Daktronics Inc

NASDAQ:DAKT

Good day, and thank you for standing by. Welcome to the Daktronics Third Quarter Fiscal Year 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Carla Gatzke, Corporate Secretary. Please go ahead.

Thank you. Good morning, everyone. Thank you for participating in our third quarter earnings conference call.

During today's presentation, we will make 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 about future events based on information currently available to us. Of course, actual results could differ. Please refer to Slide 2 of the presentation that accompanies today's call, our press release and our SEC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations.

During this presentation, we will also refer to non-GAAP financial measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measure in appendix to the accompanying presentation slides, which may be found in the Investor Relations page of our website at www.daktronics.com. Our earnings release for the 2025 third quarter, which was furnished to the SEC on a Form 8-K this morning, also contains non-GAAP financial measures, reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures as well as a discussion of certain limitations when using non-GAAP financial measures are included in the earnings release, which has been posted separately to the Investor Relations page of our website.

I'll turn the call over to our current Lead Independent Director to become Chairman of the Board, Andrew Siegel.

Thanks, Carla. Hi, everyone.

I'm Andrew Siegel here in Brookings with the team. First, I'd like to thank the investors who have dialed in today. And before we move into a review of the results from the quarter, I'd like to share some perspective from the Board regarding the leadership transition that you would have seen in the company's press release earlier this morning.

After more than 34 years at Daktronics, Reece Kurtenbach is stepping down from his role as Chairman, President and CEO. So on behalf of the Board, I'd like to thank Reece for his many years of leadership and commitment to Daktronics. His commitment to you, our investors, our employees, our customers and the communities we serve and for all that he's accomplished to strengthen and protect the company's resilient position as a recognized industry leader with world-class strengths in product design and engineering, manufacturing and of course, the installation, integration and services capabilities that allow us to exceed our customers' expectations.

We're making this change today to move more quickly and demonstrably toward our objective of growing long-term shareholder value. To capitalize on the tremendous opportunity that our end markets represent, we believe the company must accelerate change to enhance our global competitiveness and drive new levels of commercial success and financial performance. To do this, the Board believes we have to add new capabilities around these core strengths I mentioned just a moment ago. Today's announcement reflects our commitment to ensuring that we have the right leadership for long-term growth, profitability and balance sheet efficiency goals.

The Board will engage a nationally recognized executive search firm to help identify a permanent CEO who will lead Daktronics on this mission. While this process continues, the Board has appointed Brad Wiemann, the company's Executive Vice President, as Interim President and CEO. Brad has been with Daktronics since 1993. Earlier in his career, he served the company across manufacturing, engineering, product development and other functions. In his current role, he oversees the company's Commercial and High School and Parks and Recreation business, which makes him responsible for about 35% of the company's revenue.

Additionally, the Board has asked Board member, Howard Atkins, to serve as [ Acting CEO ] until a permanent CFO is named, allowing Sheila Anderson to fully dedicate herself to her previously announced new role of Chief Data and Analytics Officer. Howard will also continue to serve as the Chief Transformation Officer, in both cases, partnering closely with Brad.

So with that, I will turn it over to Reece to walk through the highlights from the third quarter. Reece?

Thank you, Andrew. Good morning, everyone, and thank you for joining us today.

Turning to our slide presentation on Page 3. Fiscal second quarter 2025 highlights. We drove sequential order growth in the third quarter. Orders in our Commercial segment increased nicely with further out-of-home bookings, international rebounding driven by the out-of-home business. And in Live Events, we secured an order for a major NFL stadium. As we have discussed in the past, the third quarter is historically a seasonally lower volume quarter because fall sports installations have been completed. There is a natural slowdown of outdoor construction projects, and we have 2 major holidays in the period, reducing the overall days of production. To offset these nearer-term dynamics and the reality of deleverage of fixed costs, we successfully activated mitigation strategies to preserve margins such as cost reductions, reduction in shifts and utilized capacity to focus teams on revenue generation and overall improvement activities.

We also had a more favorable mix of business with higher portions of sales for product versus last year's higher level of contractor type installation work in the third quarter. These actions resulted in a steady gross profit margin compared to last year's third quarter despite a 12% decrease in sales volume. Managing the business for profitability and effectively managing our working capital drove growth in cash flow from operations, again, despite lower volumes. During the third quarter, our Business Transformation Office completed the rigorous analysis and planning phase of our transformation plan and launched a number of initiatives designed to create additional sustainability in our operating margins.

We also made strides in testing and training for launches of our updated service systems and enterprise performance management tools under our digital transformation program. Additionally, the analytical work completed allowed for a refinement of ambitious financial targets, especially the achievement of growing revenue faster than our addressable market, which is currently estimated between 7% to 10%, operating margins at a sustainable 10% to 12% and 17% to 20% in return on capital by fiscal 2028. I'll give a more complete update on the business and digital transformation program shortly. We remain overall optimistic about the long-term potential in our end markets, and we believe our strategic initiatives will position us well for future growth.

I invite you to turn to Slide 4, market vertical fiscal third quarter review for more details. Our focus is to drive profitable revenue growth in markets that achieve a rate of return higher than our cost of capital. Our approach in each market is based on our future views of these subsegments, including growth and profitability, alignment with our product portfolio and development road map and market penetration to leverage long-lasting customer relationships. We benefit from our value propositions being best-in-class in the industry for providing valuable products and services, driving ongoing customer satisfaction.

Let's discuss how our segments performed in Q3. In Live Events, the demand for Major League Baseball this season was smaller as a number of potential upgrades moved out into future seasons. We won one of the few large projects available, and this softness was offset by securing a major project for a new customer and for a new NFL stadium. This project is planned to be converted to revenue late in our fiscal '26 and into fiscal '27. Our outlook for this segment remains similar to our last call. We expect Live Events demand to remain strong as venues enhance facilities to entertain fans and attract athletes. Orders in this market are large and installation can be lengthy and complex, creating variability in period-to-period order and sales volumes. Our teams are focused on winning business with an attractive return on capital.

Pictured here is an example of a video used in a Minor League Baseball stadium in Akron, Ohio. The RubberDucks are a recurring customer and highlights the use of digital display technology to enhance their venue to attract and entertain fans. Looking ahead, we continue to expect healthy secular demand for the in-bowl applications and expansion outside the bowl as more focus is placed on entertainment areas such as entryways, atriums, concourses and adjacent entertainment zones. Our narrow pixel pitch line of products matches the needs of customers for many of those locations and continues to be in demand.

Our Commercial business primarily consists of sales through resellers, we call those signed companies, to many types of customers and applications, including military, utilities, transportation, national 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 and larger advertising displays we call spectaculars and orders can vary in this market also because of larger sized orders in these 2 segments. Out-of-home activity was strong for our long-time national customers as we continue to drive orders from independent billboards.

Spectacular order wins included an upgraded display for the rooftop of the Target building in Minneapolis. We continue to build out our AV integrator network and marketing to government and military customers to sell our narrow pixel pitch displays. Our efforts are paying off as we have received orders from a number of new AV integrators and are seeing repeat business from this developing channel. Pictured here is an example of a narrow pixel pitch product utilized in an e-gaming facility at a university. We have made progress on manufacturing the displays for the center, the order in Atlanta we mentioned last quarter. We expect the remaining revenue and installation to be complete late Q4. Our focus for this market is to grow our core areas like spectacular on-premise and out-of-home and continue to develop the AV integrator channel to market our narrow pixel pitch product lines, especially in control room applications used by military, utilities and transportation agencies.

Transportation. Variability in orders versus prior periods is natural in this segment, which is a large project business and therefore, lumpy. Despite the down order comparison, our financial performance for this segment was solid as we fulfilled the backlog of orders from long-time repeat customers. We continue to see a trend in upgrades in and around airports for digital signage. Our teams are focused on winning projects for intelligent transportation systems, including traffic management centers, airport projects and other mass transit systems projects. The outlook for this segment remains solid and is poised to take advantage of selling our full line of video display systems from our NPP products to our prequalified and trusted ITS systems used by state and city governments. Pictured here is the Intuit Dome parking ramp that was installed last summer. This highlights the use of digital outside of sports and the interdependencies between our business units.

International. During the quarter, a high number of bids were converted to purchases, especially in the out-of-home space. We are actively quoting opportunities to additional out-of-home customers and for several midsized sports projects and continue to see signs of converting more quotes into orders. With our existing customer base and a focus on these types of new orders from a broad array of customers, we are laying the groundwork for future repeat and upgrade types of orders in the future. Pictured here is a digital display at Gaddafi Stadium in Pakistan.

High Schools. The market continues to convert to full video usage, while orders were down slightly within the quarter due to varied timing in order placement. We are booking orders at a record pace on a year-to-date basis. Quoting activity is outpacing last year's record performance. We began deliveries of our new higher-margin product not only to support our customers, but further bolster our contribution margin in this segment. The pictured installation at Hayward High School in Wisconsin, highlighting the conversion to LED video being a durable market trend.

Our teams continue building, testing and implementing capabilities as we continue to advance our control systems to enhance the live event entertainment experience and improve workflow efficiencies. These enhancements will empower our customers to deliver dynamic presentations using cutting-edge scoring and timing software, 3D data visualizations, real-time rendering and integrated data through sports-specific applications. The addressable market for our new solution is broad, including anyone supporting live events, entertainment and sports, even if they're not using Daktronics displays and is slated for a release this summer.

Additionally, we are introducing cloud access, allowing customers to schedule, store and manage their content and data sources from anywhere. The work that we are doing here sets us up nicely to increase our recurring revenue streams, which we intend to be a driver for gross margin expansion over time. Over the coming months, our teams will continue to test and refine features and develop the marketing and launch plans. Overall, long-term demand for digital displays is expected to continue growing, driven by new indoor LED product availability and our customers' desire to inform, entertain and persuade their audiences using dynamic mediums.

We will get into more of that, but first, for additional details on the financial results of the quarter and year, I'll now turn it over to Sheila.

Thank you, Reece.

I invite you to turn to Slide 5 and 6 titled fiscal Q3 and year-to-date fiscal 2025 financial highlights to follow the third quarter and year-to-date financial outcomes. The quarter-over-quarter comparisons in this slide and related discussion are as of and for the fiscal quarters ended January 25, 2025, October 26, 2024, and January 26, 2024 -- excuse me, January 27, 2024, unless otherwise stated.

Orders for the third quarter of fiscal 2025 decreased by 2.7% from the third quarter of fiscal '24. This decline was primarily due to reduced orders in the Live Events, High School Park and Recreation and Transportation business units. As Reece highlighted, variability in our order rates between periods is natural in the large project business areas, influenced by the time of year for sports projects and due to some delayed buying behaviors. In Live Events, we booked a large project for an NFL stadium, and this will convert into revenue late in fiscal '26 and primarily realized in FY '27. These declines were offset by order bookings in Commercial and International business units. Those increases both led by the strength of the out-of-home niche.

Orders for the first 9 months of the year increased by 1.2%. Third quarter fiscal 2025 orders increased by 5.2% from the second quarter of fiscal 2025. We have been seeing delays in U.S.-based project bookings across markets, likely due to recent actions by the U.S. government, including global tariff policy and federal funding priority uncertainties. We anticipate these conditions may impact the timing of expected orders in the near term, especially in our Transportation business. To date, orders for the first 9 months of the year increased by 1.2%. Based on the strong return to more normal seasonal trends compared to prior years and the large NFL project bookings, the project backlog was $273 million at the end of the quarter. Quoting activity remains active across all segments despite macroeconomic uncertainties.

Net sales for the third quarter of fiscal '25 decreased by 12.2% compared to the third quarter of fiscal '24. The third quarter of every fiscal year is characterized by seasonally lower volume. The sales decrease was driven by comparatively lower volumes in live events, particularly offset by increased fulfillment in the Commercial, International and High School Park and Recreation business units. On a year-to-date basis, sales levels are 3% lower compared to last year's record sales.

Gross profit as a percent of net sales was 24.6%, similar to the 24.5% for the third quarter of fiscal '24. Maintaining gross profit on a 12% volume reduction highlights the solid performance in adjusting and managing costs as demand fluctuates on a seasonal basis. Our teams utilized several tactics, including reducing shifts and workload schedules to adjust for lower volumes and preserve gross profit margin. On a year-to-date basis, gross profit was 26.1% compared to 27.7%, attributable to sales mix differences between periods.

During the quarter, we incurred additional costs for our business and digital transformation, domiciliation change and corporate governance matters. These costs, combined with lower gross margin dollars due to lower volume resulted in an operating loss of 2.4% of sales in Q3.

Adjusted for onetime consulting and corporate governance-related expenses, operating margin was positive at 1%. On a year-to-date basis, the operating margin was 6% or 7.7% as adjusted. Increased operating expenses reflect investments in staffing resources to support information technology and digital transformation plans as well as some sales team expansion to support opportunities for future growth.

During the third quarter, we incurred $2.1 million in consulting services to support the implementation and acceleration of our strategies to grow and drive efficiencies and consistent profitability levels. We expect to invest $1 million to $2 million more in the fourth quarter of fiscal 2025 for the business and digital transformation initiatives. Additionally, we incurred $2.7 million in advisory-related expenses for corporate governance matters and expect some costs related to this work in the fourth quarter.

Our careful working capital management and business profitability, adjusting operating loss for noncash expenses like depreciation and loan fair value change drove cash flows from operations of $12 million for the fiscal quarter and $75 million on a year-to-date basis. Cash, restricted cash and marketable securities totaled $132.2 million at the end of the quarter. Our working capital grew to $232 million with a ratio of 2.4:1. Management's focus remains on maintaining a strong balance sheet and managing working capital levels through the expected growth of the company.

During the third quarter, we converted $13.9 million of face value of the $25 million senior second line secured promissory note and have delivered these shares. Additionally, subsequent to the end of the quarter, we converted the remaining balance of the note and expect to deliver shares early in March, which will pay off the convertible note in full, saving the company approximately $5 million in interest over the remaining term. Note that these shares were included in the weighting for the full quarter because of the anti-dilutive nature of the fair value impact to income. But in future quarters, these shares will be fully included in EPS. To offset a portion of share dilution resulting from the convertible notes into common stock, we began executing on our existing share repurchase authorization. And during the quarter, we purchased $9 million worth of shares for approximately 535,000 shares.

As we enter Q4, quoting activity is strong, and we continue to anticipate year-over-year growth in order bookings. However, we acknowledge that we are currently seeing some delays in order placements as companies evaluate the dynamic trade environment. Additionally, we recognize that spring baseball orders were smaller this year compared to last, and we have adjusted our capacity in the near term accordingly. Over the long term, given our continued financial performance, the underlying healthy fundamental drivers of growth persisting in our end markets, our strong leading position in the market, along with the strategic initiatives we're undertaking, we are well positioned for long-term profitable growth and returns.

Now our Board member, Howard Atkins, will provide more details on our Transformation.

Thank you, Sheila. This is Howard Atkins, also here in Brookings.

You'll note that the -- I'm going to talk about the business transformation in the company that's underway. There's a lot of detail in the press release and the deck that accompanies our remarks here today that speak to the specific initiatives that are underway. What I'd like to do is to try to provide some additional perspective on what the company is trying to accomplish and what this business transformation is all about.

Many years ago, I worked for an enlightened CEO, who used to tell his team that companies don't get better by being bigger. They get bigger by being better. Daktronics is already better. But in a nutshell, completing the journey from better to best is what the Daktronics business transformation is really all about, being best for our shareholders by being best for our customers with the best team in the business. So let me describe what being best will look like at Daktronics. It's about providing great value to customers at economic returns that are well above the company's cost of capital. It's about continually developing and building durable client relationships.

Nurturing relationships helps reduce customer acquisition costs over time, which in turn helps us provide a better deal for our customers and a better return for our shareholders. Staying ahead of the competition by continuing to innovate products and services that set performance and reliability standards in our industry. It means operating our businesses at maximum efficiency and lowest cost across the supply chain from procurement through inventory management, manufacturing, fulfillment and aftermarket service. And finally, based on all of the above, delivering superior returns to our shareholders.

The company's transformation from better to best-in-class can be expressed in a few key business and financial targets and objectives. First, from a shareholder perspective, we're aiming for ROIC, return on invested capital, in the top quartile of top-performing publicly traded manufacturing companies, which we believe is in the 17% to 20% range based on all available market data, and we're aiming to accomplish that by no later than 2028. We're also looking for top line growth, as Reece mentioned, above our particular addressable market. In other words, verticals and geographies where we can compete on value and earn an adequate return on capital. We're currently setting 7% to 9% compounded annual growth over the next 3 fiscal years as our revenue target. Our market knowledge complemented by extensive global market surveys conducted recently with our consultant are being employed to strengthen the way in which our sales teams are engaged with their customers so that we can win more business by delivering value at a fair price.

Another target, improving the consistency and reliability of the company's revenue growth. Historically, Live Events has accounted for a large share of the company's top line growth in some periods as much as 75% of that growth. Now Live Events is a really important segment for the company, and we will continue to allocate capital to it. But all the other reportable business segments are now developing plans to grow at a combined compound annual growth rate above the total corporate objective. As the revenue mix in the company is diversified, the quality of the company's revenue will improve, not just the total growth rate.

A deep portfolio review across each of our reportable segments, which was conducted with our consultant last fall, has helped the company identify verticals with the longest growth runway and/or best margin capture potential and which verticals need to be improved to have margins improve before additional strategic capital is allocated. Now portfolio reviews, such as the one that was recently conducted will become a regular aspect of the company's capital allocation process. We will continue to invest in leading-edge product development while simplifying the development process. Annual product development spend will be about $40 million this fiscal year and will continue at around that same annual level, although we are currently reviewing the specifics within that $40 million to make sure that investment of resources is exclusively focused on just the mission-critical, highest return initiatives.

Another target, achieving operating margins in the 10% to 12% range through structural cost reduction. Over the last 8-plus months, the management team reviewed, valued and developed specific implementation plans for about $18 million in cost savings by fiscal '28 at a full run rate from tighter inventory management, simplifying product complexity in the company, more effective procurement contract negotiation and leaner, more targeted, more adaptable manufacturing capacity. We will be completing the next round of our cost recovery reviews for additional cost savings as part of the fiscal 2026 annual plan, which will be completed in April, and we will report out the results from that plan in our next quarterly review.

Now business transformations tend to be most successful when supported by business and financial management practices that are aligned with the objectives of the transformation and support the continuation of high-grade operating performance in a transformed company. Now at Daktronics, this is what my statement means. First, we've been looking at our compensation program. Several months ago, the company engaged a top-notch management consultant for compensation programs. And with the support of that consultant, the company is putting finishing touches on a comp structure that is designed to align the long-term interest of the executive team with the long-term interest of our shareholders, align the annual variable comp program with clear and precise performance objectives and enhance the company's ability to retain and as needed, attract top talent.

Planning. The company has been refining its annual strategic and risk management and CapEx planning to optimize capital allocation across the company, and you'll be hearing some more from us over the coming quarters in terms of what exactly that means in terms of refining the planning process. Pricing. Guardrails have been put in place to help ensure business pricing margins are consistent with value-based selling and achieving acceptable ROI, return on investment. Digital transformation, another important process underpinning our future. Sheila is going to talk in a second about more detail on the digital transformation. I would just say here that getting our internal processes on a digital platform should improve efficiency and internal controls as well as provide a more effective and reliable interface with our customers on pricing and service.

Let me conclude by saying that the Daktronics business transformation is not a project and is more than a process. It's an ongoing effort by the company to leverage its competitive advantages to realize and grow its full intrinsic value, be the best for its customers, the best for its team and, of course, the best for its shareholders. There's a lot to do and a lot left to do. The team is committed to owning the transformation effort because the team is committed to owning the results.

So let me now turn it over to Sheila to discuss a little bit more detail on the digital transformation progress.

Thanks, Howard.

Let's move to Slide 9, digital transformation update. Our IT and data technology platforms are key in our business transformation as it supports our aggressive growth ambitions, data-driven planning and is foundational to creating operational efficiencies. In fiscal 2025, we added products to our e-sales channel and improved back-office integrations with systems and processes while it delivered results, particularly in our High School Park and Recreation segment. Currently, we are in the testing and training pre go-live phases for certain parts of our enterprise performance management and service tools implementations. For our enterprise performance management tool, our testing of the consolidation and reporting phases are near completion, and we are set to run these systems in parallel to ensure they seamlessly operate to launch as expected in May.

The enterprise performance management tool has additional phases planned to launch throughout fiscal '26, including the data capture of detailed demand forecast to be utilized to further enhance and better align our strategic, operational and financial planning and make this data accessible and organized for teams to utilize in planning and capital allocation decision-making. The service system is set to launch this spring. Final documentation, training and testing is also being performed to ensure the finance system and service system seamlessly integrate. We have also made a technology vendor selection for the sales and quoting tools, and we plan to launch that during fiscal 2026. As we look ahead, we are planning for an ERP upgrade to take advantage of the automation capabilities in the newest version.

With that, I'll turn it back over to you, Reece.

Thanks, Sheila.

In conclusion, our summary on Slide 10 recaps our key highlights. Our performance serves as evidence that we are on a sustainable trajectory of growth and increasing profitability. Our transformation program supports our commitment to grow revenues faster than the addressable market growth, achieve 17% to 20% return on capital and 10% to 12% in operating margin by fiscal 2028. Our multiyear transformational strategies and near-term progress on these goals demonstrates our commitment to improve and consistently earn returns above the cost of capital and in the top range of our industry.

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. manufacturer of scale with a global footprint, servicing by geographic market and consistently demonstrate world-leading technology leadership, high-quality solutions and world-class service.

With that, I would ask the operator to please open the line for any questions.

[Operator Instructions] Our first question comes from the line of Aaron Spychalla of Craig-Hallum Capital Group.

Maybe first for me on some of the delays in bookings. It sounds like it's not too broad-based, maybe a little more focused in the Transportation segment. But can you just give a little bit more color there? It sounds like you're still somewhat optimistic of growing orders for the year. And then if you can also just touch on kind of early read on tariffs and what that means for you, but also as you kind of compete in the market as well.

Yes. Thanks, Aaron. Many of our markets have these large projects that are part of the order mix. And that can create a lumpiness as an order books on a particular day and then delivers over multiple weeks and quarters on into the future. And so we continue to see strong activity in quoting and interest from customers that are out there. And so we're seeing that the order mix and are still optimistic on future growth of the business as a whole. So I would attribute most of this to a large order mix and timing.

As far as tariffs, yes, that's a dynamic environment. Overall, though, what Daktronics as being a U.S. manufacturer, we've been paying tariffs on semiconductors, which was the focus, especially out of China, which was the focus of previous tariff initiatives by the last administration as well as the first Trump administration. The current tariffs are more broad-based across all products coming in from China. And that, we think, hits our competitors harder than us because we've already been paying some tariffs, and these are new to them in their world. So maybe a little opining on tariffs. I in no way prescribe that I have a prediction of where all that's going, but a little bit of a comment on orders. Any of that helpful?

Yes. No, that was. And then maybe you touched on it a little bit with the High School segment, but the shift to kind of digital there. Can you just talk about where that market is in general from a conversion standpoint, the drivers behind that maybe from like a payback perspective? And just what that means for you, traditional boards versus video boards from like a content perspective, just as we think about framing that growth opportunity?

Yes. The High School market is very exciting. We've been -- it's really a wide open. Those customers have been buying what we call standard fixed-digit scoreboards from us for years, but they have aspired to have more of a video -- what they see when they go to a professional stadium or college, they'd like to see in their local high school stadium or gymnasium, and we're seeing that interest as the quality of the product has continued to improve and the prices have continued to become more competitive. More and more of these schools and organizations are reaching and installing video display systems. We think Daktronics has the best round out of display systems, control systems and both the technical and professional services to make these types of customers successful. And of the 10,000 high schools that are out there today, we think fewer than 10% of them have converted one of their facilities to video as we sit today. And I might be low on 10,000 high schools. It might be more than that out there.

All right. No, that's good color. And then just on kind of capital allocation, it sounds like we'll get more color here in the coming quarters, but see you bought back some stock in the quarter. But just given where the balance sheet is at, maybe just thoughts on kind of capital allocation at a high level with where that's at.

Yes. We continue to work with the Board on capital allocation on a quarterly-by-quarterly basis. And we will -- as you said, we will invest in the best way to get value out of our CapEx. How would we invest in just different development activities, we continue to look at especially tuck-in merger and acquisition opportunities and then, of course, ways to more directly give value back to shareholders through stock buybacks and other vehicles.

Our next question comes from the line of Anja Soderstrom of Sidoti.

You mentioned International is picking up. Are you seeing that continuing now into the fourth quarter? Or how is that trending?

Yes. International has been soft for us really since the pandemic, and we've been seeing really good quoting activity, but a softness in turning those quotes into orders in prior periods. We're continuing to see an increase in that conversion rate. And we believe that absent a geopolitical incident that, that trend is likely to continue.

And is there a specific region that's doing better or that you're calling out or?

Our strongest regions have historically been Europe, the Middle East as well as Australia. And we're seeing good activity in those areas as well as some of the other areas outside those.

Okay. And you also mentioned you expect to spend about $40 million in annual product development. So you're going to spend a little bit more on that, it seems like. But are you also implementing some digital transformation initiatives there that might make it also more efficient in addition to spending more money on it?

Yes. We believe our digital transformation will really positively impact our operations and really every area of Daktronics. And so as we move forward into the future, we believe there will be efficiencies to be gained in product development, in our sales, in our services as well as in our fulfillment operations.

And I'll add, Anja, that in our product development line, too, there is about roughly half or a little less is spend on the control system side, which adds some of these unique features and help the customer automate or put up content. So that's also true.

Okay. That's helpful. And then in terms of -- you mentioned also you're renegotiating the supply agreements and scrubbing of the entire supply chain. Could you just elaborate on that?

Sure. We have a practice of having regular supplier meetings, but we're taking a more aggressive approach as we look to the future for our volumes and have started at the top of the supplier list and have worked our way through to make sure we're maximizing our terms and conditions for the company.

Our next question comes from the line of Mac Furst of Singular Research.

This is Mac Furst for Singular Research. A quick question on the International markets. You said that the quote activity has picked up internationally. And you mentioned a couple of continents, Europe, Australia. But you said that International -- the closure rate is not -- hasn't picked up. How would you explain that? Quotes go up, but...

Maybe I should clarify my comments, Mac, is that we've been seeing strong quoting activity, but the conversion from quote to order hasn't been as strong in the past periods. But we've been seeing that picking up in the prior quarter, and we believe it's still going on in the current quarter. And that absent some geopolitical event, we believe that we will see a higher conversion rate of quotes in coming quarters as well. I hope that's helpful.

I did have a question about -- yes, that answers my question. I did have a question about the import tariffs, but the previous analyst took my question.

I'm showing no further questions at this time. I would now like to turn it back to Reece Kurtenbach for closing remarks.

Well, thank you.

I appreciate everybody who attended today's conference. I would like to let you know that we do have investor outreach activities planned in the next quarter, including a virtual Sidoti Small-Cap Conference on March 19 and the Craig-Hallum Annual Institutional Investor Conference on May 18 in Minneapolis. We will host our next earnings call when we release our year-end results.

And then I might just say a few words that as you saw and as Andrew mentioned earlier in the call, I am stepping back from my role at Daktronics. I appreciated interacting with all of you each quarter over the last 12 years. And I believe Daktronics is in a great spot and look forward to seeing its success in the ongoing future. I wish you all a great spring, and you will be talking with Brad Wiemann and Howard Atkins at our next call.

Thanks, everyone, and bye-bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.