Sheila Anderson - CFO Reece Kurtenbach - Chairman, President & CEO.

Brad Mas - Needham & Company Morris Ajzenman - Griffin Securities.

Welcome to the Daktronics Fiscal Year 2015 Third Quarter Earnings Results Conference Call. [Operator Instructions]. I would now like to turn the conference call over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics for some introductory remarks. Please go, Sheila..

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 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 condition, changes in the competitive and market landscape, management of growth, timing and magnitude of future contracts, fluctuations on 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.

Please note that fiscal 2015 is a 53-week year and fiscal 2014 was a 52-week year. The extra week of fiscal 2015 fell within our first quarter resulting in a 14 week quarter versus 13 week quarter comparison. Year-to-date figures for the third quarter include 40 weeks of business versus 39-weeks year-to-date comparison.

At this time, I would like to introduce Reece Kurtenbach, our Chairman, President and CEO for a few comments..

Thank you, Sheila. Good morning everyone on the line. As discussed in the release the third quarter of the fiscal year is historically a slower quarter in profitability due to the seasonal nature of many of our businesses.

While we plan for lower revenue and profitability in our Q3 it is not our attention to have an operating loss for the quarter and obviously we are not pleased with these results. We do believe that our overall our business is growing and in the quarter we continued our work to position Daktronics for ongoing success.

In response to our Q2 we enhanced our forecasting tools and planning structures and made progress to be better position to match our demand to our capacity to optimize revenue and profit levels during our peaks seasons.

We also laid the foundation to increase our overall module production capacity and this work we will carry through Q4 to begin operation early in our Q1. We believe these two changes as well as other improvements will set us up for future success.

Finally while the projects did not book in the third quarter we have been awarded two significant awards and are working through the detailed contract negotiation and project schedules. We expect both full [ph] quarters during our fourth quarter.

The first project is for the Atlanta Falcons, we were selected to provide the systems for the new premier stadium including a unique feature called the Halo display. This stadium is open for the 2017 season therefore we won't recognize tails until likely late in our FY 2016 and early FY 2017. The second project is for [inaudible].

We will be providing a series of displays in their railway stations across Switzerland for use in both way finding and advertising applications. These systems will be delivered through a framework agreement with a roll out over the next 6 to 12 months. Orders in revenue will be recognized on a station by station basis.

Both projects are a testament of the trust our customers have that we will meet their needs through our engineering, production and delivery capabilities. For more details on the quarterly financial results I will turn it back to Sheila..

Thank you, Reece. Built for the third quarter of fiscal 2015 increased slightly to a 180 million increased as compared to a 150 million last year during the same quarter. The makeup was within the business units reflects the variability of the sales mix from quarter-to-quarter as I will further describe.

International sales was the increase as sales in that unit were up $8 million. This increase is due to our prior order success in the Australian market as we realized sales in both the sports and out of home areas. For reference out of home or OOH is an advertising industry term for our advertising medium that reach consumers outside of their home.

We include our digital billboard, on premise digital and street furniture solutions when we use this term. We saw success in other out of home applications and other global regions as well during the last quarter.

Transpiration sales were down for the quarter as compared to last year by about $4 million because of a general lag in the timing of orders and lower backlog going into the third quarter as compared to last year at the same time.

We were pleased with order performance during the third quarter and see this as evidence of opening market opportunities and the transportation unit. Commercial sales were down in our on premise of spectacular applications up by an increase in sales in our digital billboard segment as compared to last year's third quarter.

High School Park and Recreation and Live Event sales were relatively flat quarter-over-quarter. Gross profit for the third quarter of fiscal 2015 was 21.2% as compared to 25.2% on the third quarter of last year.

Gross profit decreased as compared to last year's third quarter for increases in salaries and benefits in our manufacturing and service delivery areas and for the additional cost of the data display operations.

While data display has negatively impacted our operating margin a little over $1 million on a year-to-date basis we believe the integration is going well and that this acquisition will set ourselves up for long term success in the transportation marketplace.

We will continue this integration work for the coming couple of quarters likely at a slower pace. Operating expenses for the quarter were $26.6 million as compared to $25.5 million last year. Increases in operating expenses are primarily due to personnel related expenses and the additional cost infrastructure of the acquisition.

Looking ahead to the remaining fiscal year, with our current backlog, estimated customer delivery schedule and predicted order bookings, we estimate sales in the fourth quarter to be up as compared to last year.

Gross profits is expected to be lower than last year's fourth quarter due to current projected sales mix and estimated fixed operational cost.

We anticipate operating expenses to be higher as compared to the fourth quarter of fiscal 2014 for the increases in salaries and related cost but comparable to the ratio of expense to sales of the last year's fourth quarter.

We benefited from the United States research and development reinstatement during the third quarter which allowed for a tax benefit of the third quarter. The research and development credit was reinstated only for calendar year 2014 at this point, so we will forecast an effective tax rate of approximately 36% for future periods.

As we have previously discussed our tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income. Our balance sheet remained strong and we have generated free cash flow this fiscal year to-date. Our cash and marketable securities position was up $68 million at the end of the quarter.

We’re projecting capital expenditures to be $23 million for fiscal 2015 down a bit from our previous estimates of 25 million. Looking a bit into our earlier estimates for fiscal 2016 we believe we will have similar capital needs for continued plant equipment for a new or replacement production and for capacity.

With that I will turn it back Reece for additional comments on our outlook..

Thanks, Sheila. Our third quarter was not profitable we believe this to be of short term nature. We have been successful in the professional baseball stadium market and are working this spring on delivering these systems. This has been the highest activity level in this market in the past 5 or 6 years.

To-date we have booked over 30 million of orders this fiscal year relating to baseball alone that’s up from just under 10 million for all fiscal 2014. We continue to see opportunities in the large sports business in all sales segments of college, university and professional sports.

While it's a bit early in the order cycle for our high schools as we’re just entering the selling season for this market. We see indications of strong demand for larger video display systems. In addition we continue to provide our customers with on premise messaging center solutions to assist with the schools in communication to students and parents.

We believe both of these trends will continue. A number of large video spectacular projects such as in Time Square, Las Vegas are being quoted in our commercial segment.

Digital billboards business also remain strong for new locations with both our existing as well as new customers and the replacement of existing digital displays in our customers' inventories.

We continue to have a positive outlook for our commercial out of home and on premise businesses even while orders on a year-to-date basis have been down from last year. Order timing once again has an impact here.

In our international business we continue to see strong interest in sports, spectaculars and through party advertising or digital out of home as Sheila mentioned. We believe this will continue to be a growth area for Daktronics with this said however the current strengthening of the U.S.

dollar as a trend we continue to watch closely as it impacts the near term competitive pricing of our products. While we have had the headwinds of the operating structure in Ireland this past quarter and we may experience this for another quarter or two, we’re pleased with our immigration work to-date.

As with most acquisitions there is a period of time when the staff focuses on transition related activity which can distract from selling efforts.

We’re seeing a number of opportunities and strong activity in the transportation segment in Europe and the Middle-East areas with the infrastructure we acquired we’re positioned to capture and deliver on this work in the coming year and beyond.

As discussed in the past our year-over-year comparisons in sales were relatively flat in the transportation business unit but we see the core businesses continuing to grow.

Temporary funding for state departments of transportation and the general feeling that federal funding will pass Congress in May seems to have provided some movement of projects in this market and we expect modest pickup in the coming quarters for orders.

We’re experiencing some cost pressure in wages and benefits that has and will have impact on our cost in the coming quarters. While there is some regional and broad [ph] variations this is a general trend in South Dakota, in the U.S. and many international areas.

We continue to make selected capital investments to support manufacturing operations for new product lines and automation as we size our capacity to the overall market and we expect we will continue selected investments through fiscal 2016.

Work also continues on forecasted and [inaudible] tools for the upcoming busy season over the summer and fall to maximize profitability as we continue to grow volumes and revenue. We continue to see ways to improve future profitability although we do not believe that it will be the smooth path as we focus on improving operating margin year-over-year.

Seasonal variability along with the influence of large projects will continue to affect individual orders in fiscal years. The good news is our markets are growing and we have products and solutions to meet industry demand.

On the cost side we focus on continuous improvement methodologies and are manufacturing in services area to improve efficiencies which drive cost savings and improved experience for our customers.

We prioritize our improvement in growth strategies as well as our product development initiatives to focus on the areas we feel will bring the highest value to the market.

We continue our strategy for the creation and maintenance of product platforms for both display and control systems to achieve continued production improvements while enhancing value for our customers. We have a broad range of offerings that are bringing to market higher resolutions surface mount and through whole LED products.

Overall our markets are dynamic and strong, we continue to live in a competitive marketplace we remain optimistic about the future of sales opportunities and expansion in our business. With that I would ask the operator to please open it up for questions..

[Operator Instructions]. We have a question from Brad Mas of Needham & Company. Your line is open..

Just first can you give the contribution from data display?.

Sure. For the year-to-date we have had a loss of little over a $1 million for data display but we have seen about 3 million of sales, 4 million of sales for the year since we acquired that in August of 2014..

Okay and then with the rail order [ph] with SPB, can you give any more information of the size and significance, was that leveraging the data display acquisition?.

That order was worked on and awarded before we actually completed the acquisition for data display and so the utilization of that factory will be minimal to deliver on that order. The overall size of the project could exceed even $8 billion..

Okay.

Switching to Live Events, is it too early to get a read on the fall sports order pipeline both for college and professionally?.

In last year's that we have talked some of those orders book in January and maybe even February but it appears the cycle is a little later in the year and so while we see a lot of activity the awards are not in the same level, so that will continue through Q4 and possible even into May..

Okay. And then with the upgrade at Citi Field that was announced, I mean this kind of surprise just because field is built I guess five years ago I think.

Is that unusual or are you guys trying to see some compressed upgrade cycles in these big arenas?.

Are you talking about Citi Field, the Mets upgrade?.

Yes..

We have seen a number of our customers that even though the system is still running, they have gone in and make targeted improvements to different areas within their stadium and so while the Mets has as you said installed five years ago, it's not unusual to see an equipment upgrade midway through the useful life.

In this case they combine that with something's outside of the stadium as well..

Okay.

And then digital billboard, can you guys give revenues and orders?.

Sure. For the third quarter orders were 16.3 million versus 20.9 million last year. Billboard revenue was 15.6 million versus 14.9 million last year for the third quarter..

And then do you guys -- are you guys able to size that between upgrades and new installations?.

We don’t have that information at this point but they are combination..

Okay and then just last one for me, can you talk a little bit about pricing across the major segments and if you’re seeing impact from your competitors overseas due to the stronger dollar?.

Certainly the pricing continues to be a competitive marketplace and we haven't seen maybe a lot of release in pricing but we haven't seen drastic changes either.

I think it's possible that pricing might be impacted by the current strong dollar but we maybe are kind of early in that cycle to see what the indication of how significant or what the magnitude of that would be..

[Operator Instructions]. The next question is from Morris Ajzenman of Griffin Securities. Your line is open..

You gave, say a round number on that swiss railroad backlog number.

Can you give us some sort of range of what the [inaudible] backlog number would look like?.

We believe that will be over 30 million in size..

And has any of that been recognized in the backlog in the past, going forward?.

None of that, neither order is recognized in our backlog..

Okay so again just a glance on the order, will it be recognized or what time it will be recognized in this current fourth quarter?.

We will recognize the order at the time it works and then the revenue will be recognized likely late in our 2016 and very early in our 2017 for the Falcons. Our SPB, that’s a framework agreement so it would be order and revenue on a station by station basis.

We think with the current timing it would be complete within the next 12 months but that’s somewhat determined by the customer as well..

And getting back to gross margins, again having difficult at this last couple of quarters this quarter being 21.2% I think is the number, do you envision getting back to 25% - 27% sometime over next handful of quarters.

I think the next quarter, this current quarter you are suggesting it being difficult but you see rebound in the near quarters beyond this current quarter getting back to 25% to 27%?.

I certainly think it's possible to bring -- we fully expect our gross profit will go up, whether it achieves a 25% we’re very hopeful. There is a number of factors, you’ve got the U.S.

dollars, you’ve got the response competitive pressures, we also have the number of cost saving product process initiatives coming into play so it's difficult to predict that exactly, Morris..

I understand and the cost pressure has been there, almost there magnifying themselves but the FX, I understand but looking back not the second quarter but looking back to the previous five quarters, first fiscal quarter this year and the four fiscal quarters of previous years.

Looking at four of those five quarters were mostly 25%, some are as highest 27%.

So has the competitive landscape of pricing intensified or is it the particularly across [ph] the FX that what is that has changed that looks at -- you’re hesitating to say you can get back to that level?.

If we look at Q2 and Q3 I'm just setting those aside as an anomaly and looking back at Q1 of last year and trying to predict what will be different about this coming Q1 and a competitive pressure, they are still there, they were there last year and the year before that and we have got some measures in place to help take those into account and improve our gross margins.

But we have got this strong U.S. dollar and that’s also a wild card into specifically what Q1 and Q2 might be in pricing..

Can you give us an idea in this quarter that just ended, how much FX impacted the gross margins?.

I would say for this quarter there hasn’t been a lot since we are "ahead of the game" but like Reece mentioned we’re difficult to predict but there will be some impact going forward..

Thank you. There are no further questions in queue at this time. I will turn the call back over for closing remarks..

We appreciate everybody joining us this morning. We hope the call was informative and we wish you a very good day and good week. Thank you..

Thank you. Ladies and gentlemen, this concludes today's call conference. You may now disconnect. Good day..