’s probably be a slight increase. And I think assuming we can control warranty and inventory costs, that gross profit level the last two quarters, you know, it shouldn’t be at the bottom end, but again there’s a lot of factors that go into that on a competitive side. So you can model it with those assumptions and take a look at it. You know, we’ve not growing our cost infrastructure, so –

Okay, that’s helpful. Thanks, guys.

Our next question comes from Jim Ricchiuti with Needham and Company.

Hi, thanks. I don’t know if you commented specifically on billboard orders in the quarter. Can you give us a sense as to what it represents in the commercial bookings?

Well, you know in terms of – I’ll just give you the number of billboard orders, which were roughly around $5 million for the quarter.

And just from your conversations, it sounds like you guys are anticipating that certainly picking up off of these low levels. But how would you characterize it versus prior years?

In terms of revenue dollars –

Well, anyway you look at it, it’s versus revenue and again the price points are down so the units, it’s going to take more units to get to the revenue we have in the past and we don’t really see getting to that revenue here in the near term. Go ahead

Well, I was going to say, from a pricing standpoint how much are the SPs down versus say two years ago?

You know, Jim, maybe a way to answer your question, I think I understand where you’re getting and in terms of when the billboard business does ramp up, the major players have said they’re going to be roughly at the same levels they were in terms of units a few years ago and I think we are at the $80-plus million range on an annual basis during the peak, 80 to 100 million during the peak. You know, if we’d capture the same market share, maybe it could be 50-plus million, but that’s – there is a lot of things that evolving yet in that number and how it plays out, what percent we’re ultimately able to capture and whatnot. So if it was 80 million and could drop down to 50-plus million if it ramped up to the same unit level. Is that what you’re asking?

That’s helpful. I have a question in respect to the revenues from the Live Events business in the quarter. If we were to think about the NFL portion of that business; as I recall, last year was a pretty strong – you still had some significant revenue I guess as you’re completing projects. If we were to look at it on a – I don’t know if you can do this, but if you can break out the NFL portion, how was the Live Events business versus year-ago?

Well, Jim, I can answer that a little bit differently, but I think it gets to your point. For contracts exceeding $5 million, in other words these large contracts, for the second quarter of this last – this most recent second quarter was $6 million of business versus 17 million for the second quarter a year ago. On a year-to-date basis these mega contracts were 11 million this year versus 26 million a year ago.

We had a number of NFL installations this year.

Yeah, those NFL installations were nice. Clearly, these are contracts over 5 million. I’d have to go back and think through these NFL ones and try to recall which ones of those were over five.

Okay. Now on the baseball, on the MLB side of the business, it sounds like the orders you’re attracting, or at least the potential orders you’re attracting are kind of larger in your favor. It doesn’t sound like you’re seeing anything in the way of push outs this year. Is that a correct characterization?

I think generally that’s true. We’re not seeing – we’re seeing things are happening this year. Like in any year, there’s always some that are kind of the bubble, so I’d say it’s more of a typical year in that regard. And maybe in some regards the fact that nothing happened, maybe actually a little positive effect this year, there’s a little latent potential there I think.

Jim, is the pricing pressure you’re seeing in the market, is it more pronounced in the commercial portion of the business, or is it still pretty intense in the Live Events business?

It tends to be more – the bigger the project, the more sensitive, that’s kind of how it works. So when we get these large live event projects, that’s – the pressure is quite intense there. It’s [inaudible].

Okay. And architectural lighting, is that developing faster than you expected? I know it tends to be skewed because you can get some larger deals. But just in general, I’m curious how you guys see that business, whether it can potentially be a bigger growth opportunity perhaps over the next 6 to 12 months?

It’s too early to say if there’s more or less than we expected, but certainly it’s starting to see that it’s starting to take some – get some legs here in the U.S. because it’s a relatively new [inaudible] for selection in the U.S. This type of kind of free-form display technology has been used in the traveling road show market for a few years already, but it hasn’t really caught on in the permanent installations. It’s good to see that this is either happening, and again, the more of these that are out there, the more people can see what they look like. It’s kind of hard to envision these if you haven’t seen them, so we actually have one in the front of our building here so if people come to visit we can show them what it looks like. But you have to see it to understand it. I think it’s one these things that as we get it out there it will help it move forward a little quicker.

And it’s truly been a contributor to the international, the bookings in the international portion of the business. I’m curious, again I know this can get skewed by larger deals, but just in general how do you view the pipeline of business in your international business?

Well the pipeline continues to be strong. There are a lot of potential projects out there. Again, the international market is more complex, there’s more variables out there, but you know, the pipeline is positive.

If I could just add to that, Jim, you know, this replacing a transaction link, this $10 million transaction down in Mexico, it’s tough to do. That certainly added to the 26 million for the quarter. For us to achieve that level, our pipeline, there’s no indications we’ll be at 26 million over the next quarter or two. There’s opportunities, maybe it’s possible, but it’s unlikely.

Yeah, we consider this an unusual high quarter for international. We wouldn’t expect that – you know, the next couple of quarters. We had a number of things that came in at the same time, so it’s a lumpy business. But certainly, there’s [inaudible] from out there in the pipeline.

So potentially you could see something more in the range that you saw in Q4 in Q1?

Yeah, in the last two quarters, three quarters for orders, we met 15, 13 and 0.6 million and you know, it’s – it’s wrapping up. So looking at that 13 to 15, that’s certainly an indicator of the opportunities out there and how successful we’re at will determine where it falls off.

Okay. Thanks a lot.

(Operator Instructions) Our next question comes from Dick Ryan with Dougherty.

Good morning. Thanks for taking my call. Hey, Bill, what was the warranty impact in the quarter on gross margin?

It was a percent or two higher than what we thought it would be, closer to 2%.

And how should we kind of look at that the rest of the year?

That is a good question. We’re doing the right things. This was, you know, the fact that we had an issue this quarter, it was isolated in our product line that goes back to 2007, ’08, ’09, some earlier years and there’s nothing – the good news is there’s very little, if anything, showing up on our new module designs, if I’m recalling correctly. And we’ve had that out in the field now for – it’s been out there for 6-9 months and that is showing some good performance metrics. So you know, I think – I believe we’re headed in the right direction but it’s been hard to say.

Okay, good. A question a little bit longer or maybe further down the road, you know, you talked about the refresh or upgrade cycle on the live events, you know, I think if I recall the first digital billboard kind of being installed in the 2005 timeframe. Will there be a refresh or upgrade cycle in that marketplace? I mean, do they have a 7, 8, 9 year expected life? So are some of those customers that are just coming back in with orders, are they talking to you at all about an upgrade from earlier installations?

Yes, some of the – our major customers made comments about a refresh if you want to use that term, in a couple years, that they would be replacing some existing inventory that’s went through its lifetime. So that’s out there maybe a couple of years.

Great. Thank you, guys.

I’m showing no further questions. I will now turn the conference back to Mr. Morgan for closing comments.

Well, thanks for the questions, gentlemen. I appreciate your interest and your questions. In closing, I would like to again thank all the Daktronics employees for their diligent efforts over the past quarter to achieve what we did. And thank you, everyone, for being with us this morning. Have a good day. Operator, that concludes the call. Thanks.

Thank you, sir. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.