Daktronics Q3 2024 Earnings Call Transcript

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Provided by Quartr
February 28, 2024

There are 6 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 20 24 Third Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded, Wednesday, February 28, 2024, and is available on the company's website at www.daktronics.com. After the speakers' presentation, there will be a question and answer session. I would now like to turn the conference over to Ms. Carla Gadske, Corporate Secretary for Daktronics for some introductory remarks.

Operator

Please go ahead, Carla.

Speaker 1

Thank you, Kevin. Good morning, everyone. Thank you for participating in our Q3 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 the future our future financial performance and future business opportunities. These forward looking statements reflect the company's expectations or beliefs concerning future events.

Speaker 1

All forward looking statements involve risks and opportunities that could cause actual results to differ materially from our expectations. Such risks include, but are not limited to, changes in economic and market conditions, management of growth, timing and magnitude of future contracts and orders, fluctuations in margins, the introduction of new products and technology, availability of raw materials, components and shipping services and other important factors. These identified factors could cause actual results to differ materially from those discussed in this call in the company's 2024 quarterly earnings release and in its most recent annual report on Form 10 ks. Our second quarterly 2024 earnings release contains certain non GAAP financial measures and was furnished to the SEC on a Form 8 ks this morning to clarify 3rd quarter 2024 earnings release. We also made slides available for today's call.

Speaker 1

All of these documents are available on the Investors section at Daktronics' website, www.dactronics.com. I'll turn the call over to our CEO, Rees Kurtenbach.

Speaker 2

Thank you, Carla. Good morning, everyone. Thank you all for joining us today. Our Q3 year to date results reflect our team's strong execution of our strategies across all of our business areas. These strategies have raised the bar for execution and expectations and drove robust operating cash generation in the 3rd quarter.

Speaker 2

And drove robust operating cash generation in the 3rd quarter. These results serve as evidence of the success of our past decisive and deliberate actions taken to adapt to challenging business conditions and to improve our customers' experience while increasing our profitability and working capital levels. The results also testify to the resiliency and strength of our teams within Daktronics and to our strategy of capturing demand in diversified markets and innovating across technology platforms. If you have opened the slide deck, I invite you to turn to Slide 3 titled Fiscal Third Quarter 2024 Highlights and to follow the financial outcomes for the quarter. To put our fiscal 2024 results delivery into perspective, our Q3 is historically a seasonally low volume quarter for revenue and therefore historically could result in a breakeven or even a loss making quarter.

Speaker 2

However, reflecting back to fiscal 2023 Q3, we fulfilled back ordered work as we had new designs available to take advantage of the available parts in our supply chains and as other supply chain related pressures were resolving. This resulted in extraordinarily high volume and high profit for the 3rd Q4 of fiscal 2023, a unique time for us. During this fiscal year's Q3, despite a return to more traditional seasonality and fulfilling a lower volume of orders as compared to last year's surge, we drove an $8,000,000 operating profit and generated $9,000,000 in operating cash flow. During fiscal Q3, we experienced robust order volume of $192,000,000 Live events and the commercial business unit order strengthened in the quarter and all domestic markets saw growth. 3rd quarter orders grew 29% more than last year's Q3, bringing year to date order growth to 6.6% for the year.

Speaker 2

These increases reflect our focus on profitable order generation in our serviceable address available markets or SAM. Backlog continues to decrease from last year's built up levels as we recognize the anniversary of the resolution of supply chain challenges and utilize our capacity to deliver customer orders at market expected lead times. With respect to sourcing, our revamped and more diversified supply chains are functioning well across our suppliers. As we primarily compete with companies that obtain their products from China and compete on price, we continue to evaluate our price position in the market and are adjusting our prices to achieve our order attainment goals at profitable levels. Given our results to date this year and the momentum in our order flow, we feel good about our positioning to drive profitable growth and cash flow generation into the Q4 and beyond.

Speaker 2

For additional details on the financial results for the quarter, I'll now turn it over to Sheila.

Speaker 3

Thank you, Reese. Please turn your attention to Slide number 4 titled FQ3 FY 2024 Financial Highlights for the quarterly overview. Orders for the Q3 of fiscal 2024 increased by 29.4% from the Q3 of fiscal 2023 through strong demand in the live events business unit, returning demand in the spectacular and out of home markets in our commercial business unit and solid growth in high school park and recreations and transportation business units. These higher orders offset the decline in the international business units orders as compared to last year's Q3. We believe international demand softness relates to the economic and geopolitical conditions.

Speaker 3

We generated sales of $170,000,000 for the Q3 of fiscal 2024 as compared to $185,000,000 of sales for the Q3 of fiscal 2023. This 7.9% sales volume declined as the industry is returning to more traditional seasonal trends and because during last year's back half of the second quarter and during the third quarter, the supply chain stabilization allowed us to physically finish a high volume of orders and deliver for revenue recognition in those quarters. As Reis highlighted, the Q3 is our historically low sales volume quarter because of sports seasonality, outdoor construction lows in the winter months and fewer workdays due to the holiday breaks. This year's Q3 volume was as expected. Supply chains also continue to flow generally as expected.

Speaker 3

Gross margin as a percentage of net sales increased to 24.5 percent for the Q3 of fiscal 2024 as compared to 22 point 6% in the Q3 of fiscal 2023. The 190 basis point increase in gross profit percentage is attributable to strategic pricing actions and stability in our diversified supply chains. Operating margins was 4.7% of sales during the Q3 of fiscal 2024 as compared to last year's 3.8% or adjusted to 6.3% without the non cash goodwill impairment charge recorded in last year's quarter 3. Fiscal 2024 3rd quarter's positive operating margin rate is attributable to our continued careful management of operating expenses. Again, it's notable that we delivered an $8,000,000 3rd quarter fiscal twenty 24 operating profit in our seasonally lowest volume quarter of the year.

Speaker 3

Please turn to Slide 5 as I highlight year to date performance. Orders for the 1st 9 months of fiscal 2024 increased by 6.6% as compared to the 1st 9 months of fiscal 20 23 through strong demand in live events, transportation and high school park and recreation business units. Commercial orders are down for the 9 months from year due to a large due to a lack of large project bookings and a reduction in order spend by the out of home segment customers in the 1st 6 months of the year, partially offset by the 3rd quarter improvement in order placements. International also is down slightly on a 9 month Sales grew 10.6 percent for the 1st 9 months, which aligns to the order volume and built up backlog coming into the 1st part of the fiscal year. Gross margin as a percent of net sales increased to 27.7% for the 1st 9 months of fiscal 2024 as compared to 18.2% in the 1st 9 months of fiscal 2023.

Speaker 3

The 950 basis points increase in gross profit percentage is attributable to our strategic pricing actions, our investments in factory automation, our focus on cost effective and high quality product designs and the stability of our diversified supply chain. After investments in operational areas and organic growth, the resulting operating margin was 11.2% of sales during the Q3 of fiscal 20 24 as compared to last year's 0.6% or 1.4% of that goodwill impairment was removed from the calculation, a non GAAP calculation, but helpful to compare the improvement. The balance sheet from a balance sheet perspective, our cash position net of debt increased due to cash generation from the profitable quarter and management of working capital. Cash net of debt was $27,200,000 and we generated $53,800,000 of operating cash flow during the 1st 9 months because of our profitability and our ability to lower investments in inventory levels from the height of the supply chain challenges. Our working capital ratio at quarter end was 2.2 compared to 1.6 at the same time last year.

Speaker 3

For an update on the market verticals, I'll turn it back over to you, Reese.

Speaker 4

Thank you, Sheila.

Speaker 2

Please reference Slide 6 titled Market Verticals Update. Our mission is to support our customers to inform, entertain and persuade their audiences and their customers. Let us look more specifically into our business areas. In live events, we again partnered with the Detroit Tigers to deliver the 2nd largest main video display in baseball's major leagues at Comerica Park, updating and upgrading our previous installation from 2012. Five additional displays will be installed along the fascia, dugout and line score locations ahead of the 2024 baseball season.

Speaker 2

Moving forward, we expect live events demand to remain strong as there are a number of projects being bid as venues enhance facilities to entertain fans and attract athletes. We see this trend continuing and more focused being placed on entertainment areas and the experience outside the ball in places like entryways, atriums, concourses and adjacent entertainment areas. Commercial orders, especially from customers in the out of home advertising space can be sensitive to economic conditions and they can rebound quickly as conditions improve. This market is also sensitive to the large national advertisers spending decisions, which is why we also focus on winning other independent billboard sales. We saw a nice order rebound in Q3 in both national and local out of home customers.

Speaker 2

However, large national out of home companies are noting plans continue to constrain spending in the coming calendar year. We continue to innovate and provide competitive differentiation in the marketplace to reach the needs of our customers. For example, we are seeing interest in our light direct digital billboards. Light direct narrows the viewing cone of the display, preventing light emissions from spilling into surrounding areas and targeting only the intended audience in urban and rural environments. We continue to build out our AV integrator network to market our narrow pixel product lines, especially in control room applications used by military, utility and transportation agencies.

Speaker 2

Transportation. Our teams are focused in winning projects for intelligent transportation systems as highlighted by fiscal Q3 wins on projects in Arkansas and Tennessee. International, during the quarter we won a stadium project and orders for transportation areas, yet orders have been slow this year, which we believe is due to economic and geopolitical uncertainty. Customers continue to demonstrate interest in projects, but are delaying buying decisions. Our sales teams continue to be responsive with customers and are actively quoting opportunities.

Speaker 2

In high schools, the trend going forward continues to be conversion to meet this demand and believe we are in the early stages of this transition. We are looking to speed up and simplify the sales processes and increase our market reach process by deploying sales strategies to make certain items available to be purchased online. We also continue to develop our e sales channel and these efforts are going well. We are continuing to offer more products through these online and partner channels and have improved processes to make the buying process more efficient. From a big picture perspective, our customers use our control capabilities to create, manage and schedule content for engagement with fans and audiences.

Speaker 2

We continue to make progress on our multi year strategy to create more capabilities to aid in the service and maintenance of our systems as well as continually add to the feature set of our cloud based and locally hosted systems. These capabilities are increasingly offered through software as a service and we are investing in people and capabilities to grow these higher margin opportunities. If you would focus on Slide 7 titled Strategic Focus, overall our target markets are large and growing with resilient demand driven by our customers' desire to improve their audience experience in sports, commercial and transportation environments. More specifically, we are focused on profitable growth by capturing more of our serviceable available markets or SAM by expanding the share of customer spend, adding new customers, developing control options and expanding the services we offer, driving increases in monthly recurring revenues. For example, we are offering Frameworks, a content design platform that enables students and staff the ability to access top level content to elevate their brand for event production and promotions.

Speaker 2

We're also working to capture new ways to use in demand products such as expanding applications using our indoor narrow pixel pitch product, which are applicable across all of our businesses. For example, we sold additional concourse displays from our NPP product line to the Green Bay Packers at Lambeau Field. An existing customer using our traditional products. Internationally, we are driving live events, commercial and transportation opportunities as the economic conditions continue to improve. And we are focused on developing and marketing to the military by attending trade shows specific to the industry and growing relationships with AV integrators focused on this market.

Speaker 2

As we grow revenues, we are working to further increase our nimbleness and flexibility in capacity allocation and utilization. We are investing over the coming fiscal years in improvements in our demand planning tools and alignment to capacity for integrated business planning and our expanding factory qualifications to have flexibility for where a product is built to maximize the use of our infrastructure and dynamically aligning capacity to adjust to seasonality and vary in order flow by market. Turning to Slide 8 and Slide 9, we appreciate the feedback and questions that we received from our shareholders and wanted to take this opportunity to address some of the questions most frequently asked. First, we are often asked why we don't give guidance today. As you know, our demand is project driven and therefore can be lumpy.

Speaker 2

Demand is also highly seasonal and additionally demand can be impacted by customers and construction schedules, all making it difficult to give precise estimates for the future. What we can say today is that over the next 3 to 5 years, we are working to drive sales growth with our sites on $1,000,000,000 of annual revenue and operating margin sustainability in the mid to upper end of the 5% to 10% range as we move forward. We are investing in processes systems to increase our level of control over the controllable elements of our business. This work is expected to increase our ability to be responsive to changing conditions as we grow in an increasingly complex global marketplace. By taking these actions, our goal is to raise our visibility in, as I mentioned, a lumpy seasonal business and enhance our internal planning capabilities.

Speaker 2

It is important to note that as we look more on an annual perspective in order to identify prevailing trends in our businesses and plan accordingly, while maintaining as much flexibility as possible. We will continue to reevaluate our guidance practices over time to help our investors understand our outlook. Investors also ask what is our capital allocation strategy? We historically plan around 5% of sales in research and development expenses and roughly 3% of sales on average in capital spending to maintain our technology leadership, manage and maintain our manufacturing capacity, information system infrastructure and sales demonstration equipment. We also look for opportunistic acquisitions that can help us advance our technologies, penetrate new geographies or help expand our serviceable addressable market.

Speaker 2

Going forward, as we increase our sustainability and cash flow generation, we could consider repayment of our debt and we may also consider the resumption of quarterly dividends and or share repurchases. Turning to Slide 9. Finally, we want to reiterate that our Board has aligned management's compensation structure with investors' priorities for profitable growth. Specifically, the incentive compensation program is based on operating income as our key metric with targets of 10%. The strategies we described previously are designed to help us move towards that achievement, capturing profitable SAM, developing best in class solutions and managing expenses.

Speaker 2

Maximizing our utilization and increasingly increasing the agility of our manufacturing capacity and automation through our systems and processes are keys to managing expenses. Turning to fiscal Q4, 2024 qualitative outlook, I'd encourage you to reference Slide 10. Given what we see in our businesses today, we anticipate our fiscal Q4 seasonality to be similar to pre pandemic patterns, which is historically an increase in revenue and profitability as compared to the Q3. While we are not offering a quantitative outlook, qualitatively we look for fiscal 2024 Q4 net sales to increase sequentially and decrease from the year ago period, which was again a high volume period in which we were fulfilling back orders related to the pandemic recovery. We are positioned for continued sequential margin and cash flow generation.

Speaker 2

In conclusion, our summary on Slide 11 recaps our key highlights. Our year to date results offer evidence that we have overcome the challenges caused by the constrained supply chain and pandemic implications of recent years. We enjoy our position as a global industry leader in best in class video communication systems. We are the technology leader in our industry and are the only U. S.

Speaker 2

Manufacturer of scale with a global footprint. What differentiates us from our competitors is our U. S. Base, our technology leadership, the high quality of our solutions, our high touch service and our large entrenched customer base. Our target markets are large and growing with resilient demand driven by audience experience, sports fan engagement and customer success with our systems.

Speaker 2

We are focused on a multi year journey to capture the growth in existing SAM and in other areas. This poises us for sustainable revenue, earnings and cash flows. We are very proud of our results and grateful to our teams who work together to deliver them and we look forward to a solid end to the year. With that, I would ask the operator to please open the line for questions.

Operator

Thank Our first question comes from Vijay Cook with Singular Research. Your line is open.

Speaker 4

Hey, thanks for taking my question guys. New order growth was quite a bright spot for the quarter. Interestingly, last quarter, there were higher orders in international and transportation and decrease in commercial. This quarter was quite the opposite. I know results can kind of be choppy, but is there anything unique that you're seeing in those segments given the jump in new orders?

Speaker 2

BJ, first of all, I appreciate the question. Thanks for joining us this morning. And I think what you're seeing is as we described here lumpiness, we international and transportation tends to be large order based and that order books in a certain period and then it fulfills in subsequent periods. And so I think what you're seeing is a normal kind of impact of our business, which is why we tend to look over larger periods to kind of smooth some of that out.

Speaker 4

Great. Thanks. You guys mentioned in your remarks some new sources of revenues and SaaS or recurring revenue in military as well. Can you expand on those or how far along in the sales process are you and all those different opportunities?

Speaker 2

Certainly, our what we call our narrow pixel pitch product has really matured into a nice line of different pixel pitches and different ways that our customers can use them. And the AV Integrator reseller chain that we sell a lot of that through continues to grow and be developed. Some of but there's still room to continue to add AV integrators and build our visibility in that market space. On the software as a system and some of these other content services, we see great potential in those areas, but relatively new. We're adding customers in those areas, but really in the past 12 months to 18 months that has started.

Speaker 4

Thanks guys. Appreciate it.

Speaker 2

Thanks, P. J.

Operator

Our next question comes from Anja Soderstrom with Sidoti. Your line is open.

Speaker 5

Hi, and thank you for taking my question. Congratulations on the good progress here. I'm just curious with the backlog declining. I understand that's due to catch up from last year as supply chain. But when do you think that will revert to seeing growth again?

Speaker 2

Our backlog is going to fluctuate from quarter to quarter, Anja, as we book these large orders and then kind of work them off. We believe though that a year ago, our backlog was too large. We had a lot of product in there and we weren't able to meet market lead times. And so we see the reduction year over year in backlog as a positive as we've got our delivery more into market lead times. But I would also say that as we talked about seasonality, our fiscal Q1 and Q2 tend to be our largest revenue quarters.

Speaker 2

And so we would expect backlog to grow somewhat as we go into that period and then shrink as we go into Q3 and then grow again as we would come back into the next fiscal year as we've just over time experienced that seasonality in and out. Is that helpful, Anja?

Speaker 5

Yes, that was helpful. Thank you. And then in terms of the gross margin, it's fluctuating quite a bit as well. What is sort of a sensible one to use going forward projections?

Speaker 2

Revenue growth is the gross profit?

Speaker 5

The gross margin.

Speaker 2

Gross margins?

Speaker 5

Yes.

Speaker 2

I think we're going to see a stabilization in our gross margins as the business environment just isn't as volatile as it was a year or so ago. Where does that all settle out is a good question, Anja. We believe that we certainly are enjoying these gross margins and we're very sensitive to pricing adjustments and cost increases and we're fighting to hold those gross margins quarter after quarter. As far as guidance on what gross margins would or could be, I don't think we're ready to give that at this time.

Speaker 5

Okay. Thank you. That was all from me.

Speaker 2

Thank you,

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Reese for any closing remarks.

Speaker 2

Thank you, Kevin. I'd like to thank everyone for attending our conference call today. We'd like to let you know that we are appearing at the Sidoti Small Cap Conference in March and we often have 1 on ones following the conference call and we'll host the next earnings call likely in June as we release our annual results. I hope you all have a great day and a great week. And thanks again for joining us.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Earnings Conference Call
Daktronics Q3 2024
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