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

Morris Ajzenman - Griffin Securities, Inc., Research Division Stephen Altebrando - Sidoti & Company, LLC Robert Hoffman.

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2014 Second Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, November 19, 2013, and is available on the company's website at www.daktronics.com. [Operator Instructions] I would now like to turn the conference over to Ms.

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

Thank you, Kevin. Good morning, everyone. Thank you for participating in our second quarter and earnings conference call.

I would like to review our disclosures cautioning investors and participants that in addition to statements of historical facts, we will be discussing forward-looking statements, reflecting our expectation 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 condition, changes in the 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 would like to introduce Reece Kurtenbach, our President and CEO, for a few comments..

Thanks, Sheila, and welcome, everyone, to the call. Overall, we had a great second quarter with quarter-over-quarter increases in both orders and revenues. While our top line was higher, our gross profit as a percent of revenue was lower than last year at this time. Most of the differences in gross profit were due to project mix.

We had a higher percentage of large video projects, which tend have to have a lower margin. However, warranty can still be a challenge, and we remain committed to reducing these expenses over the long term by continued investment in reliability and quality in both our product designs and our production processes.

Our business tends to be cyclical and the summer months are our busiest. Our teams did a great job in handling this peak volume again this year. And I would like to thank all of our employees, suppliers and service partners for their hard work over the last quarter. We were successful due to their efforts.

As I said, our business is cyclical and our third quarter is typically our lowest in revenue. This year, our backlog entering the period is slightly higher than last year, and our pipeline continues to be strong.

Because of this, we believe we will see year-over-year growth in the second half of fiscal 2014, and we continue to have a positive outlook for the year as a whole. Increases in order volume were mainly in our large video projects. We had significant orders in both the Sports and Commercial segments worldwide.

However, we continue to see strong activity in our billboard and Transportation businesses as well. We are receiving billboard orders for new locations, as well as refurbishment or replacement of existing displays. And the release of our full-color product for transportation use is a significant factor in our increases in this business segment.

I would once again point out that the year-over-year comparison for Transportation is down because of a significant order in FY 2013 for the new Tom Bradley terminal in L.A., even though the core business of what we call Transportation continues to grow. Our markets are still very dynamic and competitive.

We believe we will need to keep a strong focus on both product development and process improvement to be successful over the long-term. In product development, we remained focus on leveraging our investments through the creation of product platforms for both display and control systems.

As an example, in Q1, we released our new design of 15-millimeter outdoor display systems using surface mount LEDs. And in Q2, we shipped our first derivative of this design, a 10-millimeter product, and we are working on higher resolutions as well.

On the process side, we continue to follow Lean principles of continuous improvement for our production and business processes. Looking forward, we are seeing increased activity in our major segments of Sports, Commercial and Transportation business worldwide, and we are optimistic of our future business. Some comments on specific segments.

In our Commercial business, we see orders in billboard picking up as we move through this calendar year, and we now feel this will extend into calendar 2014. We also have a strong pipeline in large projects area of this business, and we see this area continuing to grow through the fiscal year.

Overall, we are expecting modest year-over-year growth in Commercial in our 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.

These customers tend to upgrade after about 10 years, and the trend is to install larger systems capable of high-definition video, as well as dynamic digital advertising. The largest systems are for the major league stadiums and arenas in the U.S., but this drives interest through all other areas of sport and entertainment, both in the U.S.

and internationally. This holds true in our High School Sports business as well, even though we saw order and revenue decline for this specific market in the year-over-year comparison. We believe this is due to timing of large video systems and not a long-term trend. We see continued growth opportunities in each of these markets.

Our third-party advertising business continues to be strong internationally.

We see an increasing shift to digital as technology prices have come down, and the expansion of our product line through the acquisition in Belgium that we completed in Q1 has increased our ability to deliver a complete solution to these customers, and we continue to win orders and install projects worldwide.

In general, we believe there's a lot of growth potential in our International business. Our Transportation is still -- business is still strong, and we see the core business to continue to grow even though a year-over-year comparison will be skewed due to the LAX project mentioned earlier. Overall, we are optimistic about our future.

We continue to focus on our internal goals of improving operating margin. We are the world leader in many of our markets. We have great products, great people, and we continue to make progress in reducing cost through eliminating waste and improving our processes. And this work is 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. I'll turn it over to Sheila..

Thank you, Reece. We were pleased to reach a level of sales that is the highest for a quarter since our fiscal year 2009. Our plans, processes, service partners and suppliers and people helped us to convert $161 million of sales from the $167 million of backlog we had going into this quarter.

This equated to a sales increase of 7.9% for the second quarter of fiscal 2014, as compared to the second quarter of fiscal 2013. International, Commercial and Live Events sales all increased, primarily due to the increase in the large video project orders we were able to secure, build and deliver.

Transportation and Schools and Theatres sales decreased as compared to the same quarter last year. Transportation sales reduction is a result of approximately $5 million of revenue we realized last year to finish up a procurement contract during the same timeframe without a similar type of project this quarter.

Schools and Theatres sales declined as some large video project displays slipped into calendar 2014, and the projects we won were smaller projects compared to last year, and therefore, lower average sales prices were realized per order. We continue to estimate a modest growth rate overall for fiscal 2014.

While our second half has historically been lower in sales and profitability than the first half of the year, because of the sports and construction seasonality we do have more optimism in this year's second half than last year.

We continue to see strong interest from our customers and large projects in the marketplace and Live Events, International and Commercial business units, as Reece mentioned.

With the increase in backlog as compared to last year, the current booked project delivery schedules and potential new orders in the third quarter, which we anticipate some converting into sales, we estimate revenues to trend modestly higher as compared to last year's third quarter. Last year, we recognized $111 million of sales during that quarter.

Gross profit in the second quarter was 26.8% compared to 28.2% of the second quarter of last year. We anticipated a decrease in gross margin percent compared to last year due to the sales mix we had going into the quarter.

As we work on larger million-dollar-plus contracts, the margin earned as a percent of sales is lower than our standard video displays and scoring systems.

Thus, due to the competitive environment, as well as the amount of installation work that's included in these type of projects, last year's second quarter had a higher volumes of standard orders as compared to this year's second quarter, where we had more larger contracts work done.

Warranty was 3.3% of sales, which is slightly higher than the same period last year of 3%. We continue to focus on lowering warranty issues by investing in quality through process improvement, supply chain management and product design.

Looking ahead, gross profit for the third quarter is expected to be similar to that as of the third quarter of last year and less than the second quarter of this year. During this third quarter, we have a number of holidays and utilize the plant and infrastructure less, causing the projected decline in margin.

Operating expenses were 16% of sales compared to 17% of sales in the second quarter of fiscal 2013. In dollars, operating expenses increased 1% from last year during the same quarter.

We plan to continue to make necessary investments in product development, process improvements and our IT infrastructure while managing costs to allow us to continue to grow profitably.

For fiscal 2014, we predict a slight increase in operating expenses in dollars to support business growth, but are working to hold expenses flat to down as a percentage of sales for the total year.

Our tax rate for the quarter was 34.1% compared to 35% last year, and this lower rate is reflective of the benefits we received from the research and development credit, which is -- had not been reinstated last year at this same time. We are forecasting our effective tax rate for the fiscal 2014 to be approximately in the 35% range.

However, that rate can fluctuate depending on which tax jurisdiction sales are procured in the world.

With that, operator, could you please open the line for questions?.

[Operator Instructions] Our first question comes from Morris Ajzenman with Griffin Securities..

Just a follow-up. Sheila, on your kind of guidance for the third quarter, revenue is up modestly, I think you said, year-over-year and down sequentially, which is not a surprise being the second quarter is a seasonally high quarter.

But if you count on gross margins -- I'm looking at the third quarter of last year, I think it's at 24.4%, and I think you said it will be similar to last year. I'm just curious, shouldn't we see some leveraging with modest top line growth rates? There's been a control low warranty expense that's come into play here.

But shouldn't this still be an improvement in the gross margins going forward into this current quarter?.

As discussed, there it has to do with mix, as well as in our utilization of the factory. So yes, we will have some uptick because of the revenue uptick. But conservatively, we feel we'll be in that area because of the sales mix going into the quarter..

All right.

And you said utilization -- is there any reason to believe utilization in this third quarter is going to be significantly different than last year's third quarter?.

It shouldn't be significantly different..

Okay. And just give me a little bit more color on the warranty expense, 3.3% in this most recent quarter.

Can you just refresh what it was the previous quarter? And you still target at getting that, the 150, 200 basis points?.

We do and are working towards reducing our warranty as a percent of sales, and our target is that 2% or so. I don't have last quarter's right with me here, but we have and want to reduce that from the 3.3% that we experienced this quarter..

[Operator Instructions] Our next question comes from Brad Mas with Needham..

Brad filling in for Jim.

Just first regarding the billboard portion of the Commercial segment, I was wondering if you could provide any revenue or bookings numbers?.

For the quarter in revenue, we had about $12 million of sales..

Okay.

And then orders?.

Orders were -- one moment. Were about $11 million..

Okay. And then with the International segment, there's obviously good growth.

Do you think it's sustainable going forward? And where -- like what segments were you seeing the strength coming from internationally?.

We believe that the growth is sustainable internationally, and the biggest segments that we see interest in is the large sports venues, these large commercial spectaculars and third-party advertising or billboard..

Okay. And then just lastly, Transportation. We obviously saw decent order activity.

Do you have any visibility into the pipeline or any opportunities in the Transportation segment?.

We do believe that our Transportation segment, the core business, will continue to grow. And so we're optimistic as we go into the second half that the order and revenue would increase..

Our next question comes from Steve Altebrando with Sidoti & Company..

In the Schools and Theatres, the release mentions ASPs being down a bit.

Is that a function of mix or pricing, competitive pricing?.

We believe that's a part of just the mix. We feel we were selling smaller display units compared to last year..

Okay. And then the Live Events segment mentioned, I think, maybe 5 -- I think it was 5 orders for $9 million or so. It sounds like a relatively small order dollar amount per order.

Are those nonprofessional arenas or ancillary products?.

What we see in the Live Events business is that orders in Q2 and maybe even part of Q3 tend to be add-ons, not complete system orders. And what we find is that in the spring months, as we move into baseball, and then the fall season is where we get the larger full-system orders..

Okay, that's helpful. And then just lastly, and I know you touched on it on the script a bit.

But if you could expand on kind of the bidding activity you're seeing in the Live Events segment, just the general interest that you're seeing, whether it feels like it's picking up as we go into fiscal '15?.

We've seen much higher activity this year, especially in large outdoor stadiums, than in the previous, I would say, 2 years. And we believe that, that will continue into the fall, certainly..

Our next question comes from Morris Ajzenman with Griffin Securities..

Sheila, you had mentioned in your prepared remarks -- and you kind of ran through it quickly. I'm not sure if I got it right.

Transportation, did you say $17.6 million last year, $5 million was from the LAX? Or did I misread you on that?.

Actually, $5 million was from another procurement project. LAX contributed to our orders through the second quarter of last year, and we had some revenue realized in the second quarter from LAX.

But we had a large procurement project that we finished up during the first half of last year, which that we didn't have a repeat-type project this first half of the year..

Our next question comes from Robert Hoffman with Princeton OPportunity Partners..

It seems, especially for those of us who are on the East Coast, that the proliferation of transportation signs, and it's nice to see the Vanguard label on all of these things and especially here in New Jersey.

Do you have any sense of -- I get the impression that the highways that put them on start with X and then end up with 3x X over the period of a number of years.

Do you have any sense of the market opportunity? I mean, are there big competitors that are taking share in other places? Or is it something that you see you have 5 to 10 years of pretty dramatic growth opportunity when you can see the results of what good signage does for traffic flow? In other words, can you give us any sense of long-term market opportunity in Transportation?.

So in the traffic business, there's especially the over-the-road signage that I think you're referencing in New Jersey and some of the other states. I believe, as you're mentioning, the core technology is seen as beneficial.

It's expensive to build highways, and putting in signage like we provide helps makes the usage of your existing highways more efficient. So we see that, that's a continuing part of a highway project going forward.

However, the procurement progress -- process is done through either a state or maybe a county or city level, and there is a heavy influence of federal dollars that often greenlight these projects.

And it's difficult to project from year-to-year how the federal government will choose to lease or not certain funds, which puts a difficulty in estimating future business in the Transportation area..

How about internationally? Are you seeing the same sort of interest in International appearances?.

As I said before, currently, our focus in International is in these other segments, and we haven't -- the selling cycle in Transportation tends to be quite long, as you need to work to get qualified by different governmental agencies. And we haven't taken that approach yet in our International business.

Not to say that we haven't done some transportation type of projects, but not these large procurement type of projects for over-the-road signage..

But are there -- are they being -- so other people are out there doing those? Or is the international market [indiscernible] the U.S.?.

Yes, there are definitely companies internationally that are participating in those markets. And you will see similar types of displays if you travel the major cities and highways around the world..

And I'm not showing any further questions at this time. I'd like to turn the conference back to our hosts for closing remarks..

I will answer Morris' question earlier about warranty as a percentage of sales for the first quarter. We also were at about 3.3% for the first quarter of this fiscal year, so we've trended that way throughout the whole first half..

Thank you, Sheila. I think that concludes our comments. We appreciate everybody's time and attention this morning, and we hope you have a great Thanksgiving holiday..

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day..