Daktronics, Inc. (DAKT) CEO Reece Kurtenbach on Q2 2021 Results – Earnings Call Transcript

Daktronics, Inc. (NASDAQ:DAKT) Q2 2021 Earnings Conference Call December 2, 2020 11:00 AM ET

Company Participants

Sheila Anderson – Chief Financial Officer and Treasurer

Reece Kurtenbach – Chairman, President and Chief Executive Officer

Conference Call Participants

Gregory Pendy – Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2021 Second Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Wednesday, December 2, 2020 and is available on the company’s website, at www.daktronics.com. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, Sheila.

Sheila Anderson

Thank you. Good morning, everyone. Thank you for participating in our second 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.

All forward-looking statements involve risks and uncertainties, which may be out of our control and may cause actual results to differ materially. Such risks include changes in economic conditions, changes in the competitive and market landscape, including impacts of global trade discussions and policies, the impacts of governmental laws, regulations and orders, including those resulting from pandemics.

Disruptions to our business caused by geopolitical events, military action, work stoppages, natural disasters, or international health emergencies, such as the COVID-19 pandemic, management of growth, timing and magnitude of future contracts, fluctuations of margins, the introduction of new products and technology, and other important risk factors, as noted and detailed in our 10-K and 10-Q SEC filings.

With that, let me highlight some of the financials. As a reminder, fiscal 2020 was a 53-week year and fiscal 2021 is a 52-week year. The extra week of fiscal 2020 fell within the first quarter, resulting in the six months ended being 27 weeks versus FY2021 of 26 weeks. Sales orders in all areas of operating expenses were impacted with that additional week in the six month comparisons.

In the near-term, the COVID-19 pandemic has caused various changes in our customers core businesses, impacting their investments in audio-visual systems. For example, businesses which rely on revenues from out-of-home advertising or who are reliant on customer foot traffic to drive sales, have been adversely impacted by stay-at-home orders or quarantine orders. This has delayed their discretionary spending, capital spending in many cases.

Many businesses using our displays for self-promotion, our on-premise advertising have reduced budgets for the foreseeable future, and some have pulled back spending. But we have also seen businesses choose to utilize displays as a part of the recovery, to drive an increase to their locations.

Venues hosting sports, entertainment and other events have seen limitations on the number of people allowed to gather, causing reduced attendance or cancellations. This has adversely impacted many sources of in-venue revenues, and subsequently, delayed expected spending and display projects. Educational campuses using displays for communication with students, parents and other visitors have had varied impacts for their investments in audio-visual systems.

Some customers in the mass-transit and airport segments of our Transportation business are expected to delay spending, as a result of the limited use of the infrastructure, and the impact on their financial stability during this COVID-19 pandemic, and in the long-term, roadway projects may be impacted by reduced tax revenues. That potential impact will increase, as the duration and – of the reduction of infrastructure usage continues.

We expect the COVID-19 pandemic to continue to have an adverse impact on our revenue and our results of operations. The amount and duration of which we are currently unable to predict. I highlight these trends, as the COVID-19 pandemic impacts have been the primary cause of the changes in our order bookings and sales declines for the quarter and for the year.

For the second quarter, overall orders decreased 10.2% as compared to last year’s second quarter, and decreased 23.9% as compared to the first six months of fiscal 2020. While the contraction due to the pandemic caused the decline in orders, we have had customers place multi-million dollar orders for live event venues, transportation signage and out-of-home advertising in both of our domestic and international business units during this recent quarter. Our on-premise display business remains strong and is comparable to last year.

Sales for the second quarter of fiscal 2021, decreased 27.2% as compared to the second quarter of fiscal 2020, and decreased 23.7% as compared to the first six months of fiscal 2020. Net sales decreased in all business units for the same reason, causing order booking declines, and due to the varied timing in the related conversion to sales, based on our customer needs and our ability to install solutions.

Gross profit for the quarter, as a percent of net sales was 26.2% as compared to last year’s 22.9% and gross profit for the year was 25.5% as compared to 24.1% in fiscal 2020. The improved gross profit rates were the result of lower warranty costs and a change in the mix of higher profit service agreement sales in fiscal 2021, as compared to fiscal 2020. In addition, during last year’s second quarter of fiscal 2020, we experienced additional project delivery costs and higher tariff related expenses, decreasing the gross profit rates in that period.

Our warranty as a percent of sales decreased to 6.6% for the quarter, as compared to 2.2% in the second quarter of fiscal 2020, and decreased to 1.4% as compared to 2.2% for the six months ended at fiscal 2020. Operating expenses for the second quarter of fiscal 2021 were $26.7 million compared to $35.3 million, or a decrease of 24.4%.

On a year-to-date basis, operating expenses were $52.9 million compared to last year’s $73.2 million or a decrease of 27.7%. These declines are attributed to our focus on managing our expenses to expected order volumes, as a result of the economic downturn caused by COVID-19. We conducted a reduction in force, both first and second quarters, to align the size of our team to anticipated order levels.

Operating expense declines were attributed to lower personnel costs, offset by severance costs, lower travel and entertainment activities, and lowered marketing and convention events, along with that focus on reducing spending in all areas. We also reduced our planned investments in our IT and product development areas. Our teams have come together to do a great job at serving our customers, while reducing capacity and costs.

The provision for income taxes during our interim reporting periods was calculated by applying an estimate of the annual effective rate to the ordinary income or loss for the reporting period adjusted for discrete items, due to various factors, including our estimate of annual income and operating in multiple states and foreign jurisdictions, our effective tax rate is subject to fluctuation.

The effective tax rate for second quarter of 2021 was 41.1%, as compared to a benefit of 63.8% a year earlier, and on a year-to-date basis, we recorded an effective tax rate of 26.2% as compared to a benefit of 14.6%. The change in the effective tax rates are primarily driven by, a decrease in tax credits and other permanent differences as a percent of estimated current fiscal year pre-tax income.

Our cash and marketable securities position was $74.4 million at the end of the quarter. We generated $40 million of cash from operations, correlating with a focus on customer collections, decreasing inventory levels, lowering personnel and operating expense outflows, as we manage our operations through this COVID uncertain times.

We’ve reduced capital spending, and have suspended our dividend and share repurchase programs also during this time. We used $5.8 million for investments in capital for new production system capabilities, building improvements and information system infrastructure and used $14.3 million in product development. Capital expenditures for fiscal year 2021 are expected to be $10 million.

Our product backlog is $201 million, which we expect to convert to sales over the coming two to three quarters. We expect our third quarter of fiscal 2021 to be lower than last year’s third quarter, due to the COVID-19 uncertainty, but of course sales could change pending project bookings and customer schedule changes. Our third quarter has historically been a lower quarter for sales, due to seasonality in our business and holiday breaks.

I’ll now turn it over to Reece Kurtenbach, our Chairman, President and CEO, for a few comments.

Reece Kurtenbach

Thank you, Sheila. Good morning, everyone. As Sheila highlighted, for the first half of the year, we have managed operating expenses and working capital to align with expected declines in orders and sales, as our customers adjust to the economic and business implications of COVID-19.

Even in these challenging times, customers have placed orders and continue to invest in their businesses, and we are hearing promising news on different vaccines and treatments, that we believe will improve conditions for all, over the coming months. We also believe the underlying trends are still strong and investments in AV systems will continue over the long-term.

We have carefully reduced and continue to strategically make choices on levels of investment in capital assets and development, while focusing on positioning ourselves for a strong recovery when the crisis is over. Our sales teams have continued to engage our customers, often virtually across new and existing markets through this time. We also have continued to invest in systems to improve our customers’ overall experience and interactions with us.

Customers choose Daktronics for new and leading technologies, our broad range of solutions, the reliability of our products and our commitment to serve them over the lifetime of their system. We are focusing on developing and releasing innovative solutions and services, tailored to different applications for both existing and new markets.

We do remain positive regarding the overall long-term outlook of the business and growth in the industry, as the world and our customers work through and get past the pandemic’s implications. But we will have greater uncertainty in the foreseeable future, due to the impact of the pandemic on different customers.

As the availability of treatments and vaccines increase the willingness of people to gather, many normal activities will resume, and our customer businesses will also become more normal. We believe that different types of gatherings and different businesses have different drivers, and we’ll move on their own timelines, creating variation in a return to what normal looks like.

With that said, for fiscal 2022 and beyond, we continue to see positive signs and believe we have ability to grow over the long-term. This belief is really because in international, our establishment of localized sales and service channels, our sales focus is on increasing market share in sport, out-of-home, Spectacular and Transportation areas.

Looking into the Live Events business, we expect to see some continued growth over the long-term, with the realization that this business is lumpy, primarily consisting of larger contracts, which can be highly competitive, creating variation from year-to-year. We expect sustained demand for larger-sized orders due to the adoption of video and sporting applications in the High School, Park and Rec market.

In our Commercial business unit, we see growth opportunities because of expansion of solutions for indoor applications, the continued replacement in new investment in the out-of-home and retail segments, and opportunities in the Spectacular segment. This segment includes multi-million dollar projects that are discretionary choices by customers, which can cause ups and downs in timings and trends.

The Transportation business in the U.S. and Canada remain strong, due to continued investment in the U.S. Transportation systems, and stability in federal funding, and increased advertising on on-premise promotional application needs in mass transit facilities.

In all our markets, we have a natural replacement cycle, and strive to serve our customers with their needs today, as well as in the future. We are expanding our Narrow Pixel Pitch offerings, and see a receptive market for these products across our business units. We continue to foster and build out indirect sales channels. Our range of solutions and global capabilities, make us the industry’s most experienced digital display provider.

To conclude, we enter the second half of fiscal 2021 with a strong backlog and signs of promising vaccines that can lead to stabilization in the world’s economy. We continue to see some uncertainty, but generally, a more positive outlook for customer willingness to purchase AV systems.

We have taken actions to position ourselves for a strong, but variable recovery, as the crisis eases, with a greater focus on reacting to the new realities of this uncertain environment. We continue development of new solutions and new customers and are investing in development areas to further enhance our customers’ experience when working with us.

Over the long-term, we believe the audiovisual industry fundamentals will drive growth for our business. We are focused on positioning Daktronics for long-term success, while carefully managing our cost structure to reflect the near-term uncertainty and market conditions. Even though we face a challenging fiscal 2021, we intend to emerge as a stronger organization.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Greg Pendy from Sidoti. Your line is open.

Gregory Pendy

Hey guys, thanks for taking my questions. Just first, I wanted to just understand, I know we have a change in administration here, but there was some news on maybe what the plans were with the trade deal. Can you just remind us, have we anniversaried most of – I believe it was a roughly $10 million uptick, due to tariffs. Is that going to be sort of neutral on the year-over-year basis at this point?

Sheila Anderson

We actually will see a bit of a decrease, because of the decline in our inventory part orderings. We’ve had some – forgiveness on some of the tariff implications, those will end as well at the end of the fiscal year. So a little bit down from 2020 to 2021, but still with an over – underlying, there is still some costs that we have going forward in our view.

Reece Kurtenbach

Maybe if I were to put little more color to that is that we are – we’re not expecting right now, a dramatic change in the tariff situation, or an increase in new or a pullback in existing and that’s our thinking as we – and if you have better guidance on what the new administration would do, we are all ears for that now.

Gregory Pendy

Understood. And then also, you seem cautious – I think on a lot of the segments? And I understand that the large amount of uncertainty, but I just wanted to hover in, maybe on sort of the outdoor billboard advertisers, it seemed like their transition – maybe a couple of the major ones, were at least looking for year-over-year growth into 2021, in terms of their digital – static to digital. Is that fair to say, or do you think that maybe the overall market will actually still be cautious?

Reece Kurtenbach

I think that what we’ve seen in the out-of-home advertising, is that when uncertainty looms, they are one of the first to pull back. But as they see positive signs, they are one of the first back in to make investments. So we think that, as the a variable recovery is may be how we think of it, that different segments will come back in different ways, we believe out-of-home will come back faster, and we’ve seen some out-of-home companies continue to invest during the downturn, so some variability there as well.

Gregory Pendy

Great. And then just one final one if I can. You made a significant investment in micro LED? Does that kind of – does that investment help offshoot some of, I guess, the R&D spend in some of the new technologies, given the partnership?

Reece Kurtenbach

We believe in the micro LED business, and continue to invest in that. But we don’t have a product on the market yet today, that has a micro LED in it. So that is maybe not reflected in our operating side. But yes, we do believe, that this will give us a stronger entry into micro LEDs in the coming quarters and fiscal years, and that are, it fits into our picture of our development spend and our forecast of our development spend.

Gregory Pendy

Got it. All right. Well, thanks a lot for taking my questions.

Reece Kurtenbach

Thanks, Greg.

Operator

Thank you. And I am showing no further questions from our phone lines. I’d now like to turn the conference back over to Reece Kurtenbach for any closing remarks.

Reece Kurtenbach

Well, we appreciate everybody joining us this morning. We know these are strange times, but we hope that you have the best holiday season possible, and that we all enter the New Year, and have a more positive outlook, and we look forward to talking to you next May. So, thanks everyone. Bye-bye.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation and you may now disconnect. Everyone, have a wonderful day.

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