Daktronics, Inc. (DAKT) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2019 Third Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Wednesday, February 20, 2019 and is available on the company's website at www.daktronics.com. At this time, all participants are in a listen-only mode. Later we'll 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 Ms. Sheila Anderson, Chief Financial Officer for Daktronics for some introductory remarks. Please go ahead, Sheila.

Thank you, Mark. Good morning, everyone. Thank you for participating in our third 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 conditions, changes in the competitive and market landscape, including impact of global trade discussions and policies, resolution of litigation contingencies, 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 in detail in our 10-K and 10-Q SEC filing. With that, let me highlight some of the financials. Orders for the third quarter of fiscal 2019 were $135 million as compared to last year's third quarter of $126 million. Commercial orders increased in a spectacular out-of-home and on premise niches. Live Events and orders increase related to private bookings for professional sports and colleges and universities. High School Park and Recreation increase were related to continue overall market demand and an increase in projects for larger video system, which include like higher sales prices. Transportation and international orders decreased compared to the same period one year ago primarily due to the variability and the timing of large project based business. For the year, orders are up 5.9%. Commercial transportation and High School Park and Recreation business units all are up offset by declines in International and Live Events. As a reminder, we derive a significant portion of our orders from sales from large dollar sized projects across our business units. These large projects can cause variability in quarterly and annual comparisons, large video and systems projects globally include installation for college and professional sports facilities, entertainment venues, transportation market applications and for account-based business in the out-of-home niche. Our business also fluctuates seasonally based on the sports market and construction cycles and is dependent on the various schedules based on our customers’ needs. Sales for the third quarter of fiscal 2019 were $115 million as compared of $130 million last year. Net sales increased in commercial, high school park and recreation and transportation business units and decreased in live events and international business units quarter-over-quarter. These fluctuations primarily follow the order changes to the first three quarters of each of these segments. We had expected sales to be slightly lower in the quarter as compared to last years’ Q3 due to seasonality and the estimated timing of conversion of orders to revenue. However, some project shipments and related sales recognition moved in to the fourth quarter causing later quarter for sales. On a year-to-date basis, sales are up in all business units except live events. During fiscal 2018 we completed a number of arenas for professional sports and college and university venues in the Live Events business units, with no similar sized projects this year during the same time frame. Other financial comparable included gross profit as a percentage of net sales at 21.6% for the third quarter, as compared to 21.9% for a year earlier in the same quarter. Warranty as a percent of sales decreased to 1.6% as compared to 2.9% quarter-over-quarter. This improvement was offset by higher commodity cost due to the global trade environments, $1.8 million of expense for a loss project and a litigation claim, and lower sales levels of our capacity cost also impacted gross profit for the quarter. On a year-to-date basis, gross profit declined to 24% as compared to 24.5% due to the same reasons. Operating expenses for the third quarter of 2019 were $32.4 million compared to $32 million for the third quarter, an increase of 1.5%. On a year-to-date basis, operating expenses have increased by 2.4% primarily due to increases in selling expenses. Selling expenses have increased due to an increase mix of international sales sold through a third part representative which earned commission. Selling expenses have increased (inaudible). Operating loss as a percentage of sales was 6.5% for the third quarter of fiscal 2019, as compared to an operating loss as a percentage of sales of 2.6% for the third quarter of fiscal 2018. For the quarter, our tax benefit is primarily attributable to a one-time release of $2.8 million in an unrecognized tax benefit related to a lapse of statute for an uncertain tax position and $0.5 million of our foreign tax jurisdiction valuation allowance release. Last year during the third quarter, the US Tax Cuts & Job Act went in to effect and included a federal rate decrease from 35% to 21%. That caused a revaluation of our deferred tax assets to create an additional $3.7 million of tax expenses last year. As we have previously discussed our effective tax rate can fluctuate depending on the changes in tax legislation and the actual geographic mix of taxable income. Our cash and marketable securities position was $70.9 million at the end of the quarter. We generated $32.2 million of cash from operations and used $16.3 million for investments in capital for new production system capabilities, information system infrastructure and for an acquisition to advance our technology offerings. We expect our capital expenditures to be less than $20 million for the fiscal year 2019. Our product backlog is a $168 million which we expect to convert to sales over the coming two to three quarters. We expect sales for the fourth quarter of fiscal 2019 to be similar to slightly lower compared to last year’s fourth quarter. Of course sales could change pending project bookings and customer schedule changes. I’ll now turn the call over to Reece Kurtenbach, our Chairman, President, and CEO for a few comments.

Thank you, Sheila. Good morning everyone. Our third quarter was non-profitable for the reasons described, yet our net income remained positive and similar to last year on a year-to-date basis. We also remained positive on our overall outlook on the business and have made continued progress on releasing new offerings through our already competitive and deserve line of solutions, positioning us to better meet our customers’ needs both today and in the future. In addition, we predict continued ongoing growth in the uses and applications of these solutions globally. (inaudible) factors support our goal of long term profitable growth. Specific highlights of our outlook by business units include, we expect sustained demand and growth for larger size orders due to the adoption of video and sporting applications in the High School Park and Recreation market. In our international business unit, we believe the market’s increased adoption of digital systems as well as our focus on increasing market share in our segments of sports, out-of-home, spectacular and transportation areas will continue our growth outside of the US and Canada. Transportation business in the US and Canada has growth opportunities, due to continued investment in the US transportation system, the stability in federal funding and increasing advertising and several promotional application needs in mass transit facilities. 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 account based businesses, expansion of solutions for indoor applications and continued replacement in new investment activity in the out-of-home segment. We expect live events sales in the short term to be down. This business is lumpy primarily consisting of larger contracts and can be holiday competitive. Over the long term however, we predict a similar sized business as previous years driven by replacement cycles and new product uses. In all of our market, we have a natural replacement cycle and strive to serve our customers with their needs today as well as in the future. Our range of solutions and global capabilities makes us the industry’s most experienced digital display provider. To support our customers over the longer term, we continually focus on developing and bringing innovative solutions and services to different application in each segments. For example, we have released and continue to release fewer generations of our LED video product lines to serve the growing demand in areas using these solutions. We also have differentiated this product offering along with customers to have more choices to meet their particular situations. We continually invest in new technologies to enhance our services and control systems offerings and will continue to improve our abilities here. While we are optimistic about our long term growth in the digital display industry Daktronics compete in the world stage and we are impacted by the uncertainties in today’s and business environments. Also in the sourcing of components to produce our products and (inaudible) these finished goods globally. As we know today’s global trade environment is very dynamic, we continue to monitor the situation and evaluate ways to minimize these impacts through vendor negotiations, alternative sources, and potential price adjustments. Our teams are focused on the continued development of industry leading solutions in global sales channels to support our goal of long-term profitable growth. With that, I would ask the operator to please open the line for any questions.

[Operator Instructions] And our first question comes from the line of Greg Pendy of Sidoti. Your line is now open.

Just the first one, can you give us a little bit of color just on the component environment. Are the trade issues creating sort of a shortage of components out there and how should we think about the timeframe for when that eases?

Greg, certainly the current trade environment has impacted certain duties and taxes on those components, as well as many companies including Daktronics are looking how to minimize these impacts and it may involve pulling ahead orders before the next tariffs or duties might come into effect, and March 1 right now is that next real milestone and over the next few weeks as we try to understand what will happen there, that will be important to look at. When will this settle down? That's a great question, Greg. You know a lot of that is out of all of our control, we can just continue to monitor and make the best decisions we can base on our view of what today is and what the future will be. Is that helpful?

And then I guess just switching gears to the other side of your gross margins, you did a really good job. It looks like on the warranty expenses coming down, now within sort of your targeted range. Can you give us a little bit of a color I think a lot of this kind of dates back to something in 2016, but when will the replacement cycles for a lot of the customers that you really took the initiative to address on the warranty issues, when do those kind of come due?

So the warranty issue that we discussed back in 2016, we think we've worked through the majority of that and that isn't as we move into our next fiscal year, isn't going to have near the impact as it has in the last few fiscal years. In general, the products that we've shipped into per say the out-of-home market, a lot of that was in the mid-odds and so those replacement cycles should be coming due on many of those products in the next few years.

And I'm not showing any further questions. I would now like to turn the call back to Reece Kurtenbach for closing remarks.

Thank you, and thanks everyone for participating in today's call. We wish you a happy spring and maybe a warmer weather when we meet again in June. Thank you everyone.

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