Sheila Mae Anderson - Chief Financial Officer, Principal Accounting Officer and Treasurer James B. Morgan - Chief Executive Officer, President and Director Reece A. Kurtenbach - Executive Vice President and Director.

James Ricchiuti - Needham & Company, LLC, Research Division Morris Ajzenman - Griffin Securities, Inc., Research Division Stephen Altebrando - Sidoti & Company, LLC Richard A. Ryan - Dougherty & Company LLC, Research Division.

Good day, ladies and gentlemen, and welcome to the Daktronics First Quarter 2014 Financial Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, August 20, 2013, and is available on the company's website at www.daktronics.com. I would now like to turn the conference over to Ms.

Sheila Anderson, Chief Financial Officer at Daktronics, for some introductory remarks. Please go ahead, Sheila..

Changes in economic condition, changes in competitive and market landscape, management of growth, timing and magnitude of future contracts, fluctuations of margins, the introduction of new products and technology and other important factors as noted and detailed in our 10-K and 10-Q SEC filings.

At this time, I'd like to introduce Jim Morgan, our President and CEO, for a few comments..

Thanks, Sheila. Good morning, everyone. Thank you for joining us this morning. In addition to Sheila and myself, we have Reece Kurtenbach with us this morning. As many of you know, Reece will be taking over as CEO on September 1. And since Reece will be leading the charge here shortly, I'll be turning most of this call over to him and Sheila.

But before I do that, just a couple of quick comments on the quarter. Overall, it was a good quarter. Orders were strong, and we had started with a healthy backlog, so we have plenty of work to do.

Our people did a great job of executing, serving our customers and meeting critical and sometimes challenging deadlines, and so I want to take this opportunity to thank all of our employees and our suppliers and our service partners for their great efforts and their commitment in serving our customers well. With that, I'll turn it over to Reece..

Thanks, Jim. Good morning, everyone. Overall, we were pleased with orders and revenue for the quarter. Order volume in our first quarter of 2014 was the second highest we had ever achieved, only exceeded by Q1 of last year.

Also, our revenues for the quarter were up year-over-year and as Jim said, all of our people involved in delivering products and services to our customers executed well. While our revenue was higher, gross profit did decrease.

Some of this was driven by the mix of large projects we worked in the quarter, and the fact that our warranty is still higher than we would like. Our goal is to continue to reduce warranty expense and drive an increase in our overall gross profit.

As you may know, our first quarter is often busy with sports projects and this year, we worked on more than 20 video systems for colleges and universities. Maybe of interest, they were 3 of these to football stadiums in the Big Ten.

Iowa, Wisconsin and Illinois, these teams are good examples of following the trend of replacing their systems at about 10 years with larger, higher resolution displays. Denver's also been a hotspot, with 2 new systems from Daktronics. The Pepsi Center and the Broncos will both have a new look for this fall.

As we mentioned in our news release, orders in billboard and our large video market in Commercial were lower than expected in Q1. However, overall activity in these markets is still strong, and we really believe this difference is due to natural variability and the timing of orders.

One area of the Commercial business that has continued to be strong is retail venues and shopping malls. These customers are installing what we call hanging banners in the walking areas, as well as large Spectaculars on exterior façades with such recent installations in Chicago, Orlando, Times Square and elsewhere.

Our markets are still very dynamic and competitive, and we believe continued investment in our products, services and processes will be essential for our long-term success. We continue to invest at least 4% of our revenue in product development, mainly in the displays and control systems.

One of our large ongoing developments was a new design for surface mount LED product on a 15-millimeter pitch that we released this summer. This product incorporates a number of quality and visual improvements, and we've been very pleased with the early success of this design.

In the remainder of the year, we will release higher resolution derivatives based on this platform, as is consistent with our product strategy, to leverage our investment through the development of product platforms. Products are certainly important as the systems and processes that support our sales production and service activities.

We have made significant improvements in previous quarters in this process improvement, and had planned a number of critical projects in these areas that we believe will allow us to better serve our customers with less waste in future quarters. We feel this is important as we focus in our internal goals of improving overall operating margin.

With that, I'll turn it over to Sheila for her comments..

Thank you, Reece. Sales increased 4.4% from the first quarter of fiscal 2013, and 11.4% compared to the fourth quarter of fiscal '13. As Reece mentioned, this increase was driven by our Live Events business unit as we manufactured and installed a number of college and university systems and other professional sporting venue systems during the quarter.

In addition, sales in our International business unit grew. Sales declined in our Commercial business unit due to the timing of orders and the related timing differences of the revenue recognition as compared to last year.

Transportation sales decreased from the first quarter of fiscal 2013 as last year we were finishing up a couple of larger procurement contracts during the same period. We continue to estimate a modest growth rates per sales in fiscal 2014.

We continue to see interest from our customers in large projects in the marketplace in the Live Events, International and Commercial business areas. With the 2% increase in backlog and our current project schedule, we estimate revenues to trend up modestly as compared to last year for the second quarter.

Gross profit for the first quarter was 25.6% compared to 22.6% in the fourth quarter, and 27.4% in the first quarter of last year. We had anticipated an increase in gross margin percent from the fourth quarter because of the sales mix in the volumes and utilization of our fixed cost infrastructure.

We also had anticipated lower warranty cost as a percentage of sales. Our sales mix impacts each quarter's gross profit. For example, during the first quarter of 2014, we did have 1 contract that impacted our margins negatively by approximately 0.7%.

And as you will remember in fiscal 2013, last year, we had an uptick in a couple of projects that helped increase gross profit by over a percent. So mix is a big factor in our gross profit's mix. Warranty as a percent of sales is comparable first quarter to first quarter and was approximately 3.4%.

As Reece mentioned, that is one area we continue to work on to reduce. It did decrease from the fourth quarter of fiscal 2013, which is at 5.6%. Looking ahead, gross profit for the second quarter is expected to be up from our first quarter, but less than our second quarter of last year.

Operating expenses were 19.4% of sales as compared to 19.3% of sales quarter-over-quarter for the first quarter. In dollars, operating expenses increased 4%, some of which is due to costs, which we don't expect to recur at the same level in the remaining quarters of this year.

We are projecting operating expenses for the next few quarters to be slightly less than our first quarter. We continue to make necessary investments in product development, process improvements in our IT infrastructure for managing costs to allow us to continue to grow profitably.

For fiscal -- total fiscal 2014, we predict a slight increase in operating expenses in dollars to support the business, but are working to hold these expenses flat as this percentage of total sales for the year. Our tax rate for the quarter was 32.2% compared to 38% -- 38.6% last year.

This lower rate is reflective of the benefits we received for the research and development credit, which has not been reinstated last year at the same time. We are forecasting our effective tax rate for the full fiscal 2014 to be approximately 34% to 35%.

However, this rate can fluctuate, depending on which tax jurisdiction sales are procured in around the world. We had some notable changes in our balance sheet this quarter. At the end of July, we had $46.7 million in cash and investments, which is down $18 million from April.

This reduction in cash since April was partially due to $5.1 million of dividend payments during the quarter. In addition, we completed the acquisitions of our OPEN Out-of-Home business in Belgium, and used approximately $5 million of cash to make the down payment and pay off their debt after closing.

Accounts receivable in cost and profits in excess of billing increased, which is attributable to the number of large value contracts in process, or being installed during and towards the end of our first quarter, which created an increase in these balances. These balances can be quite variable with our large project business.

We anticipate the collection of these receivables during the second quarter. Inventory levels are up from the end of the year and 5% from last -- from July of last year. This will support our backlog going into the second quarter, and it also includes $2 million of inventory held in our new Belgium built factory.

Finally, we invested $4 million into our capital investments during the quarter, and we estimate our total capital investments for the year to total $15 million.

Our plan is to invest in manufacturing equipment and tooling for our new Outdoor Products platform, manufacturing equipment to enhance and improve production capabilities and in our information and technology infrastructure, to keep it reliable and optimized. With that, I'll turn the call back to Reece for additional comments..

Thanks, Sheila. Looking forward, at the business, we're still excited about the third-party advertising business worldwide with the continued shift to digital as prices drop.

As we discussed in the last call, we feel the acquisition of OPEN Out-of-Home in Belgium positions us to provide a more complete set of cost-effective and reliable solutions for this market.

We continue to install projects in Europe, Middle East, Africa, North and South America, as well as Australia and in general, we believe there is a lot of growth overall in our International business. In our Commercial business, we see orders in billboard picking up as we move through the calendar year.

And we have a strong pipeline in the large projects area of this business as well. We're expecting modest growth in our Commercial business in FY 2014. In Live Events, we continue to see ongoing interest from venues at all levels to increase the size and capability of their display systems.

This trend drives interest in video for our high school sports business as well. However, we saw order and revenue decline in this market in the year-over-year comparison. We believe this is due to timing of large video systems and not a long-term trend, and we see a continued growth opportunity in both of these markets.

Our Transportation business is still strong, even though the year-over-year comparison will be skewed due to the large project that we delivered in FY 2013. Because of this, we expect revenues in transportation to be down year-over-year. Again, this is not an indication of weakness in that market, but that we had a great year in FY 2013.

Overall, as a company, we're optimistic about the future. We are the world leader in many of our markets. We have great products, great people and we have made great progress in reducing cost, through eliminating waste and improving our processes and these efforts are still ongoing.

We feel we are positioned well to continue to achieve some top line growth, and we will maintain our focus on cost reduction and bottom line performance as we go forward. With that, I would ask the operator to open it up for questions..

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti from Needham & Company..

First off, Jim, wish you the best of luck. And just if I may, couple of questions. First off, I wonder if you could talk a little bit about the pricing environment that you're seeing in some of the major markets..

So we continue to have competitive pressure worldwide, and the larger, more visible projects tend to have greater numbers of people at the table and see the -- a hotter competitive environment.

If I look at this year compared to other years, there hasn't been a significant shift, so to speak, so I think that the pricing or the competitive environment is similar this year as to last year..

Okay. Reece, you gave some good color on a couple of segments of the business in terms of what you're expecting.

And I may have missed it, but did you give any comment, or was there any commentary with respect to what you anticipate for the Live Events business in fiscal '14?.

As we discussed, we see this interest in video and these venues that have systems that are between 8 and 12 years old. They will replace those systems, and we have yet to see somebody say we want something smaller and less. They want something bigger and competitive in the environment that they're in.

And that's what we see going on in Live Events, continued growth in that area as interest in high-resolution video continues to be maintained..

So there's the potential, you think, for growth year-over-year in Live Events versus last year?.

Yes..

Okay. And education, is that -- looks like that could be a more challenging year for you.

Do you -- is that -- do you see that business as being flat to up? Or what's your sense on that part of the business?.

As so what we recall, the schools are HSPR, there's 2 aspects of that business. There's the -- in the bowl, the Sports App business, and there's outside the bricks and mortar, to communicate to traffic. Really, the growth in that HSPR business is in the bowl as they invest in video in high school or a small college venue.

And we see that, that is still a growing area, but it's really based on timing of when they choose to invest in those projects. How we end up the year, we don't see as much top end in HSPR schools market as we do in Live Events..

Our next question comes from the line of Morris Ajzenman from Griffin Securities..

Just curious, the previous question, Live Events being up for the year, fiscal '14 versus fiscal '13.

If we take out the first quarter, we fully had a healthy rebound, feel confident that we can have good trends for the remaining 3 quarters, top line year-over-year Live Events?.

Yes, we still have a large pipeline of projects in our Live Events business, and we believe there's growth in that business year-over-year..

Okay. And on the commercial side, I think you stated you still see modest growth for fiscal '14, but then you -- as you gave further color on the visual billboard that you see some improvement into the remaining 3 quarters of the year. I know we spoke about in a previous call, this year would -- looking at an overall, I think flattish year.

You were previously, correct me if I'm wrong in that, a flattish year in Digital Billboards? Is that changing a little more to the positive, looking out to the remainder of the year in Visual Billboards?.

Yes, maybe that's the difference between calendar and fiscal year. We see that the Billboard business invests on the calendar year, and that we see it strong through the rest of this calendar year and then we'll continue to monitor it going into what is calendar FY '14..

Okay, and just wanted to clarify.

I think, Sheila, I think you said G&A will be slightly down from the first quarter? Are you talking about it as a percent of sales? Or are you talking about total dollars?.

For dollars, for the total operating expense pool, we're predicting the next 3 quarters to be down in dollars for the next -- for the rest of the year..

Okay, and last question. Again, just a -- it wasn't very clear on my line -- end here.

Gross margins, did you say up sequentially from the first quarter to the second quarter, but down year-over-year?.

We'll be -- we are predicting that we'll be up from the first quarter for gross margin, but we may not quite get to where we were at last quarter 2..

Of last year, second quarter?.

Last year second quarter..

[Operator Instructions] Our next question comes from the line of Steve Altebrando from Sidoti & Company..

How should we think about gross margin for the full year, particularly, do -- you do still expect warranty to be a bit of an issue? And if the mix in business -- I guess, you'll probably see with Live Events, I'm suspecting a larger part whether that plays -- has an impact on gross margin?.

We do see gross margin -- are predicting similar levels, just slightly higher from the last full fiscal year. As I mentioned earlier, it does -- like you also pointed out, it does mention -- it does matter that sales mix and the large projects can sway that..

Okay.

But expecting it could be up year-over-year?.

Just slightly. Slightly up..

And then, do you have the billboard revenue for the quarter? And that's it..

Yes, billboard revenue for the quarter was $8.7 million..

Our next question comes from the line of Dick Ryan from Dougherty..

In the billboard space, Reece, have we seen any replacement discussions there? When do you think that cycle can start?.

That cycle has begun already. Some of the first quarter business that Sheila referenced was for replacement displays..

Did you give a percentage how much of that was replacement? I didn't catch this..

We did not. And I apologize, I don't think we have that information here. It's this lifetime curve. And so if you would go back in time, the billboard transition to digital was just beginning back 10 years ago, so it's not as big a volume as our new business..

Is the Replacement business coming from couple of the customers? Or is it centered on one? Or how would you describe that pipeline?.

It's really a function of the lifetime of the product at 7 to 10 years, and so it comes from anybody who invested back at that time..

So we have a -- back at the time, are the ones are buying the most replacement, so they're tied together, as Reece said..

Yes, yes. And you were -- you talked some -- about some excitement in the third-party advertising.

Was there a contribution from OPEN Out-of-Home in the quarter? And what -- can you give a little more color on that pipeline?.

From the quarterly operating results, it was open at less than $2 million of sales for the quarter, so not a large or material impact, recent comments on our pipeline and outlook..

Yes, it's been helpful to have the OPEN Out-of-Home as part of our product mix, it gets us into some good conversations with the third-party advertising companies, especially those outside of North America..

Our next question is a follow-up question from the line of Morris Ajzenman from Griffin Securities..

At the digital billboard, $8.7 million revenues in this current quarter.

What was that versus the previous quarter and the quarter of last year?.

So last year, same quarter, we were at $11.7 million, and quarter 4, we were at nearly $10 million in revenue..

And, just one last follow-up on this warranty, as a percent of sales. Clearly improvement from the fourth quarter, 5.6% to 3.4%, currently. I think you openly have a target of anywhere between 1.5% and 2%. Again, correct me if I'm wrong on that number.

And how -- what do you think that can be, as we exit fiscal '14 as a percent of sales?.

I think you listed our target correctly, but I would say that we wouldn't get to that point in FY 2014..

I'm just trying to get some color. Do you expect to see, maybe not a 2% but a material improvement, 3.4%.

Could it be, conceivably, 2.5%, 3% or so, as we exit the year? Just to get some sort of color on the run rate of improvement?.

I would say that to get below 3% would be a good target..

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

Yes, this is Jim Morgan again. Thanks, everyone, for your questions. And as this is my last conference call as CEO, I would like to thank all of those in the investment and financial world for your interest in and support of Daktronics over the years. It's been a privilege to work with all of you.

We've been working through the transition here the past 6 months, the planning of the transition and moving some leadership around and preparing for Reece to succeed me, and Reece is ready to step into the role. And I know he'll do a great job. And so, and I'm looking forward to a change of pace here, for myself.

Just a reminder, tonight is our annual shareholder meeting at 7:00 -- I'm sorry, tomorrow. Jumped the clock there, just -- tomorrow at 7:00. And with an open house prior to the shareholder meeting at 5:00. So we hope to see some of you there. Thanks again for being with us this morning.

Reece, do you have any more comments?.

I guess, Jim, it's been a pleasure working with you for the last 20-some years, and I hope you don't fail retirement. I hope you're successful in that goal. Everybody on the line, I look forward to talking to you in future calls..

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