Sheila Mae Anderson - Chief Financial Officer Reece Kurtenbach - President, Chief Executive Officer, Director.

Jim Ricchiuti - Needham & Company Morris Ajzenman - Griffin Securities Steve Altebrando - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2014 third quarter earnings results conference call. As a reminder, this conference is being recorded today, Tuesday, February 18, 2014, and is available on the company's website at www.daktronics.com. (Operator Instructions).

I would now like to turn the conference over to our host for today, Ms. Sheila Anderson, Chief Financial Officer for Daktronics for introductory remarks. Please go ahead, ma'am..

Thank you, operator. Good morning, everyone. Thank you for participating in our third quarter 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 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 you, Sheila. Good morning, everyone. We had a positive third quarter with quarter-over-quarter increases in both orders and revenues. It was nice to see the continued upward trend in our top line but we were really pleased to see the strong order performance.

This backlog will set us up for a positive Q4 and we believe modest growth for the fiscal year, overall. With this said, our gross profit is lower this fiscal year, mainly due to project mix as much as this year has been with large video projects, which tend to have lower margins.

We continue to focus on reducing our cost to fulfill on our project and standard order work through ongoing investments in reliability, quality and process improvement through the entire value stream.

Our business is cyclical with our Q3 typically being our weakest quarter for sales influenced by the holiday season in most of our markets, as well as natural variations in our different businesses. We are positioned for a strong Q4 as our backlog is almost $170 million or about 13% increase over last year.

Our orders in Q3 were mainly from our large sports businesses as well as our third-party advertising business, sometimes referred to as out-of-home.

Many of these orders are from existing customers and we receive repeat business when these customers have a positive experience with our people, our products and individual interactions, which accumulate over time.

I would like to thank the entire Daktronics team for their hard work over the years, which put us in a position for these recent successes. We continue to see strong activity in our different market segments in North America, as well as other regions of the world.

The strongest segments are our large sports venues, third-party advertising and spectaculars. Our new stadium construction is down from five years ago. The equipment in many existing facilities was installed about 10 years ago, which is a typical point when our customers choose to upgrade their systems.

As an example, the three NFL orders in Q3 were from the Cleveland Browns, Carolina Panthers and Jacksonville Jaguars, all upgrades of existing systems. This replacement trend also exists in our billboard business, with continued orders for new locations as well as increasingly refurbishment or replacement of existing digital displays.

While these are the strongest segments, we continue to have a positive outlook for our transportation, on premise and sports businesses. Overall 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. On the process side, we continue to follow lean principles of continuous improvement for both our production and business processes.

We believe is important to prioritize our activities on the highest value areas through knowledge and understanding of our markets and careful planning between our teams.

As an example, with the order activity and strong backlog, we are making targeted investments in factory capacity and flexibility to put us in a position to be successful in our fiscal year 2013. With that, I will turn it back to Sheila for some detail financial comments..

During the quarter, we converted $115 million dollars of sales from some of the third quarter orders and from the $132 million backlog going into the quarter. This equated to a sales increase of about 4% for the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013.

International, commercial and live events sales all increased, primarily due to the increase in large video project orders we were able to secure, build and deliver. Transportation and Schools and Theaters sales decreased as compared to the same quarter last year.

Transportation sales reduction is a result of approximately $10 million of revenue realized last year as we were building and starting the installation of the Los Angeles Airport project we have discussed in the past. A great project for us in the business unit but difficult to find a repeat order in the Transportation market.

Schools and Theaters sales declined as some large video display projects continued to move out or be delayed into calendar 2014. The sales also have been concentrated on smaller projects as compared to last year and therefore lower average sales price per order were realized during the quarter.

Our order volume for the third quarter is the highest Daktronics has reached in the same quarter, the third quarter. Overall order volume year-to-date is up by 14%.

As Reece mentioned, the order increase was driven by our multimillion dollar orders in three NFL stadiums, an increase in order volume in our third-party advertising segment and increased orders on our spectacular project in the commercial unit. This order volume will help us finish the year with modest sales growth rate overall for fiscal 2014.

While our second half of the fiscal year has historically been lower in sales and profitability than the first half of the year because of the sports and construction seasonality in our business, we were able to increase our operating margin in the third quarter of fiscal 2014 as compared to last year by $2.5 million.

With the increase in backlog as compared to last year and the current production and delivery schedules, we estimate revenues to be higher than last year's fourth quarter of $124 million. We continue to see strong interest from our customers in large projects in the marketplace in the business units of Live Events, International and Commercial.

And Transportation, Schools and Theaters demand appears to be flat despite increases. Gross profit in the third quarter was 25.2% compared to 24.4% in the third quarter of last year. The increase was primarily due to increased manufacturing utilization and sales mix.

In the fourth quarter, we anticipate gross profit to increase a couple of margin points, as compared to last year's fourth quarter because of volume, sales mix and a warranty issue that occurred in last year's fourth quarter, we do not expect to recur this year.

Larger multimillion dollar contracts generally have lower margins than standard video displays and scoring systems due to the competitive environment, as well as the amount of installation, contracted work included in these types of projects.

This will be offset by manufacturing utilization as we are able to produce more through our plants' cost infrastructure over the coming quarters. Warranty expense, year-to-date, as a percentage of sales was 2.9%, which is slightly higher than same period last year at 2.7%.

We continue to focus on lowering warranty issues by investing in quality initiatives including manufacturing process improvements, supply chain management and robust product design efforts. Operating expenses were 22% of sales during the quarter, compared to 23.5% of sales in the third quarter of fiscal 2013.

In dollars, operating expenses decreased slightly from last year's the same quarter, primarily due to the timing of third-party commissions paid last year on an international order. We, from time to time, use third-party on various locations around the world to expand sales opportunities.

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

We continue to work internally on all fronts to improve operating profitability, company initiatives include continued focus on reducing warranty expenses by investing in supplier quality program, volume reliability equipment and manufacturing process control techniques.

In addition, we continue to work on operational efficiencies throughout all areas of the business to reduce costs and improve services to our customers. Our tax rate for the quarter was 19.3% compared to a benefit last year of 119.6%.

Last year, we received the benefit during the third quarter for a retroactive restatement of the research and development credit and for a tax protection for a special dividend paid during last year's third quarter. During the third quarter of fiscal 2014, we received benefits from stock option deductions and return to provision true-ups.

We are forecasting our effective tax rate for fiscal 2014 to be in the 34% to 35% range overall. However that rate can fluctuate depending on the tax jurisdiction sales realized in around the world. We continue to invest in manufacturing equipment for new product introductions and efficiency improvements.

We invested in our IT infrastructure to maintain our system. And we invest in demo equipment for our sales initiatives. As the news release stated, we are committed to expand manufacturing facility by 30,000 square feet and estimate the expansion to cost approximately $4 million.

Most of this capital will be part of our fiscal 2015 capital expenditures. For fiscal 2014, we estimate about $16 million in capital expenditures to support our business growth and initiatives.

Reece, you have further comments?.

Looking forward, we are seeing increased activity in our major segments of sports, commercial and transportation businesses worldwide and are optimistic on our future business. Maybe some comments about these specific segments.

Our commercial business, we have seen orders in billboard pick up as we move through calendar year 2013 and we feel this will continue through calendar 2014. We also have a strong pipeline in the large projects area of our Commercial business and see this is a continued growth area as we move into next fiscal year.

Overall, we are expecting modest year-over-year growth in Commercial in FY 2015. 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 in video through all other areas of sports 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 our current fiscal year. We believe this is due to the timing of large video systems and not a long-term trend. Our third-party advertising business continues to be strong internationally.

We see an increasing shift to digital as prices have come down. The expansion of our product line through the acquisition in Belgium that we completed in Q1 of 2014 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 is a lot of growth potential in our International business. Our transportation business is still strong and we see the core business continue to grow even though the year-over-year comparison is down due to the LAX projects Sheila mentioned earlier. Overall we are optimistic about the 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 and great people and we continue to make progress in reducing cost through eliminating waste and process improvement and this work is still ongoing.

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

Yes, sir. (Operator Instructions). It looks like our first phone question will come from the line of Jim Ricchiuti with Needham & Company. Please go ahead. Your line is open..

Hi. Good morning.

First question, just with respect to the NFL projects, my understanding is that the NFL, the league has some sort of a CapEx plan called G4 which I guess supports upgrades of video and audio projects and I am just wondering, are you seeing any activity associated with hits process with the Cleveland Browns project? How do you see that going forward?.

Well, we see that each one of these venues tends to be different. So in some venues, a government agency is the owner of the facility while the team is a lessor of the facility and sometimes that relationship is different.

It's a blend of venue owner money that goes into these projects versus team money can be different based on the project and the location. So I don't believe there is a hard rule of whether it's the NFL CapEx money that goes into these projects or not. And most of this work is a blend of display upgrade as well as further stadium improvements.

So I don't believe there are many instances of finances drawn or financing done just for the display system..

Got it, and just maybe staying on topic on Live Events.

Can you talk a little bit of the activity you are seeing for the upcoming MLB season in terms of the activity?.

Most of the activity we saw at major league has been in the NFL and MLB has been a little quieter this year, even though the same trends exist when they go to replay, really upgrading the overall features and capacity of their system..

Okay and maybe one final question. I will jump back in the queue.

If we think about Q4 and the kind of sequential increase we might see in revenues, would it be more in line with what we saw last year, low double-digit? Is there any color you can provide on that?.

We are estimating a low double-digit increase over the $124 million we had last year similar to the FY '13 year..

Got it. Thanks very much..

Thank you and our next question will come from Morris Ajzenman with Griffin Securities. Please go ahead. Your line is now open..

Can you give us a little color on digital billboards during this quarter as far as the revenue number versus last year? will what you put on the there.

I have ordered numbers available for the year? I am just wondering what else you can spin that you can put on that?.

So I have order numbers available. For the year, we are up in digital billboard, we are at about $41 million of orders compared to $36 million last year at the same time..

Okay and you mentioned a couple of new locations. I know in previous calls you talked about this year being a replacement cycle.

Is the majority of the business again replacements or is the new site location picking up since then?.

I would say, Morris, that the majority of the business is still new locations but we are seeing that the amount of spend on replacement or refurbishing of existing sites continues to grow and we believe that is a function of the ramp up, seven to 10 years ago of digital billboards that it started slower and then it moved more quickly over time..

Can you give us an approximation of the $41 million? What percent would be new location versus refurbishing, just roughly?.

I don't have that number, unless Sheila, you got an indication?.

And I don't have that available either..

Okay, and the last thing on the transportation, LAX.

Refresh me, fiscal fourth quarter last year, was LAX still a large contributor?.

It was..

And if so, by how much?.

About another thing $10 million that was sold. That was about the $20 million project. So we were finishing it up in the fourth and a little bit in the first quarter of the fiscal year..

Okay, so we had another difficult $10 million comparison fourth quarter, year-over-year?.

For transportation, yes..

For Transportation, yes. And very last thing and I will hop back in queue.

Anything you can say about what's going on in LED?.

In LED in general, we see that as the go to technology for outdoor in high ambient light environments. The LED manufacturers are all chasing the general purpose lighting market in various lighting niches. So they continue to invest in the base technology of which we are a beneficiary as the products that we use continue to get better and brighter..

And was there any additional traction in this most recent quarter on in the coming quarter with LED to you guys?.

When you are saying additional traction, you mean in the base technology or could you give some clarification?.

Well, I am just trying to get a handle on it, is this contributing more revenue year-over-year on an ongoing basis now?.

Our technology has been all LED for, I would say, at least four years now, maybe longer..

Yes, actually.

I am confused more, actually what I am referring to when I said LED, I meant to say on the outside of Vegas in the casino you have the --?.

Like architectural lighting?.

I am sorry. That's what I meant to say. I meant to say architectural lighting and I said LED. I take that back. I am specifically referring to architectural lighting. I was brain dead there for a moment. I apologize..

No, that's helpful to provide some more clarification. We see that as an ongoing growth area for Daktronics. An example of a project we did recently is Wembley Stadium over in London. They have been Wembley Way where the main tube station comes out and people walk up to the stadium. We did a large atrium display that targets that audience as it comes.

I saw it in January. It looks beautiful. It's very nice. We see continued interest in projects like that in our pipeline..

I guess what I really wanted to ask is in architectural lighting, can you bring out revenues for first nine months versus last year? Do you break that out at all?.

We don't break that out currently, Morris..

Okay. Thank you..

Thank you..

(Operator Instructions) And it looks like our next one question comes from the line of Steve Altebrando with Sidoti & Company. Please go ahead. Your line is open..

Good morning. It doesn't sound like the backlog includes anything material in the baseball market.

Can you characterize how activity was this year? Is there some projects out there that you suspect slipped into next year?.

Yes, Steve. Any facility that their equipment starts to age, if they choose to not upgrade in this current year for this current season, they become a candidate for next season and so it wasn't that there were a number of MLB projects that we just didn't win or were there. It was just a quiet year for MLB..

Okay.

When does the activity start getting underway for next year's NFL? In other words, what hit your backlog this year at this time?.

Yes, the closer you get to 120 day window, the less likely it is that they will be successful on really the size of the systems that they are putting into the NFL. So as you get four months before the preseason games, that's when that window starts to close..

Okay, and it sounds like the warranty, the release mentioned the warranty coming down in the quarter.

How much area was that and is there further upside for you guys there?.

We continue to work on warranty through business that Reece mentioned earlier. Our warranty through the quarter was 1.8% compared to year-to-date, we are at about 2.5%. So it was helpful for the quarter on the warranty side..

Okay and then lastly, excluding the mix factors if you could characterize what you think of the margin of the backlog, it would be helpful..

We don't have that necessarily but the large projects do, as we have talked about historically, have a lower gross margins due to the installation factors and that's just the competitive nature of those projects and we have the large projects, like Reece mentioned, in our backlog and we will be working to those in Q4 and in to some more months..

Okay and maybe I should clarify it a bit.

If you could maybe characterize the pricing or the competitive environment?.

While these markets still are competitive, we are not seen a dramatic shift in pricing from last year, if that's closer to the mark to your question..

Yes, it is. Okay. Thank you..

Thank you. And presenters, at this time, it looks like there are no additional questioners in the queue. I would like to turn the program back over to management for any additional or closing remarks..

We thank everybody for attending the call today and we appreciate the questions. And there is no further questions, we wish you all a good day and a happy spring..

Thank you, presenters, and thank you, ladies and gentlemen. This does conclude today's call. Than you for your participation and have a wonderful day. Attendees, you may now all disconnect..