Daktronics, Inc. (DAKT) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and WELCOME to the Daktronics Fourth Quarter and Fiscal 2015 Earnings Results Conference Call. As a reminder, this conference is being recorded today Tuesday, June 02, 2015 and is available on the Company’s Web site at www.daktronics.com. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I’d now like to turn the conference over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics for some introductory remarks. Please go ahead, Sheila.

Thank you, operator. Good morning, everyone. Thank you for participating in our year-end and fourth quarter earnings conference call. I’d 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 condition, changes in the competitive and market landscape, management of growth, timing and magnitude of future contracts, fluctuations on margins, the introduction of new products and technology and other important factors as noted and detailed in our 10-K and 10-Q SEC filings. As a reminder, fiscal 2015 was a 53-week year and fiscal 2014 was a 52-week year. The extra week of fiscal 2015 fell within the first quarter resulting in a 14 week quarter versus 13 week quarter comparison. At this time, I’d like to introduce Reece Kurtenbach, our Chairman, President and CEO for a few comments.

Thank you, Sheila. Good morning everyone. Overall we had a successful fiscal 2015. Our sales exceeded $615 million in this 53-week fiscal year, surpassing pre-economic downturn years and setting a record sales level for the Company. This sales volume reflects the health of digital system solutions in the global marketplace. Our international business earned over a $100 million in sales, our first for this unit, result of our ongoing strategy and investment in growing our international market share. In August of 2014, we acquired a company in Ireland focused on the transportation market in Europe and United States. While international sales for this entity approximated only $5 million of our international sales in FY2015, the knowledge, capabilities and product platforms acquired will be leveraged further draw our transportation sales outside of the U.S. Live Events sales remain strong reflecting the continued trend of professional and college sports arenas, upgrading to new larger and higher resolution systems in order to attract, entertain and inform their fans. Sales also increased in the commercial business unit relating to digital billboard and spectacular solutions. During the fiscal year of 2015, we changed our name of the schools and theaters business unit to High School Park and Recreation, HSPR due to the sale of the rigging and theatrical portion of this business unit. HSPR sales improved year-over-year due to the inclusion of video systems in the sports side of this business and the increased size of many of these projects. HSPR on-premise message centers sales remain strong. These systems are used by the school to communicate with students, parents and the public. Sales in the transportation business unit were down mainly due to project timing and uncertainty in the federal transportation highway bill. This is the key funding source for state projects that include intelligent transportation and display and control systems. The acquired business in the U.S from the Ireland entity contributed nearly $4 million of sales for the year. While sales level improved, our overall operating margin, while positive, declined year-over-year. This decrease was caused by many factors including our overall mix of business. FY2015 has significantly higher amount of large project work and this work had increased amounts of subcontracting which is done at a lower gross margin than our product work. Another factor was the capacity constraints experienced during our fiscal Q2. We were fortunate to win more orders than expected, but then needed to spend more to fulfill these orders to meet critical customer deadlines. And finally, we had increased operating costs as well as the continued competitiveness within our businesses. For more details on the financial results, I’ll turn it back to Sheila.

Thank you, Reece. Sales for the fourth quarter of fiscal 2015 increased to a $158 million as compared to a $136 million last year. Live Events contributed to the sales increase as the number of projects for both major league and minor league baseball stadiums were up as compared to last year. We were also successful in our commercial business unit due to projects in our spectacular and billboard segments, but still saw some softness in our on-premise and national account segment. International also had a nice increase in projects as compared to last year, primarily due to the timing of business, due to the lumpy nature of the large project business in international. Looking at the whole year, sales were up by over 11% due to increases in International, Commercial, Live Events, and High School Park and Recreation. A portion of the sales increase is related to the additional week in the year. The increases were also due to continued demand in the marketplace as many of our customer segments have increased as Reece mentioned. We also broke $100 million in international, as we continue to execute on our international expansion strategy. On the other hand, transportation sales were down for the year by over $6 million due to the general lag in the timing of orders. For the fourth quarter, gross profit was 22.3% as compared to 24.8% in the fourth quarter of last year. This decrease for the quarter was primarily impacted by the mix of business. We had more larger projects, which puts pressure on margins due to the competitive nature and the inherent subcontracting work within those projects. Gross profit for the year decreased 20% to 23.5% from 25.7% for similar reasons and which were mentioned in Reece’s commentary. Operating expenses for the quarter were $28.2 million as compared to $26.9 million last year. Increases in operating expenses are primarily due to personnel related expenses and the additional cost infrastructure of the acquisition. For the year, operating expenses increased for the same reasons and were $113.3 million compared to $105.2 million. Overall, while sales increased a little over 11% for the year, operating expenses capped [ph] at 7.7%, which cause the decrease as a percent of sales from 19.1% to 18%. While we enter the year with a record $191 million backlog, I’d like to point out that a little over $30 million of this backlog is not expected to be realized until late fiscal 2016 and mostly into fiscal 2017, because of the large projects for the New Atlanta Stadium. As we look into the first quarter of fiscal 2016, buildable backlog, estimated customer delivery schedule and predicted order bookings, we estimate sales in the first quarter to be comparable to slightly up from last year. And as a reminder, our first quarter of last year included that extra week. Gross profit percent is expected to be lower than last year’s first quarter and comparable to the fourth quarter due to the current projected sales mix and estimated fixed operational costs. We anticipate operating expenses in dollars to be comparable to slightly less to the first quarter of fiscal 2015 for increases in salaries and related costs and additional costs for the Daktronics Ireland Company we acquired in the second quarter of last year. Offset by the additional week of fiscal 2015, and slightly better as comparable to the ratio of operating expense to sales. Our overall expected tax rate for fiscal 2015 was 34.1%, slightly less than our fiscal ’16 forecasted rate of 36% as research and development credit was reinstated in fiscal 2015. As we have previously discussed, our tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income. Our balance sheet remains strong and we have generated free cash flow this fiscal year to-date. Our cash and marketable securities position was up $83 million at the end of the year. We’re projecting capital expenditures for next year to be $25 million for continued plant equipment for newer replacement product production, for capacity, and for investments in quality and reliability in-line production equipment. We also will continue on expanding some of that CapEx for IT infrastructure costs. With that I’ll turn it back to Reece for additional comments on our outlook.

Thanks, Sheila. As we enter our new fiscal 2016, we are confident in the global digital marketplace and the opportunities available across the sectors we serve. Domestically many companies continued to turn to digital messaging solutions to advertise or communicate information in the on-premise and out-of-home marketplaces. They use our solutions on local, regional and national levels to create higher levels engagement, greater relevancy in their messaging, and better brand consistency. You will see our systems at Main Street businesses, at schools, at regional and national chains, major retail centers, and by major roadways and transportation hubs. We also see the number of opportunities increasing in the commercial, spectacular segment. These are unique projects you might see in Times Square or the Las Vegas area or other locations attracting large sustained audiences. While our on-premise solution sales were down for fiscal 2015, we are optimistic for new product line releases in fiscal 2016 and positive economic conditions will create continued opportunities for expansions. The trend is continuing in the sports to add larger video systems from the local schools and colleges to the larger universities and professional sports stadiums. We expect this level of sales to continue in the near-term. Our transportation unit has seen a number of projects move ahead, giving us confidence this market continues to grow with opportunities for digital messaging systems. In addition, the acquisition we made this past year in Ireland has opened up additional opportunities in the United States, because of the new product line acquired. Internationally we are focused on continuing to leverage the acquired knowledge and our now combined product offerings to expand our transportation business in the Europe and in Middle East markets. In addition, internationally we’re focused on sports, spectacular and out-of-home application projects, all of which have continued opportunity for expansion. In all our business areas we have natural replacement cycles as these products have a known end of life. This combined with the general economic conditions are conducive for continued modest growth and demand from the marketplace. We match this demand with a broad range of applications, services, and solutions offering our customers high degrees of reliability and performance. We also bring technical expertise to intricate designs and logistically complex installations. We work with our customers to offer them cost-effective solutions to meet their objectives. While the market is set for growth, we understand we need sustained profitability to capitalize on this opportunity. We continue to focus on improving our operating margins and growing profitably over the long-term. We have a number of initiatives in place to work towards these improvements; however, the benefits will take some time to realize. With this said, we're not alone in seeing in the opportunities and we live in a competitive marketplace. Many others are seeing a positive demand picture and continue to compete aggressively in this business. Our competitive field has been stable, but in the last fiscal year there have been some consolidations and acquisitions which may had some impact on us. Also as our international business increases, we are influenced to a greater degree by economic conditions across the globe. We are also experiencing some cost pressure in wages and benefits that has and will have impact on our costs in the coming quarters. While there are some regional and role variations, this is the general trend in South Dakota, in the U.S., and many international markets. We did increase our U.S manufacturing production employees pay at the beginning of fiscal 2016, to remain competitive in the marketplace. These economic conditions are a reality, but we believe our market reputation, product portfolio, and internal capabilities put us in a strong enviable position. We're focused on succeeding in this business and we have initiatives targeted continued improvement in our world leading solutions and operational excellence. We have a number of product introductions coming this next year to serve the demand for transportation solutions, higher resolution video systems, and specific customer request through our ongoing investment in product and control system platform. We are focused on continuous improvement methodologies in our manufacturing and services areas, to create efficiencies which drive cost savings and improve the experience for our customers. To support our initiatives, we continue to make selected capital investments, to support new product lines and automations as we size our capacity to the overall market. Work also continues on forecasting and planning tools to maximize profitability as we continue to grow volumes and revenue. We see ways to improve future profitability, although we do not believe it will be a smooth path. While we’re focused on improving operating margin year-over-year, we believe that seasonal variability along with the influence of large projects will continue to affect individual quarters and fiscal years. The good news is our markets are growing and we’ve products and solutions to meet industry demand. Overall, our markets are dynamic and the underlying fundamentals are strong. While the market is competitive, we remain optimistic about the future of sales opportunities and expansions in our business. With that, I’d ask the operator to please open it up for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open.

Hi. Good morning.

Hi, Jim.

Reece, I wanted to ask you about the Live Events business. Just in light of the bookings strength you saw in Q4 and what -- I think it appears to be guidance for flattish revenues for the full-year of fiscal ’16, were there orders that were -- you were anticipating in Q1 that were pulled into Q4, and generally how does the pipeline look for Q1 orders in Live Events?

Our Live Events marketplace continues to be a great spot for Daktronics as the systems get bigger and more complex and we think our winning ratio is similar to previous years. However, depending on the timing of the projects in the orders, what we can deliver within a certain quarter can vary. There are still projects that are on -- are still in the decision-making process that are for Q2 and the first half of the year, so we will see how those play out as the next months unfold. Is that helpful, Jim?

Yes, I guess was the level of bookings in line with your expectations or a little stronger for Q4? Just it seems to be about the strongest bookings we have seen in this segment of the business in a while and I know there is seasonality to it.

Yes, I think the bookings are good. I would say that we are very happy to have the Atlanta Falcons contract and the Vikings, but those are not for a fall delivery. They are for later on in this fiscal year and into next fiscal year as Sheila said. Many of the big projects for this fall happen to be in indoor arenas, which was different than last year of this time when we had a lot higher mix of football. With that said, its not that there was some big projects in football that we missed out on, it just -- they didn’t happen this year at the same extend as last year.

Okay. And just moving to the topic of gross margins, which is obviously I think what people are focusing on as well. You are assuming, I think you are guiding to flattish gross margins in Q1. But you are trying to, I think, make a number of -- take a number of actions to I think improve margins, how should we think about when you're going to see some benefits from this playing out over the course of fiscal ’16?

I think we have given guidance or some indication of what we could see based on how we view the market in the first two quarters as we roll out some of these product enhancements, we'll see how that impacts the second half of this fiscal year.

Reece, I’m not completely clear on that. Are you -- should we assume that with modest growth in revenues this year that you'd see a more meaningful improvement in gross margins or would you see flattish gross margins for the year with modest revenue growth?

I'm personally hoping that we can see an impact of our changes and see some increase in gross margins.

Okay. Thanks very much.

Thank you. [Operator Instructions] And I'm showing no further questions at this time. I’d like to turn the call back over to Reece Kurtenbach for closing remarks. And it looks like we do have a question from the line of Morris Ajzenman with Griffin Securities. Your line is now open.

Hi, guys.

Hi, Morris.

Continuing on the gross margins, I know about a year or so ago, I think it was a warranty expense, I’m not exactly sure, that had a big negative impact on gross margins. And you have always talked about the competitive pressures. Yet the last three quarters, again, gross margins have been pretty far south of 25%. What is it that’s changing? I know you have initiatives that is costing near-term, but is there any specific things that have really changed, or is it competitiveness, whatever that has really put pressures on gross margins most of this year? And I understand next year you are saying by your investments; that’s kind of building [ph] pressure. But has anything changed materially over this past year to impact gross margins?

As we try to indicate in our conference call it may be a collection of things. We had this --- for last fiscal year we had this issue in our Q2 of last year where we had capacity constraints. We are seeing increased competitive pressures in the marketplace. There have been a few minor change or minor acquisitions and consolidations in our industry; we'll see how that plays out in our fiscal 2016. As far as real dramatic thing I could point to Morris, I’m not finding a real silver bullet there. I will say warranty as you mentioned, continues to decline as a percent of sales for us and we are continuing to focus on our quality and reliability to make sure that that continues to trend in a favorable direction.

I know we don’t project out this far, but should we believe that fiscal ’17 gross margins can be north of 25% again after all the initiatives have played out?

Yes, that's further out than I project, Morris. We continue to focus on improving our internal processes and the performance of our products, both performance our customers see and performance it takes for us to build and cost to build, and so we continue to drive in that direction. I think it's early for me to make a prediction on that.

And a question for Sheila, was there any FX impact? I know International you have about $100 million of revenues this past year [indiscernible] any FX hit in this quarter or the year?

Yes, there is some impact to us because of the strong dollar. But it's hard to just maybe see in our financials. It’s more on the quoting side where we become a little less competitive in, say Europe and those sort of areas. But I would say there were some impacts, but not a material one, but we did see some impact because of it.

Okay. And can you just give us for this quarter what billboards year-over-year comparison was in for the quarter

Sure. For the billboard revenue for the quarter we had 17 -- little over $17 million of sales compared to about $14 million last year.

Thank you.

Thank you. And our next question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open.

Just on the subject of billboards, I was wondering it -- maybe it’s a little too early, but are you seeing any, any change in the competitive dynamics with the consolidation there of one of your major competitors?

That competitor’s presence in the billboard market hadn't been at the same level as in previous years. And so with that consolidation it hasn’t really impacted our billboard market as we said today.

Reece, maybe are there -- maybe you can just touch on the competitive environment where you're seeing perhaps a little bit more pricing pressure. Is it in other segments of the commercial market or is it in the Live Events, which I guess is also tends to be more competitive with some of your larger competition?

Yes, in the display products we’re seeing continued competitive pressures really across the board, but that is similar to previous years. And then in our Live Events for this large project business, we have products that we manufacture as well as the site works and what we would call subcontracting work that we do. And the projects that we were -- were available last year had a bigger percentage of subcontracting than the previous year. So all of those blend together to create the overall gross profit for the Company.

Is there any way to look at backlog and give us any sense whether that backlog will have similar dynamics with respect to subcontracting work?

As far as firm backlog, we of course have visibility to that, but it doesn't go out in time. We generally book in this -- while we book in this quarter, we would shift next quarter. So our visibility on that is three to six month range and it doesn't go out over the long-term.

But looking at that backlog and the various projects that are involved, would you -- you had more subcontracting work in these projects. Do you expect a similar profile with the backlog that you have right now?

I would say looking into the first quarter is similar to our mix from fourth quarter.

Okay.

So there is a level of subcontracted work yet to be performed.

Got it. Thanks. And one final question from me, just in general in the commercial market, showed very -- some nice order growth there. Can you talk about where that's coming from? Is it fairly broad based? Are you seeing any signs of -- we have obviously seen some weakness on -- in GDP growth here in this -- in the U.S., but just in general, where are you seeing the strength coming from in commercial?

We had a nice year of sales and orders in our billboard marketplace and that can be somewhat of a timing when our larger customers place large orders to us. But we continue to have optimism there. And then we talked about our spectacular niche in the displays and say like a Times Square or in Las Vegas, we have seen a nice uptick there. But we have seen the softness in the on-premise advertising or for the local businesses that might buy a display that’s been a little bit down this past year.

And then on the international front any color you can provide on where the strength is coming from there? Obviously, you had anything some large orders, but is there any color beyond that on the international side of the business?

It has been some pretty nice international. We have had some out-of-home advertising, we had some nice sports orders, some with the spectaculars, the transportation business, we are doing this nice product in -- or this nice project in Switzerland as well as some other work in the European areas. So I don't think it may be any one niche that excel beyond the rest, but kind of a just a blend in the business.

That sound like very -- sorry, go ahead.

Just as I said in previous calls, that we’ve invested a lot in the years and kind of in international presence and we’re seeing that having people in different offices around the world they're able to build relationships and be responsive.

It appears at least that you're gaining some market share here, is that maybe a fair way to characterize with the market right now in the international?

Certainly we are doing better internationally. Understanding the whole market for international and what our piece of that is, is a pretty complex picture. I don’t know if I have a good figures to give you there, Jim.

Okay. Thanks a lot.

Thank you. And our next question comes from the line of Joe McCallum with Keeley Asset Management. Your line is now open.

Thanks for taking my call. I just had two questions on the topic of gross margin. The first, last quarter you had mentioned a 100 -- I think 150 basis point drag from the data display results. Could you make a similar comparison in this quarter?

Maybe for the whole year we have seen around $1 million, $1.5 million of additional costs that were covered by additional sales. So maybe the drag could characterize for the whole year.

Okay. And my next question is last quarter on the topic of gross margins, we talked about the problems you guys had handling the planning process and using your systems effectively and that the fix for that was improving systems, improving processes. So I'm wondering if this quarter’s gross margin reflects the problems you had before you took steps to improve things or if there are -- if any improvement was offset by some of these other factors.

Well, the planning we talked about was to really help prevent us from getting into over capacity situation. And I think we’re in a much better position there of better visibility. But we didn’t see it as situation happen in our Q4. So I don’t think it impacted Q4 as much.

Okay. Thank you.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back over to Reece Kurtenbach for closing remarks. End of Q&A

Thank you everyone. I appreciate your time and your candid remarks. I hope you all have a pleasant summer and we look forward to talking to you again after Labor Day. Thank you.

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