Daktronics, Inc. (DAKT) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2017 Third Quarter Earnings Results Conference Call. As a reminder, this call is being recorded today, Tuesday, February 21, 2017, 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 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, LaToya. Good morning, everyone. Thank you for participating in this third 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 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 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 would like to turn that call over to Reece Kurtenbach, our Chairman, President, and CEO, for a few comments.

Thank you, Sheila. Good morning everyone. As highlighted in our press release, order volumes were strong [technical difficulty] the quarter and we noted a number of [technical difficulty] order volumes for the quarter. This supports the success of our commitment to sever customers and maximize their business [ph] with our products, engineering and service capabilities. Some highlights of unique projects includes the replacement of the entire surface of Piccadilly Circus [technical difficulty] iconic location in London. The new display will replace all current video signage with one [technical difficulty] 4K system. While one surface, Piccadilly operators will have great flexibility using this campus to create tactful and informative image [technical difficulty] as either a single 4K stream or as many different displays. We continue to see growth in both the size and usage of video streams worldwide. During the quarter, we completed installation for Qudos Bank Arena, our largest Centerhung LED Video System in the Southern Hemisphere. This trend is also reflected in our High School Park and Recreation business units with greater numbers of larger systems. We installed the largest video display in Wisconsin High School and have had the success in many -- in many parts of the country this year in providing video systems in high schools. The order for Nevada Department of Transportation project NEON includes multiple large full color displays that extend across six lanes of traffic and includes dynamic message capability to show incident and speed information. We continue to have success in our Commercial business unit with an 8.9% increase in orders for the quarter and a 20.2% increase on a year-to-date basis. Spectacular niche in commercial predominantly led to improved order volume year-to-date. We are seeing greater boarding activity in this market, and more customers are moving forward on decisions this year as compared to last. The billboard niche has also seen some improvement on a year-to-date basis. On-premise orders have increased from digital technology adoption and addition of orders from in-store digital media solutions sold through ADFLOW, the company we acquired last year during the fourth quarter. Our defense business unit orders were up for the quarter, but remain down on a year-to-date basis. Minor League Baseball facilities orders led the third quarter order improvement compared to last year during the same quarter. We believe overall market activity to be down in this unit through the first three quarters of FY 2017, we booked one project over $5 million in this year when generally more than a handful are available in the market. While unusual for this time of the year, the outlook connectivity in the market remains strong. As an example, we have been awarded two large projects in the fourth quarter, one with Milwaukee Bucks and one with the Detroit Lions at Portfield. The Bucks display will be the largest Centrehung in basket ball and enhance plan engagement during the games. The Lion's new products will also elevate their advanced game day experience and increase the event presentations to another level. For more details on the financial results, I will turn it back to Sheila.

Thank you, Reece. Orders increased 22.6% for the quarter for reasons Reece highlighted. For the year, order volume has increased 4.3%. While orders were strong, our buildable backlog available in the third quarter was lower as compared to last year following the 6.5% decline in sales, decreases occurred in live events, transportation and international business units. Buildable backlog is defined as contracted orders with customer design approvals and site readiness has aligned with optimizing our factory production levels. It's not unusual to have more buildable backlog during the third quarter due to the sports seasonality of our business, two holidays impacting production work days, and a slowdown in construction activity in the winter months. Gross profit improved to 20.1% during the third quarter of fiscal 2017, as compared to 17.8% in the third quarter of fiscal 2016. Gross margin percentages were favorably impacted by a lower warranty cost of the percentage of sales, improved productivity, and favorable sales mix. Total warranty as a percent of sales was 2.9% for the quarter, as compared to 4% last year. We continue to serve customers impacted by the warranty items discussed during fiscal year 2016 and monitor those reserves. Operating expenses increased $2.7 million or 9.7% to $30.3 million for the quarter. Selling expenses increased $0.9 million, primarily due to the addition of ADFLOW's costs compared to the last year, and increases in personnel costs in other selling areas. General and administrative expenses increased $0.7 million due to rise in personnel costs and increases in professional fees. Product developments increased $1.1 million due to additional resources allocated to our product development functions increased velocity of solution development. Our overall tax rate benefit was 27.9%, as compared to the benefit of 64% [ph] last year during the same quarter. The United States Research and Development credits reinstatement last year during our third quarter caused that large catch-up in benefits during the quarter. We forecast the forward-looking effective annual rates to be approximately 30% to 32%. Our effective rates can fluctuate depending on changes in tax legislation and the global mix of taxable income. Taking all into account, we experienced a lot during the third quarter, primarily due to the decrease in sales for reasons noted, and the different situation in our tax provision when compared to last year. While the loss is undesirable, we continue to monitor and manage our cost infrastructure, the opportunities we proceed, and continue our focus on serving customers with industry-leading solution, while generating profitable growth. Our cash and marketable securities position was $76.6 million at the end of the quarter. We reported positive free cash flow of $38.8 million on a year-to-date basis, as compared to negative free cash flow last year of $10.8 million for the same period. The increase in free cash flow was primarily due to improved profits for the year, improved operating net inflows, due to the timing of receivables and project cash receipts, net of payments up for inventory due to the decrease in inventory and due to reduced capital spending. We spent $6.7 million for capital expenditures for the year, as compared to $13.4 million same time last year. We expect our capital usage to be less than $15 million for fiscal 2017. Primary uses of capital include manufacturing, equipment for new or enhanced production, products development testing equipment and facilities, demonstration equipment for new products, and information technology infrastructure. We made no repurchases of stock during this past quarter. Looking ahead to the fourth quarter, we have a strong backlog and pipeline. We expect to work through with the $170 million backlog over the coming quarters. For the fourth quarter, we expect a slight sales improvement and slight increase in operating expenses, as compared to the fourth quarter of fiscal 2016. For gross margin, we estimate improvements over the third quarter due to the increased sales volume and improved rate over the fourth quarter of last year due to the warranty issue experience last year. With that, I'll turn it back to Reece for additional comments and our outlook.

Thank you, Sheila. Our outlook remains similar to past discussion, all indications from market activity and estimates from industry research going to and expanding digital marketplace. Our International business unit has already exceeded the entire fiscal 2016 order volume at the end of the third quarter. International orders are challenging to predict due to many global factors, but over the long-term we expect to grow both in this market and in our market share in this business unit. High School Park and Recreation started the year at a great pace, and we expect to see a strong market here of larger orders due to the adoption of video systems. We expect live event sales to continue to be similar to past year's levels based on anticipated activity within this customer base, but predict orders to be slightly down for the year. Transportation has room to grow with the demand picture. There appears to be satiability and federal funding, and we have success in winning statewide procurement projects and other infrastructure road projects. In our Commercial business unit, our Spectacular segment has many opportunities in our pipeline that position us for an increase year-over-year and into the future. Our Billboard segment, we expect similar to slightly improve volumes based on overall activity we see in the national and local third-party advertisers, demand for replacement and new digital billboard requirements. In our On-premise segment, we are actively promoting our indoor network solutions and new product lines, and expect to increase this in this business. We have some progress on increasing product development velocity, and expect to continue this into the future. While these efforts will increase development expenses, we believe this investment is necessary to drive forward, use solutions to meet customer needs, and to expand our global market share. Rollouts of products and new control solutions are expected through the coming year. While the path will not always be smooth, growing market and our industry-leading solutions position us to generate long-term profitable growth. With that, I'll ask the operator to open it up for any questions.

Thank you. [Operator Instructions] The first question is from Jim Ricchiuti of Needham & Company. Your line is open.

Hi, good morning. If I look at your guidance, initially I thought it was flat to up modestly from a year ago for the quarter. So I'm just wondering was there anything in particular that might have slipped that caused the revenues to come in down versus the year ago?

I think we had expected very similar to slightly down coming into the quarter, and it really just went to the timing of order bookings as well as the production schedule. So, nothing alarming differences to our prediction.

And that shortfall in revenues, again, Sheila, maybe I didn't get your guidance last call, I thought you were assuming that your gross margins will be in more in the $22-$23 -- 22%-23$ level, was that just a function of the revenues coming in a little lower that you -- was there anything in this 20.1% gross margin, are there additional warranty charges that might have caused the margins to be lower?

It wasn't anything material that was in that expectation besides what we stated at the beginning where our revenues were down a bit that caused us not have the ability to cover some of our fixed costs. And we had maybe a few hundred thousand additional warranties. So, warranty as a percent of sales is up a little bit, 2.9%, which we would like to see at 2% or what, so that had a little bit of an impact as well.

Okay. And looking at Q4, would you anticipate your gross margins to be something closer to the fiscal first half levels, or is it -- is the level of revenues that you are anticipating going to make it challenging to get to that 25% level?

Our revenues may not quite reach those at the beginning of the first part of the year. So that would challenge the gross margin a bit.

Okay.

At the same level.

And Reece, your audio at least from my end was not coming through all that clear.

I am sorry.

What were the main drivers that drove the significant increase in orders I think that you saw on the commercial area and international?

In the commercial area, the change was really in our Spectaculars segment. So, the order growth in that area, we saw performance in all areas, but the main growth area was in Spectaculars. In our international business, it was -- I don't think any one segment that stands out, we had good performance in all of our different segments internationally. And I don't -- trying to think regionally if there was one region that was -- they're both doing quite well, APAC and EMEA.

And then last question from me, if you look at your live events business, you mentioned that the order activity that you saw, I believe in live events, one of the contributing factors to that was strength in the minor league baseball market. Has it been a fairly slow bookings quarter for major league baseball? It sounds like the activity that you are seeing is really looking out further into the NFL season, some upgrades on the NBA side. What can you say about the MLB portion? Is that expected to be fairly quiet this year for you?

Yes, on the MLB side, there wasn't really a significant project left in Q3 for this spring.

Got it. Okay, thank you.

Thank you. [Operator Instructions] The next question is from Jayant Ishwar of Singular Research. Your line is open.

Hi. Two questions, one is on the business unit sales segment, going into next year -- you are probably building the planning for next year right now, which segments do you expect to outperform or do better than average?

So, as we look forward into next year, I think some of the comments we made in our call is that we think this Spectaculars business, there still appears to be a lot of activity in that business. Our on-premise especially with the addition of the ADFLOW acquisition, where we think there is optimism there. Our international business is much harder to predict, but in general, our market share is much lower internationally than it has been in the U.S. And so, we would see that as an area for growth, even though all of these tend to be not smooth, many small orders, it's lumpy with a few large orders every quarter.

Okay, any thoughts on stock buybacks? You got a lot of…

We continue to evaluate that on a question-by-quarter basis with our Board of Directors. So we don't have any real guidance to give on whether we would have activity there in the next quarter.

Okay, thanks.

Thank you. And at this time there are no further questions. I'd like to turn the call back over to Reece for closing remarks.

Thank you everybody for attendance this morning. I hope you have a great spring. We look forward to talking again in June. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.