Daktronics, Inc. (DAKT) Q1 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2017 First Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, August 23, 2016, and is available on the company's website at www.daktronics.com. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the conference over to Miss 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 this first quarter earnings conference call. I would like to review our disclosure cautioning investors and participants that, in addition to statements of historical fact, we will be discussing forward-looking statements reflecting our expectations and plans about 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 vary and 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, fluctuations of margins, the introduction of new products and technologies, and other important factors as noted and detailed in our 10-K and 10-Q SEC filings. 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. We had a nice start to our fiscal 2017. Orders, sales and net income all increased from fiscal 2016's first quarter results. Going into the quarter and into this fiscal 2017, we see and continue to see some macroeconomic trends influencing our customer’s appetite for ordering, but we are pleased with the order activity that we are seeing. For example, we were successful winning orders for a number of multimillion dollar projects outside the US, including Hurst Stadium and Qudos Arena in Australia, Queen Elizabeth Park in the United Kingdom, and Real Madrid in Spain. We also won a few nice orders in our international spectacular niche throughout Europe and the Middle East. Some of these we have been working with our customers for a number of quarters to finally move forward with the order. Domestically, we also see order activity increase for projects in our spectacular niche of the commercial business unit. Our High School Park and Recreation unit started the year with record orders in sports applications, traditionally a high quarter for this segment as schools prepare for fall and winter sports seasons. Our other business units are also doing well as we start out the year. We continue to serve our customers impacted by the warranty issue we discussed last year. We are monitoring the health of our displays and working to maximize our customers' experience with our systems. For the quarter, we did not experience any large change in cost expectations for this issue. We are focused on adding velocity to our design and development groups this fiscal year. We were successful in a number of new product or enhancements this quarter, and we expect our spend - and even though our spend rate has not yet increased, we plan and execute our developments, we believe this will be reflected as an increase in our product development expenses. For our more details on the financial results, I will turn it back to Sheila.

Thank you, Reece. Sales for the quarter increased approximately 4.6% from $150 million last year first quarter to $157 million this quarter. We had anticipated a slight decline going into the quarter but were able to secure a number of orders, as Reece mentioned, and start delivery. For the quarter, the increase in sales in Live Events was due to the work on a number of NFL projects this period as compared to last year's first quarter. We also had a great start to our High School Park and Recreation business unit for the increased activity in the sport systems and related deliveries. Sales volumes decreased in our Spectacular segment of the commercial business unit and in the international business unit as compared to last year's first quarter due to the volatility in this large project based segment. We acquired ADFLOW at the end of last fiscal year, so had a full quarter of revenues this first quarter, and their sales approximated $2 million and contributed to the sales increase. This primarily impacted our commercial business unit segment. Sales in the commercial billboard niche and in the transportation business units increased slightly over last year same quarter. With the order volume and sales levels, we grew backlog to $198 million. We expect the majority of this backlog to be earned into sales over the next 12 months or so. Gross profit improved to 24.8% for the quarter as compared to 23.6% for the first quarter of fiscal 2016. Gross margin levels were favorably impacted by volume and mix of business and lower warranty costs as a percentage of sales in all businesses except for international. International's gross profit declined for the quarter due to lower sales volumes across the primarily fixed cost infrastructure. Total warranty as a percent of sales was 2.8% for the quarter compared to 3.7% for last year's first quarter. During this first quarter as Reece mentioned, we evaluated our reserves for the specific warrant issue we discussed last year. To date, we are maintaining our estimates for this work and during the quarter, we worked to continue to serve our customers on the issue with preventative maintenance and repair work. At the end of the quarter, we had $4.6 million of reserves remaining for that specific warranty. Operating expenses increased $1.7 million, or 5.7%, to $31.1 million for the quarter. Increases relate to our personnel costs and professional fees in our general and administrative area and the addition of ADFLOW's entity for the full quarter. In addition, personnel costs increased in the selling department as well. As we have previously discussed, for fiscal 2017, we will work to constrain cost growth in the coming year as to manage our expenses to the order fixture. We plan to allocate additional resources to our design and development areas to complete developments, enhance our design and our display and control systems. Our overall effective rate was 31.2% for the quarter for taxes and we forecasted forward-looking effective annual rate to be around 32%. But because of the R&D credit restatement in the United States last year that has impacted our tax rate. However, our overall tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income. Our cash and marketable securities position was at $50.2 million at the end of the quarter. We reported a positive free cash flow of $4.5 million for the quarter compared to a negative free cash flow last year at $17.2 million for the same period. The cash flow generation is primarily due to improved profits for the quarter, related improvement in the timing of working capital for net inflows from projects, cash receipts and payments for inventory, and reducing capital spending during the quarter. To date, for the year, we've spent $2.2 million on capital expenditures compared to last year's $7.2 million. We expect our capital usage to be less than $19 million for fiscal 2017. Use of capital expenses is for manufacturing equipment, for new or enhanced product production, demonstration equipment for new products and continued information infrastructure investments. As disclosed earlier, in our first quarter, our Board approved a stock repurchase program to allow for opportunistic repurchases of stock for potential future use. For the quarter, we utilized $1.8 million in cash on share repurchases. We won't disclose specific guidance on share repurchase cash use as we weigh the purchasers against a number of criteria, stock price, cash use for acquisitions or other business investments, capital additions, operations, et cetera. And looking into the second quarter, we expect to show slight improvement of sales and gross margins with some increases in operating expenses for the velocity - design and development as compared to last year's second quarter. With that, I will turn it back to Reece for additional comments on our outlook.

Thanks, Sheila. As we look forward into fiscal 2017, our outlook remains similar to our comments in previous calls. We continue to see the digital marketplace expanding. For the year, our goal is to grow sales and improve operating margin. We expect Live Events to continue to grow slightly based on anticipated activity with this customer base. High School Park and Recreation started the year great and it seems they could grow at a nice pace. Transportation has room to grow nicely with the demand picture and stability in federal funding. While it's more difficult to predict the Commercial and Spectacular segment, there are many opportunities in our pipeline that position us for increase year-over-year. For commercial billboard niches, we expect similar volumes based on the overall activity we see in the national and third-party advertisers. In our commercial on-premise activity, we will be actively promoting our indoor network solutions and new product lines. Internationally, we see opportunities to grow, but it can be challenging to predict how the year will shape up as our customers wrestle with different macroeconomic factors. To achieve sales growth over the long-term, we plan to accelerate activities in our design groups to complete a variety of developments. While these efforts will increase development expenses, we believe it is necessary to drive forward our ability to competitively compete and to continue to capture global market share as we meet the requests of our customers. Rollouts of products or new control solutions are expected throughout the year. As the order picture can be cloudy and influenced by many external factors, we continue to monitor and limit the amount of costs added for personnel, our largest non-inventory cost. We also carefully evaluate capital expenditures and managing our other expenses for this year. We have challenged our managers to be frugal throughout the company as we position our organization for success in this fiscal year and beyond, supporting our development teams to bring solutions to the market with higher velocity as part of this overall plan. We continue to see many opportunities to be successful in this business and believe that, while the path will not always be smooth, we are positioned to generate long-term profitable growth. With that, I would ask the operator to open up the line for any questions.

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

Thank you. Good morning. Sheila, a question for you. It sounds like, the way you're characterizing gross margins for the current quarter fiscal Q2, it sounds like you are anticipating the margins, gross margins, will come down a bit from Q1 levels?

We had a nice quarter for gross margins, and it's hard to predict with the timing of our revenues, but we will be similar to maybe slightly down potentially is what we are looking at for Q2.

Okay. That's helpful. I wonder if, Reece, maybe you can comment on the pipeline that you see in Live Events. I know that business can be volatile quarter-to-quarter, but we are now, I guess we've seen three quarters of year-over-year declines in orders, I think, in Live Events. I wonder if you could just talk a little bit about the environment. Is it just - is that one of the areas where you are seeing some effects from macro or is it competitive or is it timing?

Yes, good question. Certainly, there is a competitive environment in the large sports business, but it is also impacted by the investment that those organizations will make on a season-by-season basis. And there's really, as far as large, major construction of projects, there's only a few in the works, and we seem to be doing well in those areas. So much of the work is in renovations, and those are a much more flexible schedule depending on what the customer may choose to do and how they might choose to invest their money. But we believe our share of the marketplace is roughly the same this year as last. Does that help?

Okay. It's helpful. I mean, in the current quarter, is this a quarter where you would be seeing more bookings for the indoor business? I'm just trying to get a sense as to how we might think about the bookings activity, the pipeline in this quarter?

I understand. The work right now is on cleaning up any final orders for, as you described, the indoor business, the arenas, as football has already been through, and then setting up the pipeline for next year, baseball, any mid-year work that people are doing and then football for the following year.

Okay. And how does that look?

The activity seems to be strong, a lot of conversations with customers, and it appears the projects are real.

And that's both for the arena and the baseball business?

Stadium, yes.

Okay. Thanks a lot.

Our next question comes from the line of Morris Ajzenman with Griffin. Your line is now open.

Hi, guys. Just a follow-up to a previous question. I think, Sheila, during your presentation when you talked about the second-quarter use of sales, gross margins, other items up slightly year-over-year, and then in answer to a previous question, I think you said gross margins - and again, the previous year, gross margins were 22.5% versus 24.9% in the first quarter just finished. And then I think you answered his question by saying gross margins will be slightly -- will be similar to slightly down sequentially. So I'm just trying to reconcile. Did I miss something versus that guidance earlier in your presentation?

Yes, from what we see today, we are expecting a bit better in gross margins as compared to last year's second quarter, but maybe not quite as good as our first quarter. Time will tell, but that's where we are seeing it today.

Okay. And is the improvement driven in large part by the kind of warranty expense or is it in part mix? What's driving that potentially?

Last year, during the second quarter, we started to see some impacts to that warranty issue on the quarter, so there's some of that and mix of business and volumes.

Okay. And on the international side, I clearly heard a pickup of orders this quarter. But again, this quarter and last quarter on the topline sales internationally kind of got hit hard, declining revenues. Is that just sort of a timing issue with your customers, et cetera, et cetera, and you expect that to start ramping up again? How do you see that playing out?

On the order front, Morris, we were light on orders in the last two quarters of 2016, and that set us up with a low backlog in international for their Q1. We were fortunate, we had a good booking of orders, and some of those we actually booked and delivered within the quarter. But we were also positioned with a better backlog as we move into Q2. So we are optimistic or at least on the right track with our international business as we start FY '17.

Thank you.

That concludes today's question-and-answer session. I'd like to turn the call back to Mr. Kurtenbach for closing remarks.

Thanks everyone. I appreciate you joining us and hope you have a nice summer. As a reminder, we have our annual shareholder meeting coming up here in a week or so on September 1. If you're in the area of eastern South Dakota, you're welcome to stop by. Thanks everyone.

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.