Daktronics Management Discusses Q4 2012 Results - Earnings Call Transcript

Daktronics (DAKT)

Q4 2012 Earnings Call

May 30, 2012 11:00 am ET

Executives

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

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

Analysts

Morris Ajzenman - Griffin Securities, Inc., Research Division

Stephen Altebrando - Sidoti & Company, LLC

James Ricchiuti - Needham & Company, LLC, Research Division

Robert Thurston Hoffman - Candlewood Capital Management, LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Daktronics Fourth Quarter and Fiscal Year 2012 Earnings Results Conference Call. As a reminder, this conference is being recorded today, Wednesday, May 30, 2012, and is available on the company's website at www.daktronics.com. [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. We appreciate everyone's participation this morning in our year-end conference call.

I'd like to first offer our disclosure, cautioning investors and participants that in addition to statements of historical facts, this call and our news release contain forward-looking statements, reflecting 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 I'll follow. And then we'll open it up for some questions.

James B. Morgan

Thanks, Bill. Good morning, everyone. Obviously, this was a very challenging quarter for us. Our first challenge was that we didn't generate as much revenue in the quarter as we needed to, to have a good quarter. This was a combination of delivery on some projects being delayed and some projects that we were awarded and which could have generated revenue in the quarter not being booked before the quarter end. Some of this pent-up demand ended up in inventory, which Bill will talk about in a minute.

Secondly, we did have a couple large projects for the site work ended up creating some problems for us, which hurt our gross profit. While there's always some risk of costs overruns on fixed price in installations, overruns this extent are very unusual for us as we pride ourselves in our project management capability, which we've been doing for many years. We are studying these situations carefully and making adjustments to make sure we don't have repeats of this nature.

Our Live Events business top line was relatively flat for the year. We lost some gross profit points including some onetime hits, as described here, above, that will be working very hard to make sure don't recur. We will be focusing on reducing our overall cost to deliver in this area to improve gross profit margins.

International revenue for the year was actually up partly due to the higher backlog we took into the fiscal 2012. The gross profit was off of the unusually high levels we experienced in fiscal 2011. We continue to see good activity internationally, but due to its concentration on large project work, it does tend to be the most lumpy of our businesses.

The strongest performance for the year overall from a financial perspective were our Transportation and Commercial business units. It was great to see the increase within commercial for the year, as noted in the press release, with all aspects of the business having a strong year led by billboards and large contract business.

One of the opportunities for us going forward, which we're excited about, is participating in the replacement or updating of displays that have reached their end of life. That's both for on-premise and third-party advertising customers. For smaller displays, this will also mean this is a complete replacement of the display. For larger billboard site displays, there is an interest by our customers to minimize the CapEx investment, so we will be working with them to identify what the best approach is. As a minimum, it would mean a module replacement.

The Transportation business unit has continued strong through the downturn and continued to perform well this year. We have started off fiscal 2013 with specially strong orders in this business unit. We have talked about warranty fair amount in the past. We did see a meaningful improvement in warranty costs over the previous year. And with the increased emphasis on reliability testing that we have been doing for the past few years, we are expecting warranty cost to improve further in fiscal 2013.

As mentioned in our news release, our largest investment in product development will be in surface mount LED products. We do offer some surface mount LED products now, but these new products will be based on a new platform to allow us to more cost effectively offer a wider range of pixel pitches. We are seeing increased opportunities for this surface mount technology and out-of-home third-party advertising, especially in international markets.

IPTV for sports facilities and architectural lighting continue to be developing opportunities for us. We believe our offerings in each of these areas offers unique features and benefits. We have some nice reference installations to both of these product areas and have a good sales pipeline going in both areas as well.

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