Daktronics Q1 2025 Earnings Call Transcript

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September 4, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by, and welcome to Daktronics First Quarter Fiscal Year 2025 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' prepared remarks, there will be a question and answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Carla Gatzke, the company's secretary for Daktronics for some introductory remarks.

Operator

Please go ahead.

Speaker 1

Thank you, Jonathan. Good morning, everyone. Thank you for participating in our Q1 earnings call.

Speaker 2

I would like

Speaker 1

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. These forward looking statements reflect the company's expectations or beliefs concerning future events. All forward looking statements involve risks and uncertainties, which could cause actual results to differ materially from 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 technologies, 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 Q1 2025 quarterly earnings release and its most recent annual report on Form 10 ks.

Speaker 1

Our Q1 2025 earnings release contains certain non GAAP financial measures and was furnished to the SEC, the Securities and Exchange Commission on a Form 8 ks this morning. We also made slides available for today's call and all of these documents are available on the Investors section at Daktronics' website, www.daktronics.com. I'll turn the call over to our CEO, Reif Kurtenbach.

Speaker 3

Thanks, Carla. Good morning. Thank you all for joining us today. We're off to a great start to the year against a record prior year quarter, demonstrating our continued strong execution towards driving growth and returns above our cost of capital. As you can see on our slide presentation on Page 3, 1st quarter fiscal Q1 2025 highlights, we delivered revenue growth as well as gross and operating profit expansion on a sequential basis.

Speaker 3

These continued financial results were primarily earned through steady growth in new orders, which increased 11% from last year, the completion of several large projects and efficient planning and execution throughout our fulfillment teams. This orchestration between our production and product teams served our customers well with on time deliveries, especially for sports installs in our live events and high school parks and rec HSPR business. Our operating environment remains stable with supply chain reliability adding greater predictability to our production schedules. Our more profitable business model generated solid operating cash flow of $19,500,000 a very strong performance against last year's record comparison. During the quarter, as throughout the past several quarters, we have also executed on a number of strategies along our digital transformation, growth and efficiency roadmaps, making progress toward our long term objectives and enhancing our ability to drive future profitable growth.

Speaker 3

We have specific milestones along this roadmap planned for this fiscal 20252026 and are on track for these next steps, which I will discuss further later in our call. Our backlog of $267,000,000 reflects our year over year order growth and continued return to more normal seasonal trends as we continue to anniversary our resolution of past supply chain challenges. We enter our 2nd fiscal quarter with good momentum and we expect to drive order growth in fiscal 2025. Our mission is to support our customers as they inform, entertain and persuade their audiences. Let's look more specifically into our business areas on Slide 4, market vertical FQ1 review.

Speaker 3

In live events, during the quarter, we made progress and recognized revenue on a number of large college and university projects for fall football, including Penn State, University of Texas, LSU and Colorado University. The LA Clippers new home at the Intuit Dome also debuted their double sided halo and other AV systems, which we have been building and installing over the last 2 years. This installation is a demonstration of our continuous innovation to extend our technology leadership and its strong reception from our customers. Looking ahead, we also booked some great projects for University of Connecticut, Alabama and Auburn. Our outlook remains similar to our last call.

Speaker 3

We expect live events demand to remain strong as venues enhance facilities to entertain fans and attract athletes. We see this trend continuing and more focus being placed on entertainment areas and experiences outside the bowl in places like the entryways, atriums, concourses and adjacent entertainment areas. Our narrow pixel pitch line of products matches the needs of customers for these places and continues to be in demand. Our commercial business primarily consists of sales through resellers, primarily sign companies to many types of customers and applications including military, utilities, transportation, national REIT retailers, quick serve restaurants, casinos, shopping centers, cruise ships, commercial building owners, petroleum retailers and other on premise customers. Also included in this segment are out of home advertising companies.

Speaker 3

As compared to last year's Q1 Q4, commercial orders picked up gaining strength as we continued to see order flow from resellers for on premise users of displays, out of home companies and commercial building owners, often referred to as spectaculars. This market is sensitive to overall economic conditions and advertising spend. And even with these dependencies at this time, this market is doing well. Our strategies to promote independent out of home operators is also driving this increase. Spectacular sales also increased in these comparative periods and we see continued interest going forward.

Speaker 3

Our focus for this market is to continue to grow our core areas and continue to build out our AV integrator network to market our narrow pixel pitch product lines, especially in control room applications used by military, utility and transportation agencies. Transportation. Orders in this segment grew from both last quarter last year and our teams are focused on winning projects for intelligent transportation systems, airport projects and other mass transit systems projects. We were pleased to have been awarded a contract with Dallas Area Rapid Transit for rollouts using our displays across their systems. International continues to be slow as compared to prior years, which we believe is due to economic and geopolitical uncertainty.

Speaker 3

However, it increased 20% sequentially as a result of our bookings of out of home companies for digital billboard rollouts. Customers continue to demonstrate interest in projects, but in some cases have been delaying buying decisions. Our sales teams continue to be responsive to customers and are actively quoting opportunities and we are starting to see signs of more quotes converting into orders. The picture here is an installation in Dubai for a unique advertising marquee. High schools.

Speaker 3

We had order successes compared to last year and last quarter as the market continues to be converted to full video usage. We launched a new higher margin product to not only support our customers, but further bolster our contribution margin for this segment. This past quarter, we delivered on 2 larger display systems akin to university projects, 1 in Texas and 1 in Hawaii, showing the continued usage of digital technologies to advance student and fan experiences. On the control system front, our show control solution is undergoing major advancements to enhance the live entertainment experience and improve workflow efficiencies. These enhancements will empower our customers to deliver dynamic presentation using cutting edge scoring and timing software, 3 d data visualizations, real time rendering and integrated data through sports specific applications.

Speaker 3

The addressable market for our new solution is broad, including anyone supporting live events, entertainment and sports, even if they're not using Daktronics equipment and is slated for release by fiscal year end. Additionally, we are introducing cloud access allowing customers to schedule, store and manage their content and data sources from anywhere. We continue to focus on our strategic milestones, which I'll cover in a moment. But first, for additional details on the financial results for the quarter year, I'll turn it over to Sheila.

Speaker 2

Thank you, Reese. I invite you to turn to Slide 5 titled FQ1 Fiscal 2025 Financial Highlights to follow the Q1's financial outcomes. The quarter over quarter comparisons in this slide and related discussion are as of and for the fiscal quarters ended July 27, 2024 April 27, 2024 and April 29, 2023 unless otherwise stated. As the operating and seasonal environments in fiscal Q1, 2025 was more comparable to our fiscal Q4, 2024 results than a year ago results, we are adding in sequential comparisons, which are more meaningful this quarter. As a reminder, fiscal Q1, twenty twenty four results reflected record volumes as pent up backlog was still being fulfilled.

Speaker 2

Our seasonal order revenue and profit patterns continued to normalize. Order generation for the Q1 was strong and follows sequentially a Q4 strong order quarter, setting us up for the higher seasonal revenue generation, typical of the seasonality in our business. Demand rebounded in all areas of our commercial business unit, on premise spectacular and out of home, especially in independent billboard operators, a reflection of our focus to these customers. Based on the strong return to a more seasonal to more seasonal trends, product backlog level was $267,000,000 at the end of the quarter and we're seeing higher levels of quoting activity. In fiscal Q1, we generated sales volumes of $226,000,000 a 4.7% growth rate from the 4th quarter and down from the record quarter of a year ago.

Speaker 2

The sequential increase is attributable to production and deliveries ramped up for sports installs, especially for live events and high school park and recreation business units. These levels of sales demonstrate our ability to convert orders into timely revenue generation through our manufacturing and our other fulfillment work streams. Gross margin increased sequentially to 26.4% and continue at levels that generate strong financial returns. The solid gross profit level is a reflection of volume, mix and some price improvement. We continue to generate operating income consistently through the last 4 quarters in the high single digits and at 10% of sales in Q1.

Speaker 2

Operating expenses have increased primarily due to sales and wage increases followed by additional hiring to support sales expansions, digital transformation and other consulting services to help us implement and accelerate our strategies to grow and drive efficiencies and consistent profitability levels. We further strengthened the company's balance sheet this quarter. Cash, restricted cash and marketable securities totaled $97,200,000 at July 20 7, 2024. We generated $19,500,000 of cash from operations and our working capital has grown to $231,000,000 and the working capital ratio was 2.2:one. Management's focus remains on managing working capital through expected growth of the company.

Speaker 2

Given our strong start to this year and the momentum in our order flow, we feel good about our positioning to drive profitable growth and cash flow generation through the remainder of fiscal 2025 and beyond. Excluding a change in the fair value of our convertible note relating to our higher stock price, adjusted net income was $16,600,000 Now I'll turn it back to you, Reese.

Speaker 3

Thank you, Sheila. Turning to Slide 6 titled FY 2025 Strategic Priorities. Overall, we have a unique leadership position in our target markets, which are large, growing and enjoy resilient demand driven by our customers' desire to improve their audience experience in sports, commercial and transportation environments. To capitalize on this position, we are focused on digital and business transformation, improving our cost structure and further growing our markets. On the digital transformation front, we are investing in foundational enterprise performance management tools that will strengthen our management systems and improve data available to guide capital allocation decisions and focus our investments in the most profitable business segments.

Speaker 3

During fiscal 2025, we're also plan to launch modernized service and systems management tools, which will improve both internal operations and customer experiences. Another focused effort will be planning automation in our front end quoting and sales processes, which we plan to launch in phases beginning in fiscal 2026. We're also making investments to improve profitable growth and accelerate the lowering of our overall structural and product costs to increase market competitiveness. Not only do we see the digital transformation efforts as foundational to lowering our structural costs, but we're also investing in people capabilities and working with consultants to accelerate strategies expected to increase operational efficiencies to lower overall costs and increase market competitiveness. Finally, we continue to execute on strategies to both grow and capture a greater share of our SAM.

Speaker 3

These strategies include the advancing of our control system capabilities I previously mentioned and adding professional services and other content to drive MRR, ensuring we are delivering enhanced returns as we help our customers achieve success in their investment in our offerings. To accelerate these strategic plans in fiscal 2025 and beyond, we are investing in transformation resources, both in world class consulting support and in information technology capabilities. While these costs will impact fiscal year 2025's operating margins between $8,000,000 $10,000,000 we expect these investments to accelerate our generation of returns meaningfully in excess of this investment as we structure our business for expected growth on a higher profit base. With these initiatives, we will continue to advance many existing elements of our strategy and our competitive differentiation, including our premium value proposition, our U. S.

Speaker 3

Design, fulfillment and high touch services, our key investments in control systems and our unique culture of lifetime service to our customers. To visualize the milestones along our road map, please turn to Slide 7 titled FY 2025 Strategic Priorities, highlighting the road map into FY 2026. This shows the planned timing of our business and digital transformation deliverables and investments. This year, we are investing in growth through product and sales development and in back end digitization. Then leveraging our fiscal 2025 upgrades, we plan to develop automated front end sales and quoting tools for launch during fiscal 2026.

Speaker 3

To effect seamless transitions, we have planned this year's implementations to take place during our seasonally quieter FQ3 and through year end. We will keep you apprised of our progress as we implement our strategies and move through the year. In conclusion, our summary on Slide 8 recaps our key highlights. Our consistent performance serves as evidence that we are on a sustainable trajectory of growth and increasing profitability. Our multi year strategies and near term progress on these goals demonstrates our commitment to improve and consistently earn returns above the cost of capital.

Speaker 3

We are focused on the right allocation of resources and capturing growth in existing profitable SAM and developing growth in additional areas. We are focused on accelerating digital transformations and other initiatives to lower structural and product costs. We are a global industry leader in best in class video communication displays and control systems and we continue to focus on bringing value to our customers. We are the only U. S.

Speaker 3

Manufacturer of scale with a global footprint and service seen by geographic market and extending technology leadership, high quality solutions and world class service. With that, I would ask the operator to please open the line for questions.

Operator

Certainly. Our first question comes from the line of Anja Soderstrom from Sidoti. Your question please.

Speaker 4

Thank you for taking my questions and congratulations on the great execution in the quarter. Can you just talk a little bit about the backlog? When do you expect that to normalize?

Speaker 3

Good question, Anja. Backlog, we think we'll start to see more of a seasonal cycle represented in our results where Q1 and Q2 tend to be higher sales revenue months, Q3 tends to be lower and Q4 starts to build into our busier summer. So we would expect our backlog to grow as we move through Q3 and then tend to trend down in our summer months. And so we would expect that to continue on into through FY 2025 and into FY 2026. But I think our backlog that was really high as we entered our last quarter or excuse me, Q1 of 2024, most of that has been resolved as far as unusually high backlog based on the supply chain issues and things that were going on into that last fiscal year.

Speaker 3

And maybe just a few final comments on backlog. The markets like these large projects, a lot of their business sits in backlog for a quarter or 2 or maybe more depending on whether it's a new construction project. But some of our markets like our commercial on premise and our standard high school business, that runs on a much shorter lead time. And so maybe a 10 week lead order could book and ship within a quarter and never be seen in our backlog figures.

Speaker 4

Okay. Thank you. And then for the revenue in the Q1 was quite strong sequentially. Was there anything there that was pulled in from the Q2? Or how should we think about the Q2?

Speaker 3

In our summer months, there's a lot of projects in flight as many of our customers are sports driven and getting ready for the fall sports. So it's sometimes difficult to predict what's going to happen right at a quarter boundary. But there wasn't, I'd say, unusual amount of movement. And so I don't think much was pulled in from Q2 into Q1.

Speaker 4

Okay. And in terms of your targeted operating margin, you're there already and you have you're taking a lot of initiatives with the digital transformation. Do you think maybe there would be room to expand that target or?

Speaker 3

Great question. And that's our management team is looking at that today or now. We believe there's room for growth and we believe there's room for margin growth, operating margin growth. How do we balance those 2 is really the opportunity we have in front of us. But we believe there's room for top line growth and operating margin growth.

Speaker 4

Okay. Thank you. And you also mentioned pricing as a driver for margin expansion. Can you just talk about the competitive environment and your value proposition compared to competitors and how you win?

Speaker 3

Yes. Thank you. Continues to be a competitive environment and most of our competition comes out of Southeast Asia with some kind of product and then maybe it's sold more closer to an end user or maybe there's a reseller or 2 in between that product and the end user. Our value proposition has been very strong and remains consistent that we have a strong control of the displays and how those AV systems are made. We have strong capability in the control systems and can offer features and workflows that maybe are harder for our competitors to offer.

Speaker 3

And we are a full service organization, both technically keeping the equipment looking and working its best as well as what I might call professional services using the equipment in a manner that helps our customers achieve their overall objectives. And by balancing all those three things together is what's made Daktronics strong.

Speaker 4

Okay. Thank you. I'll get back in queue.

Speaker 3

Thank you. Appreciate your questions today.

Operator

Thank you. And our next question comes from the line of Mac First from Singular Research. Your question please.

Speaker 5

Yes. This is Mac First with Singular Research. Congratulations on the quarter.

Speaker 3

Thank you. Welcome to the call.

Speaker 5

Thank you. I wanted to ask you about market share. How has that developed in the last couple of years and specifically in the last, say, 3, 4 quarters? Can you comment on that? Or do you not follow that very closely?

Speaker 5

Or is that data hard to come by?

Speaker 3

It's more of that data is hard to come by. We do track win loss on our opportunities and so we do track our overall market share. But I would say one thing as we've gone through the COVID and in our current times, we spend much less time with customers that are really price focused. They really want their lowest dollar is the highest priority thing that they're looking at. And so we are focused on customers that see the value proposition that Daktronics has and are interested in pursuing a solution like that.

Speaker 3

And in this price sensitive highly price sensitivity market, I suspect we don't have as high a market share as we had previously going into COVID.

Speaker 5

Understand.

Speaker 3

In other areas, I believe we've been able to maintain our market share quite well.

Speaker 5

Okay. Can you comment at all about the credit position of the company And how has that developed in the last couple of quarters, let's say 3 to 4 quarters, please?

Speaker 3

As a credit position, we have a very strong balance sheet today, high levels of cash and are not pulled out any on our line of credit. Did I hit the right spot there, Mac? Or was there another point to your question?

Speaker 5

Yes, yes. Yes, you did. What kind of credit is at your disposal at this point in time if you needed it? Maybe you don't need it, but if you needed it.

Speaker 2

So we have an asset based lending line and it roughly runs around $35,000,000 of availability on that line.

Speaker 5

Thank you. Thank you, Shneur. Thank you. That's all I have. Thank you very much.

Speaker 3

Thank you.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Rice Guttenbach for any further remarks.

Speaker 3

Thank you everybody for joining us on today's call. Look forward to seeing you at our Q2 earnings release. And between now and then, we do have some investor marketing activities planned, including the September Sidoti Conference. So maybe we'll see you out there in those types of activities. Have a great fall season and we'll see you in about 3 months.

Speaker 3

Thanks everyone.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Daktronics Q1 2025
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