Daktronics Inc

NASDAQ:DAKT

Earnings Call Analysis

Strategic Partnerships and Market Dynamics

In the world of Live Events, our company has made significant strides by teaming up with the Detroit Tigers to install the second-largest main video display in the major leagues. We're not stopping there, as we are installing additional displays at key points around the stadium to ramp up fan engagement for the 2024 baseball season. Our commitment to enhancing venue experiences signals our expectation of continued robust demand in this space, anticipating more projects in the pipeline focused on transforming areas like entryways and concourses into more interactive and entertainment-rich environments.

Diversified Growth and New Opportunities

Our strategy is not solely anchored in Live Events. We're also harnessing opportunities within the commercial sector, although this area's potential is subject to the ebb and flow of economic conditions. We've seen a rebound in orders, notably in out-of-home advertising, despite sizable national companies signaling a tighter spending approach in the near future. Innovation remains at our core, as we've captured interest with our Light Direct digital billboards, tailored to reduce light pollution and enhance targeted messaging. Further, we're strategically expanding our narrow pixel product lines by leveraging partnerships within the AV integrator network — strengthening our footprint in control room applications used in military, utility, and transportation sectors.

International Projects Amidst Economic Headwinds

Globally, we've secured a stadium project and continued to court the transportation sector. However, international orders have moderated, likely due to prevailing economic and geopolitical uncertainties. Despite delays in purchasing decisions, customer interest remains resilient, with our sales force proactively engaging in new opportunities and actively quoting prospective projects.

Technology and E-commerce at the Forefront of Education

The educational sector, specifically high schools, has shown an emerging trend towards full video conversion — a transition we are well-equipped to support. By streamlining the sales process and amplifying our online presence, we're making it easier than ever for these institutions to access our offerings. As part of our digital push, we're also enhancing our e-sales channel, introducing a swath of products to our online and partner channels and refining the efficiency of the buying process.

Targeting a Billion in Revenue

Our ambitions are clear: we're targeting $1 billion in annual revenue over the next 3 to 5 years, with a keen eye on operating margins, seeking to sustain them in the mid- to upper 5% to 10% range. This growth isn't arbitrary; it's a calculated expansion aimed at capturing a larger share of our serviceable available market by enticing new customers, developing control options, and scaling our services — all this while increasing the predictability of our revenues through monthly subscriptions and leases.

Fiscal Q4 2024 Outlook and Year-to-Date Performance

Looking ahead to fiscal Q4 2024, we anticipate a return to our traditional seasonal uptick in revenue and profitability, contrasting with the prior year's anomaly that included fulfilling pent-up demand from pandemic-related backorders. We're not providing specific numbers, but the trend points to sequential growth in net sales, albeit lower than the same period last year. Despite the lack of precise guidance due to the project-driven nature of our business, our year-to-date performance and ability to navigate supply chain disruptions underscore our leadership in video communication systems, our commitment to technological innovation, and the quality of our solutions. As we press on to capture further market growth, we hold fast to our reputation, technological edge, and comprehensive client base that distinguish us in a competitive field.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Daktronics' Fiscal Year 2024 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. [Operator Instructions] I would now like to turn the conference over to Ms. Carla Gatzke, Corporate Secretary for Daktronics, for some introductory remarks. Please go ahead, Carla.

[Carla Gatzke, executive]

Thank you, Kevin. Good morning, everyone. Thank you for participating in our third quarter 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 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 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 identifying 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-K.

Our second quarterly 2024 earnings release contains certain non-GAAP financial measures and was furnished to the SEC on a Form 8-K this morning -- clarify, third quarter 2024 earnings release. We also made slides available for today's call. 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, Reece Kurtenbach.

[Reece Kurtenbach, executive]

Thank you, Carla. Good morning, everyone. Thank you all for joining us today. Our third quarter and year-to-date results reflect our team's strong execution of our strategies across all our business areas. These strategies have raised the bar for execution and expectations of profitability in our operating model. As a result, we have delivered record sales and operating income to date in fiscal 2024 and drove robust operating cash generation in the third 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 follow the financial outcomes for the quarter.

To put our fiscal 2024 results delivery into perspective, our third quarter is historically a seasonally low volume quarter for revenue and therefore, historically could result in a breakeven or even a loss-making quarter. However, reflecting back to fiscal 2023 third quarter, we fulfilled back ordered work as we had new designs available to take advantage of the available parts in our supply chain and as other supply chain-related pressures were resolving. This resulted in extraordinarily high volume and high profit for the third and fourth quarters of fiscal 2023, a unique time for us.

During this fiscal year's third quarter, 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 million profit -- operating profit and generated $9 million in operating cash flow. During fiscal Q3, we experienced robust order volume of $192 million. Live Events in the Commercial business unit orders strengthened in the quarter and all domestic markets saw growth. Third quarter orders grew 29% more than last year's third quarter, bringing year-to-date order growth to 6.6% for the year. 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 utilized 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 fourth quarter and beyond.

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

[Sheila Anderson, executive]

Thank you, Reece. Please turn your attention to Slide #4 titled FQ3 FY 2024 Financial Highlights for the quarterly overview. Orders for the third quarter of fiscal 2024 increased by 29.4% from the third quarter 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 Recreation and Transportation business units. These higher orders offset the decline in the International business unit orders as compared to last year's third quarter.

We believe international demand softness relates to the economic and geopolitical conditions. We generated sales of $170 million for the third quarter of fiscal 2024 as compared to $185 million of sales for the third quarter 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 Reece highlighted, the third quarter is our historically low sales volume quarter because of sport seasonality, outdoor construction lulls in the winter months and fewer workdays due to the holiday breaks. This year's third quarter volume was as expected. Supply chains also continued to flow generally as expected.

Gross margin as a percentage of net sales increased to 24.5% for the third quarter of fiscal 2024 as compared to 22.6% in the third quarter 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 margin was 4.7% of sales during the third quarter of fiscal 2024 as compared to last year's 3.8% or adjusted to 6.3% without the noncash goodwill impairment charge recorded in last year's quarter 3. Fiscal 2024 third 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 million third quarter fiscal 2024 operating profit in our seasonally lowest volume quarter of the year.

Please turn to Slide 5 as I highlight year-to-date performance. Orders for the first 9 months of fiscal 2024 increased by 6.6% as compared to the first 9 months of fiscal 2023 through strong demand in Live Events, Transportation and High School Park and Recreation business units. Commercial orders are down for the 9 months from last year due to a lack of large project bookings and the reduction in order spend by the out-of-home segment customers in the first 6 months of the year, partially offset by the third quarter improvement in order placements.

International also is down slightly on a 9-month basis. Sales grew 10.6% for the first 9 months, which aligns to the order volume and built up backlog coming into the first part of the fiscal year. Gross margin as a percent of net sales increased to 27.7% for the first 9 months of fiscal 2024 as compared to 18.2% in the first 9 months of fiscal 2023. The 950 basis point 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 third quarter of fiscal 2024 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 $27.2 million, and we generated $53.8 million of operating cash flow during the first 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 1.6x at the same time last year.

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

[Reece Kurtenbach, executive]

Thank you, Sheila. 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's look more specifically into our business areas. In Live Events, we again partnered with the Detroit Tigers to deliver the second 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 facia, dug out and line score locations ahead of the 2024 baseball season.

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 focus being placed on entertainment areas and the experience outside the bowl 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 advertiser 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. However, large national out-of-home companies are noting plans to 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.

Transportation, our teams are focused on 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 the economic and geopolitical uncertainty. Customers continue to demonstrate interest in projects but are delaying buying decisions. Our sales teams continue to be responsive to customers and are actively quoting opportunities.

In high schools, the trend going forward continues to be conversion to full video. We are well positioned 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. We continue to make progress on our multiyear 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 market 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 FrameWrx, 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. 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 Lambo 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.

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 varying order flow by market.

Turning to Slide 8 and Slide 9, we are -- 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. 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 sights on $1 billion 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 and 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. 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.

Going forward, as we increase our sustainability in 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. 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 encourage you to reference Slide 10. Given what we see in our businesses today, we anticipate our fiscal fourth quarter seasonality to be similar to pre-pandemic patterns, which is historically an increase in revenue and profitability as compared to the third quarter. While we are not offering a quantitative outlook, qualitatively, we look for fiscal 2024 fourth quarter 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.

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. 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. We are focused on a multiyear 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]

[Operator Instructions] Our first question comes from BJ Cook with Singular Research.

[BJ Cook, analyst]

New order growth was quite a bright spot for the quarter. Interestingly, last quarter, there were higher orders in International and Transportation, 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?

[Reece Kurtenbach, executive]

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 the 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.

[BJ Cook, analyst]

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

[Reece Kurtenbach, executive]

Certainly, our -- what we call our narrow pixel pitch product, has really matured into a nice line of different pixel pitches in different ways that our customers can use them. And the AP 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 to 18 months that has started.

[Operator]

[Operator Instructions] Our next question comes from Anja Soderstrom with Sidoti.

[Anja Soderstrom, analyst]

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's supply chain. But when do you think that will revert to seeing growth again?

[Reece Kurtenbach, executive]

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 our -- 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. 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?

[Anja Soderstrom, analyst]

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

[Reece Kurtenbach, executive]

Revenue growth is the...

[Anja Soderstrom, analyst]

The gross margins.

[Reece Kurtenbach, executive]

Gross margins. 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.

[Operator]

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

[Reece Kurtenbach, executive]

Thank you, Kevin. I'd like to thank everyone for attending our conference call today. I would like to let you know that we are appearing at the Sidoti Small Cap Conference in March, and we often have one-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.