Daktronics, Inc. (DAKT) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Daktronics First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Sheila Anderson, Chief Financial Officer. Ms. Anderson, you may begin.

Thank you, operator. Good morning, everyone. Thank you for participating in our first quarter earnings conference call. I would 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 of 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. With that let me highlight some of the financials. Orders were $175 million compared to $153 million for the first quarter of fiscal 2018 as compared to fiscal first quarter of 2017. Most of the order fluctuation this quarter is attributable to the volatility in our large project and account-based business in the commercial, spectacular and billboard niches and in the international business unit. Orders were also impacted by a softer demand in commercial on-premise displays this quarter. As a reminder, both orders and net sales fluctuate due to the impact of the large project-based business and account-based business that we are in, including displays for professional sports facilities, colleges and universities, spectacular projects and national or global accounts, primarily in our out-of-home advertising space. Our business also fluctuates seasonally based on the sports markets and construction cycles and is dependent on various schedules -- by the various schedules based on our customer's needs. Sales for the first quarter of fiscal 2018 increased to $173 million as compared to $157 million last year. Sales increased in live events, high school park and recreation and transportation business units, decrease in commercial and international business units, all quarter-over-quarter. Live events contributed to the sales increase as the number of projects for both professional sports and college and university work was up compared to last year. Continued market demand and delivery timings also contributed to sales increases in the transportation business unit. Other business unit sales declined following the trends in orders. Looking ahead to the quarter of fiscal -- second quarter of fiscal 2018, we are starting with a strong backlog and order pipeline. We currently are estimating our second quarter sales to be comparable to last year based on the current customer demand. Gross profit improved to 25.8% during the first quarter of fiscal 2018 as compared to 24.9% during the first quarter of fiscal 2017. Gross margin percentages were favorably impacted and on improvement on actual delivery class on our large projects in the sports segment and by improved productivity and higher sales volume over our fixed cost. Total warranty as a percent of sales was 3% during the first quarter of fiscal 2018 as compared to 2.8% last year. Operating expenses increased $1.8 million or 6% compared to last year to a large degree from the increase in product development expenses. Product development expenses increased by $2.0 million to speed up our development of display and control solutions through additional resources allocated to our product development function. Selling and general and administrative expenses remained relatively flat quarter-over-quarter. Our overall effective tax rate expense was 29.7% as compared to the expense of 31.2% last year. We forecast the forward-looking effective annual tax rate to be approximately 30% to 32%. As we have previously discussed, our effective tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income. Our cash and marketable securities position was $52 million at the end of the quarter. We reported negative free cash flow of $8.9 million as compared to a positive free cash flow of $4.5 million for the same period in fiscal 2017. This cash usage was primarily due to the timing difference between sales recognition and the outflow of payments for inventory components as compared to the receipts of cash from our customers upon the agreed-upon payment terms. Capital expenses increased to $4.1 million for the quarter as compared to $2.1 million last year. Primary uses of capital included manufacturing equipment, research and development testing equipment and facilities, demonstration equipment for new products and information technology infrastructure. We made no repurchases [indiscernible] during the first quarter. We expect capital expenditures to be less than $20 million for the fiscal year. At this time, I'd like to introduce, Reece Kurtenbach, our Chairman, President and CEO for a few additional comments.

Thank you, Sheila. Good morning, everyone. We had a positive start to fiscal 2018. Our teams across the company worked hard to serve our customers, which translated into financial performance for the first quarter. We are historically busy at this time as the first half of our fiscal year has many of our sports customers installing facility upgrades or enhancements. This is also the construction season in the Northern Hemisphere and much of the world uses this time to install outdoor applications before the winter months. The higher sales levels improved performance in our large project business through improved manufacturing and productivity, increasing our gross profit. Operating expenses increased as we invested more in our product development area to accelerate the creation or enhancement of customer solutions, including investments in both display and controlled technologies. Orders lagged a bit from last year on a first quarter to first quarter basis, but overall reporting levels across businesses remained strong. We expect continued success in growing our business over the long-term for the following reasons. We continue to be confident in the expanding global digital marketplace through digital adoption and available market growth across the sectors we serve. We continue to enhance and develop product lines and comprehensive solutions for our broad market base and specific customer needs. This allows for success in markets during natural ups and downs of each segment. In addition to our comprehensive product lines, we are committed to earning customers for life, driving continued investments in quality, reliability and other performance enhancements to meet our customer's needs today and over the long term. Active support from initial project planning throughout the intended use of the system leads to satisfied customers and repeat business during the natural replacement cycle. While we are optimistic about our long-term future, various geopolitical, economic and competitive factors may impact order growth. Our business will continue to be lumpy. While these areas can impact a specific fiscal period, we continue to pursue long-term profitable growth. Our outlook for fiscal 2018 remains unchanged from a quarter ago. Our international business unit continues to be poised for growth through expansion and the use of digital systems and increases in market share in our focused segments of sport, out-of-home, spectacular and transportation. We expect continued demand for large orders due to the adoption of video supporting applications and the high school park and recreation market, allowing for growth. Transportation has growth opportunities due to continued investment in the U.S. transportation systems and the stability in federal funding. In our commercial business unit, we see opportunities for growth, mainly driven by digital opportunities in the spectacular segment, both new and replacement systems for our national account-based business, expansion of solutions for indoor applications and continued activity in the Billboard segment. We also expect live event sales to maintain order levels of prior years. During fiscal 2017, we made progress on increasing product development velocity and expect to continue this into fiscal 2018. While these efforts will increase development expenses as a percent of sales in the near term, we believe this investment is necessary to drive forward new solutions to meet customer needs and to expand our global market share. Rollouts of products including display and control solutions are expected throughout the coming year. While the path will not always be smooth, we believe the growing market and our industry-leading solutions position us to generate long-term profitable growth. With that I would ask the operator to please open up the line for questions.

[Operator instructions] Our first question comes from the line of Morris Ajzenman from Griffin Securities. Your line is now open.

Hi Reece. Hi Sheila.

Good morning.

Live events, clearly, you're starting to make some good traction here, up modestly to previous quarter and up about 20% this quarter, and then you have on the international side is kind of flip-flopping Q4 was up very strong I think like 34% to top line with orders down modestly, but yet in Q1, international sales down 90% and the orders are down 41%. I understand it's kind of lumpy there, but just playing out live events and international, obviously there is other additions, things happen there too, but what trend should we expect over the next handful of quarters? Will they continue to be lumpy or will we have some sort of progression at least for those two divisions?

Morris, both of those two divisions are really our large project-based business. So, it's multimillion dollar projects that you win or lose. What we book in one quarter, we tend to deliver in the next quarter or two and so we expect those businesses will continue to remain lumpy throughout their -- as long as we're in them I would say. We do have a much longer track record base and so we see maybe even though we know it's lumpy, you've seen it more consistent over the past few years. We believe that if we had 30 years in the international business, we would see an installed base there drive maybe more predictable or more consistency in that business.

And switching gears and then I get back in queue here, gross margins north of 25%, which I think is trying to get some traction 25.8%, yet surprisingly, you're able to reach that level of warranty expense then still being 3%. How sustainable are those gross margins over the ensuing quarters? You're looking at flattish revenues I think again for Q2, can we -- gross margins above 25% going forward?

Based on a project-by-project basis, the gross margins have been stable. We haven't seen that being constricted. What we do see is if the volume goes up in any one quarter, our operating expenses don't go up at the same level. So, we get some traction there. So, it will depend somewhat on volume, but the gross profit has been relatively stable.

And then we also have the historical Q3 that's like Reece mentioned that really highlights the volume difference, but…

I am sorry, any comments on warranty expense being 3%.

It was a little bit of mix of our projects this quarter. So, I think it was a little bit higher, but we are still maintaining and working on our quality and reliability throughout our organization and hope that comes down over time as we’ve talked.

Thank you.

Thank you. Our next question comes from the line of Jayant Ishwar of Singular Research. Your line is now open.

Thank you. Great quarter. I have a question on your pipeline. I see in the order on the bookings compared to last year are down, but how strong is the pipeline at this point as compared to the same time last year?

The quoting activity is very strong and we feel we have a very active pipeline. As far as the quarter-over-quarter, I'm not sure if we have those numbers available for you today, but I would say, it's comparable.

Okay. And the gross margin, is that sustainable over the rest of the year, except for Q3?

It depends on mix, like Reece mentioned as well as the volume. So, it all goes together.

Okay. Thank you.

Thank you. I'm showing no further questions at this time.

I would like to thank everybody for attending today's call. As a reminder, our Shareholders Meeting is August 30, next Wednesday and details of the meeting can be located in the proxy. I hope you have a happy rest of your summer and fall and we'll talk to you next quarter.

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