Daktronics, Inc. (DAKT) Earnings Call Transcript & Summary

Okay. I see people starting to come into the room. So with that, we'll start the presentation. I'm Bill Holobowski Associate Research Director at Sidoti. I'm very happy to welcome back Daktronics ticker symbol DAKT back to the Sidoti conference, It's great having them back. A lot of good stuff happening at the company. And I think a really interesting story and a lot of progress in the past year. I'm here to talk about that with CFO, Sheila Anderson. As is the case with all of our presentations, we will go for 30 minutes, and we open the floor to Q&A as time allows us at the end. If investors have any questions, please put them in the Q&A chat at the bottom of the screen and I'll curate those at the end. So with that, thanks for joining us again, Sheila, and welcome.

Well, thank you, Bill, and I appreciate it, and I appreciate everyone for attending today's call. I'll tell you about Daktronics and of course, I'll be talking about some forward information that may or may not come through. So please preview our SEC filings for any further information on that. First of all, I want to reflect back on our mission, and we're focused on being the world's leader in informing and entertaining audiences through dynamic audio communications systems. And what does that mean? It really means we need to engage our employees, develop strategic partnerships with our suppliers and other service providers, provide and use our strength in our product innovation and manufacturing and service capabilities, work to better our communities and generate an attractive return to our investors. And what does that look like in pictures. We focus on the LED video display business, both in the U.S. and around the world. We manufacture our displays by procuring piece parts and components around the world here in the United States and the center of the country in South Dakota as well as in Minnesota and in Ireland and in Shanghai, China. And we are seen as the world leader and a leading supplier to the North America LED sector. We had $754 million in revenue this past fiscal year, which just ended in April of 2023. About a 20% gross margin and generated $30 million in EBITDA. We focus on these different business units, so different segments of businesses and sporting venues that utilize our products to advertise, inform and persuade their audiences. Our technology is based on our product platform design, so we can utilize and sell the same or similar features and systems throughout these different end markets. To address all the needs in the marketplace, we help with the large system, design and from design services to manufacturing to installation services. We pride ourselves on the quality and reliability of our products and have invested heavily in our reliability lab and other reliability type of services to make sure that our products can stand the test of time in both an indoor and external environment outdoor environment. We have been in business for a long time, over 55 years and we leverage those customer relationships that we've built over those decades to win back our key business and win back the replacement cycle. Once the location goes digital, often, they don't go back to a static usage. So every 7 to 10 years, we're looking at a replacements project for the customers that we have earned. And not only do we manufacture for our customers and design solutions for our customers, but we offer services that in content creation or ways that they can use their displays to better serve their customers and achieve their objectives. And we also provide the ongoing service and support for our customers over the long term. Roughly 10% of our business is in that service revenue line either through maintenance agreements, time and material orders or through these content services or other professional services. And we're excited to be in this business. We've had some challenges over the pandemic years, which I'll show you a chart here shortly, but we're excited about the future because not only do we expect growth in business, but the company called Futuresource Consulting also is expecting growth over the coming years. In 2022, their expected market size [indiscernible] was $8.7 million and is expected to grow to $18.8 [ billion ] in 2026. As you can see, much of this growth is expected in the Asia Pacific region. So that includes China, which is a majority of that. That's this greenish bar. We don't currently sell in China, but we do see there is some growth outside of the Chinese market in the APAC region, which we have sales and service support for. But also in our core markets and core geographies in the Americas and in EMEA, we're seeing growth there, expect growth to come in those areas. And why is the use of LED displays and technology is growing. What's really the -- the key reasons, again, is to inform, entertain or persuade audiences, advertising, making shows and events, sporting events, really exciting and to capture people's attention to for that entertainment or for the advertising. And included in this growth is usage of maybe the type of display, so not only in large stadiums where you'll see a display from a distance, but now even fitting out more of the concourses and bars and restaurants and sporting events. We turn to transportation markets to the control centers and military applications that would use at closer display is where a lot of the growth is coming to this narrow pixel pitch. LED design is also set to grow from 2022 to 2026. We told about 45% market share in North America, a smaller portion globally because of the size of the world and our market focus. But this, again, is an exciting reason why we see a lot of opportunity for Daktronics in the future. We are known as the industry leader. We provide a well-rounded offering of services from that engineering to the manufacturing fulfillments and ongoing support over the years in many different assets and many different end user types. As I mentioned before, we saw a pretty dramatic pullback in business during the pandemic. So our fiscal year ends in April, and so the beginning of the pandemic was right here at the end of our fiscal '20. We still produce products and had orders during fiscal '21, but at a much pullback perspective. So well below $500 million in revenue that year. In fiscal '22, things rebounded. And in fiscal '23, we had a great year just ending again in April of this year at $754 million. There was some pent-up demand during this time, but we were challenged at the end of fiscal '22 into fiscal '23, because of supplier chain challenges that many companies had, but we specifically were our suppliers of our integrated circuits. We were on short supply, and we're put on allocation. So we were getting many of us devices than we needed to complete our manufacturing processes for many of our displays. So for the first quarter and half or so fiscal '23, we were not very efficient and incurred a lot of additional costs to react to the situation in purchase additional and new design or additional components for the new designs that we created to fulfill our customers' orders. We ended the year with strong sales and stronger profitability and then much more stable operating environment as well as we look into fiscal '24. We're focused on a number of strategies also now in our fiscal '24, continuing to growing the business profitably. We started the fiscal year with a high backlog at $401 million, and we'll continue to utilize the capacity that we put into place just during fiscal 2023 in both people and in plants to produce at higher rates and lower that backlog. We want to and have been seeing our lead times come more into a pre-pandemic ranges of lead times, which is market competitive and good for our customers. Of course, we'll carefully manage our expenses as we grow into the future. We continue to work on our working capital because during the fiscal '23, we invested in our inventory levels so that we have this ability to serve our customers and serve our backlog. And by decreasing our inventory levels, we believe that we're in a cash generation cycle now that will continue to build cash as we go into the future. With the less need of the amount and quantity of inventory on hand. We'll continue to work on being operationally efficient and growing into the new size and new production rates that will have -- are very focused on market production, market development as well for our selling more of those narrow pixel pitch products and developing new AV integrator channels. And of course, we'll prioritize the highest growth markets and highly profitable markets as well as we configure the portfolio of areas that we sell into -- into the markets that we sell into. We also invest in product development and in projects that we believe will add a lot of value to Daktronics in the future. Some of those include automating some interactions with our customers and making it easier for our employees to serve our customers and as well as other automation projects through our factories and other business processes. And finally, we're focused on building out more integrated business planning capabilities for future planning as we go into this new growth cycle. And just a little bit more than about our business before I turn it over for some questions. We do focus on customer end markets, which we call live events, commercial, transportation, High School Park and Recreation and then international would be anything outside of the U.S. and Canada. And as you can see, live events was the largest portion of our business last year at 38%, then our commercial market at 23%. High School Park and Recreation at 19%. International is 11% and transportation at 9%. And just to put a little picture behind when those words live events business would be in professional sports like the Twin stadiums that was renovated and new displays were put in for this baseball season, and then also college and universities and other arenas. And here's another example of Arizona State hockey arena. We do have competition, and the competition primarily comes out of the Asia Pacific region, mostly out of China. And that is true for all of our business areas. These competitors will maybe come in through a business integrator here in the States or come in from a company like a Samsung or Panasonic as an example. We believe that there's a lot of growth drivers here in live events, albeit that's more of a stable environment. Our customers here are upgrading to larger, bigger displays. They really want to entertain the fans and also get advertising revenue on these display elements as they -- as the sporting event or the event is occurring. High School Park and Recreation market is similar in that there's a lot of sports focus here, but there's much displays. So live events can be multimillion dollar packages that we're selling and high school can be more in the $100,000 to $500,000 range, sometimes in larger schools, you can get into the $1 million ranges, but really good business here. The trend is to move more towards video displays lots of high schools across the country. And so that's all good. High schools have benefited from COVID funding, which has helped also drive this business. But really, much of the money for these displays comes from the advertising revenue that they generate and then can put back into their school systems as well into either the sports or other curriculum events. From a growth driver perspective here, again, is that video movements. We're also working on the communication experience as well, so usage of iPads to put up the scoring to make it a much easier control segments. We've also added some curriculum around our sales programs as well to help students learn how to use their equipment and then they can further pursue careers in production at their college or university or other sporting venues. From a commercial business unit, we focus on on-premise, which you'll see here in this casino the picture and then the out-of-home business, which is our out-of-home advertising business and then other usages in commercial settings -- commercial business settings. I roughly would say that of this business unit, a 1/3 would be the third-party advertising, 1/3 is for on-premise and 1/3 is that spectacular or video [ walls ] that you'd see primarily in Times Square or in Las Vegas or large city centers as well. And we continue to see growth here because of the growth and adoption and use of digital. There can be many messages configured for that store or location. It's an effective use for advertising. So our out-of-home customers are continually now changing out displays that are 7 to 10 years old or they do continue to place new digital billboards in certain locations if it makes economic sense for them. Our transportation business focuses on the intelligent transportation systems and airports and mass transit. And there is the infrastructure bills that was passed that helps give this transportation segment stability for long-term business. It helps flow funds to these projects that will get greenlit that oftentimes include a digital application. There's continued need for traffic management across the country as well as advertising. This governmental funding helps and continued infographic communication is helpful for these various transportation sectors. And then our international business focuses on the sports, the spectacular and transportation segments. State international, where we saw a large rebound in the U.S. and Canada, international seems to have more of a [ leg ] for us from a post-pandemic perspective. But we take the same technologies and then market and distribute them throughout the world. And we again compete with similar competitors outside the U.S. as we do within the U.S., and it's mostly these Chinese competitors, as I mentioned, or the large electronic competitor names. I'm going to look a little deeper into some financial information, may be I'll go to last year's annual results. We had a nice year second half was a more stable year. We've made some pricing changes and pricing methodologies about a year earlier from this time frame, which we're starting to work through the backlog. And so that was contributing to better gross margins as well as the overall stability in our manufacturing processes because of a more stable inventory supply chain was relieved and a bit better. As you can see, we have generated free cash flow during the pandemic heavy year, we did take cash out of working capital. And then as we started to go back in FY '22, it started to reuse some cash. And then during FY '23, we generated cash from operations but did invest into the company to have this higher capacity level and tool us for growth in the future. A little bit about Daktronics. We are lumpy. We have some of these large projects that can make some of the comparisons between quarters of its harder. But overall, we are excited about the future with the opportunities for growth. And with that, I'd open it up, Bill, for any questions.

Sheila, thank you for the presentation. Again, participants can pop questions into the Q&A chat. I have lots. So I'll be a little selfish and start there. The share price revival over the past year, obviously, you had a lot of things go your way. But just -- this is going to be a really broad question. How should investors view Daktronics, more electronics company, more infrastructure company, in terms of valuation, if I'm new to the story and trying to gauge who to compare you with domestically, what's your perception of how investors should perceive your position in the market and valued stock?

Sure. We are kind of a tough study that way. We are a little bit of each of those types of businesses. So I would say looking at companies in a blended view. We are certainly a technology company and at the leading edge of that, but there's certainly some industrial myth to our company as well with the manufacturing side of life. And it's been great to see the stock recovery. We have been -- we've entered back into the Russell Indexes, which I think has been helpful to the overall stability of the company stock as well. But I think getting through the pandemic when as I displayed here, our customers use our Boards and our systems for informing, entertaining and communicating to audiences. And so there wasn't a lot of that gathering happening. And so I think there is lot of pull back in the system and then now we're on to a more stable footing as well.

Good. Okay. In an earlier slide in your presentation, you slashed operating profit, the margin. The thing that I noticed is, well, a, do you guide on operating margins? Secondly, I noticed figures 5%-plus in the fiscal '14, '15 time frame. Can you discuss effects of why it's maybe compressed a little bit now what is it going to take to get back to those levels? And can you aspire to levels beyond that in the foreseeable future?

Yes, our goals are to be in the upper single digits of operating income. So like you said, something similar to back in these areas. And so we don't guide on revenue or operating margin just because of the lumpy nature of our business. And we do see ways to get back there and have plans to get to these rates of return and operating income. No excuses here, but maybe some of the factors that impacted some of these years we did have a warranty issue that took a couple of points off here in the fiscal '16, '17 and '18, that compressed our margins. So if I put in more normal margin in Europe, they would be maybe up towards the 4% to 5%. And then we also invested in this narrow pixel pitch technology '18, '19 and '20 into our product development, that's all expensed on the income statement. And so that as well would take a few points through here. During this time frame, we saw a lot of inflationary pressures. Much of our backlog was booked at a fixed price contract. So there was -- and there was a lot of inefficiencies through this time frame and through the COVID area. And so the back half of fiscal '23, I think, is much more representative of the ongoing improvements in operating income that we're focused on.

Did you change sourcing in any way? By that, I mean is there more in-sourcing. I think product available raw material for lack of a better term, availability was a little constrained for a period on COVID as I recall. Are you in-sourcing more? Or have you found new channels for parts that you need to ensure that on-time delivery and things of that nature?

Yes. We've done a little bit of all of that. We redesigned some of our product lines so that we have an alternative skew for the pieces and components that we need, which would get us to different vendors as well. And we've done some more in sourcing to have more control over more of the metal working areas. We've upgraded our metal working equipment and that really builds the chassis and what holds the display together, which gives us more of that in control -- we're more in control of the build schedule and then the costing of those areas. And then we've also -- really, the bigger impact that we've had is we've modified our pricing to reflect some of these changes that -- we've seen electronic components actually go up in price versus down in price, which is not a normal thing in the electronics world. Usually, it's a continual down scale. So we're evaluating and monitoring and adjusting our pricing methodologies as well through this and have changed that during this time frame.

Okay. Good. I'll go to some of the questions that are coming into the chat now and try to combine a couple. So you talked about lumpiness already, a little bit of unpredictability perhaps. First question is on whether there's seasonality in your business? And then secondly, as to achieving more consistent profitability, which the consensus suggests you would through the end of next year. Can you talk about SG&A, whether there's a possibility to reduce that line?

Sure. So there is seasonality in our business. Generally, the sporting -- the sports business, outdoor construction and just the way our quarters work. The first couple of quarters are really heavy into the sports season as high schools are starting up, professional sports are starting up. So those systems have been installed and have been produced in place. Our third quarter then is winter season. So there's a little bit less work because of that. And there's 2 major holidays for us in that third quarter, which gives us less production days. And then Q4 starts to come back for maybe the spring baseball season and that construction season again. So like I mentioned, it's a lot of the sports seasonality that we do see. And from managing our OpEx expenses, we do believe we're able to maintain or even reduce as a percent of sales in that area to add some leverage. We are, however, investing in some digital transformation type of work. So our IT spends likely will rise, for example, during this time frame. But we'll work to manage that as we see the top line unfold itself.

Okay. Great. There is a question tied now to free cash flow, which you've generated what the poster is calling very meaningful free cash flow in the past few quarters and suggest you have significant balance sheet capacity after recent refinancing. What do you expect to do with that accumulated cash? And is the return of a dividend possible at all in the near future?

Sure. Yes, good point. We just refinanced the company in May of this year. And that's going to give us a lot of runway to run the business through these ups and downs, and we'll utilize the capital in a few different ways. One, we historically have done tuck-in acquisitions that help us build out either technologies or our availability to region that we might not have as much sales presence in to build out our market presence. So we'll move our focus towards looking at some of those sorts of tuck-in acquisitions that would be accretive to our value. Then we do have this capital -- this manufacturing business to maintain. So there's generally across all the asset needs, we generally spend around 3% of our sales, and we'll invest that back into capital equipment of some sorts. And then like the [ rider ] mentions, we would look if there's -- should we pay some of our new debt back? Or and should we consider the dividend or share repurchase program again. Those 2 programs were stopped during the pandemic time. So those are all possibilities. We'll string together a few of these profitable quarters, and then we'll make more decisions with that possibilities.

Got you. And if we could squeeze in one more before any closing thoughts you may have. So poster asks, since you mentioned the market growing at a [ mid-teens ] percentage or higher for the next couple of years. Is it fair to picture Daktronics growing at the top line at that same kind of rate? And also, too, if you could you could squeeze this all in, with 45% domestic market share sounded, if I have the figure correct, when does that suggest you have like additional pricing power, I mean, it seems like it's kind of a market you've cornered. So I'm curious about that perspective too.

Sure. So we do believe that we should be able to, at a minimum, follow the growth trends that's expected because of the markets and brand awareness we have and the good work that we feel our customers recognize us for. From a pricing perspective, we do work to balance and make sure that we're -- we do have the right pricing out to the marketplace. Our competitors though always make pricing -- they have a lower pricing. We're never the low price out to our customers. But so we have to balance the competitors' pricing with the customers' expectations and that. So there's some competitive pressure there on pricing that we just have to be very [ cognizant ] knowledgeable of.

Got you. And on the top line point, that's -- it seems very promising if you grow at the market rate or higher. So -- any closing thoughts before we wrap up since we've reached the end of the presentation time.

I appreciate your interest in Daktronics. If you have questions, please reach out to me, but we are excited for the position that we're in and the stability that is back in front of us and look forward to profitable growth in the future.

Great. We thank everybody for joining us this afternoon or morning depending on where you are in the U.S. And also there are questions we didn't get to. If any, I could pass these along to you Sheila or they can follow up with you directly or to myself at [email protected] and we'll do what we can to get toward the pertinent questions. So Sheila Anderson, CFO of Daktronics. Thank you again for participating in the conference and sharing your story once again.

Thank you so much, Thanks, all for attending.

Everyone, have a great day.