Daktronics (DAKT)

Q1 2012 Earnings Call

August 23, 2011 11:00 am ET

Executives

William Retterath - Chief Financial Officer, Principal Accounting Officer and Treasurer

James Morgan - Chief Executive Officer, President and Director

Analysts

Robert Hoffman - Candlewood Capital

Stephen Altebrando - Sidoti & Company, LLC

Richard Ryan - Dougherty & Company LLC

James Ricchiuti - Needham & Company, LLC

Steven Dyer - Craig-Hallum Capital Group LLC

Unknown Analyst -

Morris Ajzenman - Griffin Securities, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2012 First Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, August 23, 2011, and is available on the company's website at www.daktronics.com. I would now like to turn the conference over to Mr. Bill Retterath, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, sir.

William Retterath

Thank you, and Good morning, everyone. We appreciate your participation in our conference call. I'll give some brief updates about the quarter, and then open it up for Q&A, following our prepared comments.

I'd like to first offer our disclosure cautioning investors and participants. In addition to statements of historical facts, this call and our news release contain forward-looking statements, reflecting our expectations and beliefs on future events, which could materially affect our performance in the future. We caution you that these and similar statements involve risks and uncertainties, including changes in the economic and market conditions, management of growth, timing and magnitude of future orders and other risks as mentioned during this call, and in our press release and our SEC filings. Forward-looking statements are made in the context available to us as of the date of this call. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

With that, I'll turn it over to Jim Morgan, our CEO, for some comments.

James Morgan

Good morning, everyone, and thanks for joining us this morning. The highlight of the quarter overall was that orders were strong, which positions us for a good second quarter. Maybe to put our typical year in perspective, Q2 is typically our strongest quarter, Q3 is typically our weakest quarter, and that's due both to the business seasonality and the holidays in Q3, which in turn translates to shorter work days in that quarter. The first and fourth quarters typically fall somewhere in between in terms of financial performance. So while we would typically expect to have a strong backlog going into Q2, given the economic news that we're all hearing lately, it was good to see the orders come through.

Overall, our story for this quarter is similar to the fourth quarter of 2011. Our 2 business units that were trending up in fourth quarter of 2011, namely Commercial and International, continue to trend up this quarter. Our Live Events and Schools and Theatres business units are a little slower to return to growth. Our Transportation business has remained strong through the downturn.

A few comments about areas we are investing in. We continue to invest in product development to deliver improved products at reduced price points, as well as bring new products to market. Our increased product development investments are a reflection of aggressive development schedules, along with more thorough prototyping and design testing, which adds to the initial development cost, but provides a more robust and more cost-effective design over the life of the product.

Our focus for the next couple of quarters in the display development area is in tighter pixel pitches for our outdoor video displays and the next generation of our high resolution video products for indoor. We are extending our platform strategy to these products like we did with our larger pixel pitch outdoor products a year or so ago. This strategy increases the commonality of parts for the products that share a platform, which in turn reduces inventory handling, as well as setup cost in manufacturing. At the same time, the new designs take cost out of the building materials.

We are also finishing the design for our new architectural lighting product, which we'll ship in second quarter. We also continue to invest in our control systems. And in fact, approximately 1/2 of our product development investment actually is in the control system side of things. We have few platforms there, our Show Control platform for live events applications, such as sporting events, and our Visiconn, that's spelled v-i-s-i-c-o-n-n, for scheduled program and applications, which is typically advertising.

We continue to see opportunities for IPTV, that's Internet Protocol Television, in stadiums with the strength of our integrated control systems, controlling and synchronizing displays throughout the stadium. We have now completed several major IPTV installations. And we expect to be able to announce another IPTV contract award for Major League Baseball in the near future. All of these product developments will position us to be more competitive and enable us to improve our gross profit margins.

We also continue to invest in expanding our International business, which takes investment both in terms of selling expense and administrative expense. At the same time, the results for our International business in the quarter demonstrate that there is opportunity on that front. And we are very pleased with how our International business is performing.

On the cost side, in general, we have opportunities for efficiency gains on all expense line items on the income statement, from the cost of goods sold through SG&A. Some of these improvements will take some time to develop. We continue to be cost conscious in all areas of the business and continue our efforts at streamlining our processes and our procedures to eliminate cost, which typically is time, out of all of our processes throughout the company.

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