Daktronics (DAKT)

Q2 2012 Earnings Call

November 22, 2011 11:00 am ET

Executives

James B. Morgan - Chief Executive Officer, President and Director

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

Analysts

Morris Ajzenman - Griffin Securities, Inc., Research Division

Neil Chatterji - Craig-Hallum Capital Group LLC, Research Division

Richard A. Ryan - Dougherty & Company LLC, Research Division

Stephen Altebrando - Sidoti & Company, LLC

James Ricchiuti - Needham & Company, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2012 Second Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, November 22, 2011, and is available on the company's website at www.daktronics.com. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] 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 R. Retterath

Thank you, and good morning. We appreciate your participation in our second quarter conference call.

I'd first like to 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 Chief Executive Officer, for some comments, after which, we'll open it up for questions.

James B. Morgan

Thank you, Bill. Good morning, everyone, and thanks for joining us this morning. We were generally pleased with our execution this past quarter. We ended the quarter with a healthy backlog, which positioned us for a strong quarter. We did have the challenge that the product mix and our backlog had taken a rather strong shift towards surface mount technology LEDs as opposed to through-hole technology. So we had some execution challenges, adjusting our capacity to meet demand, and thanks to the hard work of -- and the close collaboration of a lot of our people, we were able to meet the many tight deadlines this entailed.

I was disappointed to have the cost dip, that we described in our press release, which in total reduced our operating margin by more than 2 percentage points. As noted, we do expect most of these to be onetime costs.

I would like to shed a little more light on a new market and product family opportunity, where we have become an increasingly excited about. Again, we have mentioned this in the past. That is what we refer to as architectural lighting, also sometimes referred to as LED mesh product, that's M-E-S-H. A key characteristic that differentiates this product from our traditional video displays, is that this product has a degree of transparency. In other words, you can see through it, somewhat analogous to window blinds. This in turn results in some unique advantages in terms of weight, wind loading and power consumption, which makes it the preferred, if not the only solution, in a wide variety of applications.

We are excited to have just completed an installation at the WinStar World Casino, located in Oklahoma. That is our first, where we have married our LED technology with the unique mechanical mesh technology provided by our new business partner out of Europe. This mesh design is very robust and has been proven in applications without electronics for many years. We have a nice pipeline of opportunities utilizing this unique mesh design in combination with our LED technology.

We do enter third quarter with a relatively strong backlog, considering our third quarter is typically our weakest quarter, so we are pleased about that. How we end up for the fiscal year, where for the most part depend on our orders book in the third quarter.

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 bringing new products to market such as the LED mesh product I mentioned earlier. 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 costs that 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 continues to be in the tighter pixel pictures for outdoor video displays, and the next generation of our high resolution video products for indoor. We're extending our platform strategy for these products, like we did with our larger pixel pitch of our products over the past couple of years. This strategy increases the commonality of parts of the product that share a platform, which in turn reduces inventory handling, as well as setup costs and manufacturing. At the same time, the new designs take cost out of the building materials.

We also continue to invest in a control systems and in fact, approximately half of our product development investment is in the control system side of things. We have 2 platforms there: Our Show Control platform for live event applications, such as sporting events; and our Visiconn, for scheduled program in applications, which is typically advertising.

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