Sheila M. Anderson - Chief Financial Officer Reece A. Kurtenbach - Chairman and Chief Executive Officer.

Jim Ricchiuti - Needham & Company Morris Ajzenman - Griffin Securities Triston Thomas - Sidoti & Company.

Good day ladies and gentlemen and welcome to the Daktronics Fiscal Year 2016 First Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, August 25, 2015 and is available on the Company's Web-site at www.daktronics.com. 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, Stephanie. Good morning, everyone. Thank you for participating in our first 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 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.

Fiscal 2016 is a 52-week year and fiscal 2015 was a 53-week year. The extra week of fiscal 2015 fell within the first quarter resulting in a 13 week quarter versus 14 week quarter 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. The first quarter of this fiscal year lagged in sales as compared to historical first quarter performances and lagged with our expectations for the quarter. Few factors impacted our top line, a primary driver being timing and product mix in our Live Events business.

In contrast to last fiscal year where we booked a number of NFL and college football orders, this year much of the work available in our Live Events business was in indoor applications. We will do a record 29 center-hung or arena systems this year.

Arena projects tend to have a fall delivery as opposed to summer and the products for indoor impact our production areas differently, more surface mount placements. We did focus on nine stadium projects this year. However, the installation for these projects begins late this calendar year and on into mid next year.

This highlights how the volatility and timing of large projects in our various business segments can create difficulties in predicting sales levels on a quarterly basis. Also, even though there were not as many significant stadium projects this season, we believe outdoor sports is still a strong ongoing business for Daktronics.

We began our fiscal 2016 with strong quarterly order bookings and we continue to see solid activity in our different market segments worldwide. Our large sports business continues to find success with new stadium builds and refurbishments.

We were awarded a contract for the Minnesota Vikings new stadium in the first quarter and we recently announced the Miami Dolphins has selected Daktronics for their stadium upgrade, due to open for the 2016 season.

We also continue to see strong order and quoting activity in projects at other professional, college and university and high school venues to enhance their game-day experience for their events.

We have seen success in our International business unit order bookings and are entering the second quarter with a $40 million backlog, which is an all-time high for this unit. Many companies continue to turn to digital messaging solutions in their on-premise and out-of-home marketplaces.

However, we are seeing a general market delay from our customers in the commercial segment. We believe this is influenced by economic conditions and uncertainties. We have also seen project delays in the spectacular segment of the commercial market.

This work is characterized by unique projects that remain active, even if the decision can be pushed out due to complexities in the design, permitting and other processes. The Transportation business unit remained stable this quarter, with some growth anticipated over the next 12 months.

Legislation to increase federal funding for transportation had another short-term extension through October of this year. We are hopeful that some sort of longer-term funding solution will be enacted in the near future bringing greater predictability to this business. For more details on the financial results, I'll turn it back to Sheila..

Thank you, Reece. Sales for the first quarter of fiscal 2016 decreased to $150 million as compared to $167 million last year. Sales were impacted by having one week less in the first quarter of this year compared to last. From a business unit standpoint, the decrease in sales was primarily from Live Events due to the factors Reece mentioned.

Sales in the Commercial business unit increased due to projects in our Spectacular and on-premise segments relating to a strong backlog coming into the quarter. International sales increased nicely as compared to last year due to the work performed on a number of transportation related projects.

For the first quarter, gross profit was 23.6% this year as compared to 26% last year.

Factors lowering gross profit include higher warranty charges this quarter, additional infrastructure cost for the Ireland factory we didn't have at this time last year, increased production labor cost for wages we discussed last quarter in our production area, and the nonrecurring gain on the rigging business sale included in the fiscal 2015 first quarter gross profit.

Operating expenses for the first quarter were $29.4 million as compared to $29.8 million last year. The slight decrease reflects one less week for the first quarter of fiscal 2015, which was offset by increased personnel related costs and increased product development material costs for our current product development activities.

While we entered the second quarter with $205 million of backlog, some of this backlog is more long-term in nature as the timing of conversion to sales is tied to new stadium construction schedules which go into next fiscal year.

As we look into the second quarter of fiscal 2016, our sales performance is dependent on our scheduling of production and shipments based on on-site and customer schedules. While this has been true in our business for a long time, it seems more variability exists this year and some project sales could move into the third quarter.

We are currently estimating sales in the second quarter to be comparable to last year. We anticipate gross profit percent to improve based on the expected mix of business and due to the improved planning processes with additional capacity available for backlog. This will offset the increased wages for our production employees.

If you recall, during last year's second quarter, we had lower gross profit due to additional costs relating to meeting customer demand and a higher mix of on-site installation work which generally has lower margins.

We anticipate our operating expenses in dollars to be comparable or slightly higher to the second quarter of fiscal 2015 for general increases in personnel costs. Our overall effective tax rate for the first quarter was 35.9% and approximates our forecasted effective annual tax rate of approximately 36%.

As we've previously discussed, our tax rate can fluctuate depending on changes in tax legislation and geographic mix of taxable income. We reported negative free cash flow of $17.2 million for the first three months of fiscal 2016, compared to a positive free cash flow of $19.8 million for the same period of fiscal 2015.

The cash usage was primarily due to the timing of inventory receipts and production of subassemblies in preparation for upcoming projects. Cash flow was also impacted by the timing of cash receipts for projects in process as compared to timing in prior quarters.

Our cash and marketable securities position remained positive at $60.8 million at the end of the quarter.

Our capital forecast remains unchanged and we expect to spend $25 million of capital expenses for continued manufacturing equipment, for newer enhanced product production, expanded capacity, investments in quality and reliability equipment, demonstration equipment for new products and continued infrastructure investments.

With that, I'll turn it back to Reece for additional comments on our outlook..

Thank you, Sheila. As we discussed, orders this quarter were strong and we're entering the second quarter with a solid backlog and a plan to meet our commitments. We have materials and manufacturing capacity to achieve our customer schedules and we do not anticipate additional cost for fulfillment, as we experienced last year during our busy season.

We continue to see ways to improve profitability, although we do not believe it will be a smooth path. Seasonal variability and the influence of large projects on our businesses will continue to affect individual quarters and fiscal years. The good news continues that our markets are growing and we have products and solutions to meet industry demand.

With this market growth, we are seeing a number of competitive mergers and acquisitions which could cause changes in the marketplace dynamics. Also, changes in global economics and currencies may have an impact in our business, especially in our international region.

As of today, we continue to focus on our strategies to serve our customers with quality and high reliable solutions which meet their business needs over the long term. The outlook since our June conference call remains very similar. We see continued adoption of our products in all of our major markets.

Our on-premise and out-of-home customers continue to turn to digital messaging solutions to advertise or communicate information to their audiences. Unique projects in Times Square or Las Vegas continue to be considered by developers and venue owners of all types to help attract large sustained audience.

Our solutions in these markets have naturally placement cycles as the products have known end of life. The trend for larger more capable video systems continues in sports from the local high school level, all the way through the college ranks to the professional sports venues.

Transportation will benefit from innovation in roadway usage and ongoing federal funding. International is a combination of all these markets with political, cultural or economic influences impacting specific market potential by a region or country.

These factors combined with generally positive economic conditions are conducive for modest growth in the future. During the first quarter, we continued to work on our strategies to develop new and enhanced solutions for the market to meet customers' needs. For example, we released a high resolution product this past quarter for indoor use.

We have additional developments on the roadmap and are working on a number of product introductions to serve demand for transportation, higher resolution video and high-quality display solutions for both outdoor and indoor applications.

We believe in our strategy for product platforms and have aligned these solutions along more comprehensive platform roadmaps for both our display and control system development.

We continue to innovative with our customers and invest into additional product options to meet their project requirements and pricing needs for specific applications or regional expectation. With that, I would ask the operator to open it up for questions..

[Operator Instructions] Our first question comes from Jim Ricchiuti with Needham & Company. Your line is open..

First question, just regarding the weaker sales, my sense was that you were expecting flattish revenues for the quarter, and I would assume based on the backlog you had a good sense of what projects would be shipping, delivered.

Is this a case where there was some indoor arena work that you had anticipated perhaps completing in the quarter that slips out into fiscal Q2?.

I think we had a good idea of our backlog, but the timing of production, we can often make adaptations to our customer's schedule that we think are best for them and for us, but might move production volumes around – across quarter boundaries..

So, Reece, again was this some of the indoor business shifting that you had anticipated in this quarter shifting to Q2?.

Yes, the indoor product line was the predominant product that we produced in this quarter because of the large success in our indoor applications and just the low volume that was available this year in our outdoor applications.

So if we have a broader product mix, we have more ability to blend that across the different production lines, but when our product mix goes to be something more uniform, then we have less flexibility, if that's helpful..

Got it, okay. And just as we think about Q2, it sounds like, Sheila alluded to this, a little bit more variability in the business.

Again, is this focused primarily on the North American indoor arena business?.

We have certainly in the first part of this quarter a lot of this arena business that will still be in process, and then as we move into the latter part of the quarter, we'll start working on a broader mix of business across international and our other business units.

And so I think it's a blend of all of that as we try to stitch our quarter together..

But to the extent that you do experience a little bit more variability in the current quarter, that has the potential to make what is normally a seasonally weak quarter, Q3, a little bit stronger for you this year?.

One of the things in our backlog this year is we have a high amount of longer lead time work which can allow us to pull some product in and build early, but we don't want to build it too early because if you are too far off from delivery sometimes it removes your flexibility.

But I would agree that we have a better view of our Q3 backlog this year than in previous years..

Okay. Then last question and I'll jump back in the queue.

Just given a little bit slower start to the year, are you still driving toward increasing revenues for the year as a whole this year?.

We are still driving towards that.

One of the reasons that gave us the slow start is that we felt that we needed to beef up our surface mount capacity and we were making some critical additions to our surface mount lines and they spilled into the start of this fiscal year, but yet we think our capacity puts us in a good position to leverage the increased resolution which is more LEDs, more placements, that we see coming in the future..

Okay. Thank you..

Our next question comes from Morris Ajzenman with Griffin Securities. Your line is open..

Just to follow-up to the previous question but looking at it on a more sort of broader basis, the last couple of years top line grew by 5% or so and this year have been a little tougher start. You just mentioned you see growth but you didn't really quantify it, but it appears to be at best I presume in the low single digits.

My question is, and again we've got some lumpiness, but looking longer-term, the end markets you cater to appears to have great growth reach than that, it appears to, I'm reaching out to get your opinion on it, what do you think the end market growth rate is and your ability to grow the top line over the next two, three, four years might be?.

So two questions, so what is the end market growth rate and then I think with our ability to grow the top line. It's retaining and increasing market share. I think that the overall market growth rate is hard to pin down, Morris, but we see continued activity from our customer base and not a slackening in interest of what we might call digital.

How fast they adopt it and how quickly is maybe debatable.

Now our value statement, we believe in having customers for life and we believe we're going to be with our customers through various product cycles, and that means a high reliable long-lasting base product and then services that back it up, and we think we've got that today better than our other competitors and so that puts us in a good position to leverage that growth.

How fast we can move in the international markets as we sit today is a key driver for that and a lot of uncertainty today in international outside of just the digital marketplace and the political environment and obviously you guys are more aware than I am of the marketplace today..

Would you be willing to put a growth rate on the top line looking out the next few years or so overall?.

If I would throw something out there of a long-term goal, we think it would be possible for us to exceed $1 billion in revenue. Would that happen in five years? I question that. Would it happen in 10? I think that's possible..

Okay.

And on the Live Events, do we have a difficult comparison on the top line for the second quarter?.

Sorry? Comparison for Live Events on second quarter, is that what you're…?.

Yes.

I mean what was – I guess I can pull it up, but what was the revenue number last year and is that a difficult comparison for you guys overall?.

Last year our revenue in Live Events was $62 million, almost $63 million. Will be comparable, I would venture to guess, depending on some of the factors Reece mentioned, though, some of these projects could move out into the third quarter..

Okay.

And just a couple of quick follow-ups I'll get on the – back in Q, but the warranty expense, what was it as a percent of revenues this quarter versus last year?.

For this quarter it was 3.7% of sales. Last year the same quarter it was 2.9%, and last year we finished the whole year at 2.2%..

Okay. And again, let me just follow up on this and I'll stop there, but it's always been an issue when you've been trying to get your hands around the launch expense, really bring it down to a much low level, and I thought you were getting there.

Is this a one-off event where it got back to 3.7% or was there some other issues that it will just take time to get down to a 1% or 2% level?.

We don't think this is an endemic issue that's going to affect us long-term..

Okay. Thank you..

Our next question comes from Triston Thomas with Sidoti. Your line is open..

Just a couple of questions.

Maybe I missed this part, but for the arena hung projects, what's the main determinant of whether they fall in Q2 or Q3? Is it specific sport or is it just strictly dependent on the schedule for the [indiscernible]?.

As far as Q2 and Q3 for arena, most seasons begin before November 1, and so that gets it into our Q2, unless for some reason they don't need it by the season opening.

Maybe it's a new construction or a major renovation project or their decision process was late and so they had to find another window, but most of our arena projects, the majority of them, will be in before or during, before the start of our Q3..

Okay. Just a question regarding the backlog.

Excluding the $28 million or $29 million, that all should be recognized in fiscal 2016, right?.

We believe that some of that will slip into our fiscal 2017 based on project timing and when this equipment is needed on site, and some of this actually needs site verification measurements and so the facility physically needs to exist before we can begin production..

Okay, got you. And then you said the international backlog was $40 million.

Could you maybe break that out? How much of that was European through the transport business, how much of that was in Asia, and then also what's your take on your business in China after all the macro news kind of coming out of there?.

Maybe I could address China a little bit. We have some good projects in China, and the whole China market is a real small percentage and it tends to be the high end large buildings, high-profile installations, and that market has been good for us.

Whether that will be impacted by all the stuff going on in China, those are difficult tea leaves to read, Triston, but we have a good name and a good reputation in China and we continue to drive forward in that market..

And for the….

Okay. I'm sorry, I'm sure you were just going to answer my question, Sheila..

For the international markets, I don't have any facts by regions. We do have a couple of sports projects and other commercial applications in the Middle East region, a sports project down in Australia, and a little bit of transportation projects that are continuing on as well in the European region..

Okay, great. Thank you, guys..

[Operator Instructions] Our next question comes from Jim Ricchiuti with Needham & Company. Your line is open..

Reece, I wanted to just touch on the comments you made about the competitive environment and the recent increase in M&A activity in the market, and are you talking more about North America just given Samsung purchasing YESCO, and I'm wondering if you are anticipating potentially a pickup in competition from the pending acquisition of Planar Systems from Leyard, do you see them becoming potentially a bigger factor in the live events market in North America going forward?.

Certainly we're not privy to their strategic plans but we believe they made those investments for a reason, and so they will try to monetize those investments. Samsung, we haven't seen a lot of activity from them yet, a little bit of action here or there. We're unsure of their overall strategy yet.

And of course Leyard and Planar hasn't completed their transaction yet. Planar has been in the business but hasn't been a competitor of Daktronics. They've been in a different part of the business. Whether Leyard has chosen to do this action to further Planar's business or as a way to get into other business is uncertain to us..

Got it, that's helpful. Sheila, I'm not sure if you gave this out.

Did you provide any revenue detail for the billboard business? Can you break that out if you didn't, what that represented in terms of revenues and bookings in the quarter?.

Sure. For bookings for billboard this quarter, we had $9.8 million of bookings, similar to last quarter – or last year's same quarter, that was at $9.8 million as well. And then we realized sales of $9.8 million, so easy number to remember..

Okay. Now on OpEx, if I heard you correctly, you are anticipating OpEx is going to be up modestly versus a year ago.

Would it be up – are you anticipating OpEx to be up sequentially as well modestly?.

It would definitely be similar to sequentially from the first quarter and similar to a little bit from last year..

Okay, good. And just last question for me is, just there are – you've got a fairly large installed base, both in Live Events and certainly there's been a lot of upgrade business there with the arenas and outdoor stadiums adding more displays.

But looking at the commercial business, and I guess particularly visual billboards, are you seeing much of an upgrade business where some of these products that you put into the market a number of years ago are now having to be replaced, what's the status of that? Are you anticipating that is going to be a driver for you over the next year at all?.

We see a couple of actions there. They will replace the existing billboards and they will sometimes take the older product and move it into new markets. All of that we think is good for building long-term business. The permitting is still a limiting factor in both third-party advertising and on-premise.

And the overall spend for a third-party advertising company tends to be a certain amount. How will they increase that spend to allow for both new locations as well as replacement is still difficult to flush that out..

We generally think that they share that bucket of money to both replacements and new installs at this point..

Okay. And if I could just slip in one other question, I was curious about this multi-million dollar architectural lighting project that you mentioned in the release this morning.

Can you elaborate on that, where that is and when you'd be seeing the revenues from that?.

It's in China, Asia, and in that part of the world, when you put up a big beautiful building, you want to decorate it so it comes alive, and it's one of these building decoration projects. I don't remember the exact timing of revenue. I believe it would be within this fiscal year. I don't know if it's all in Q3 or some before or some after..

Okay, thank you..

I'm showing no further questions. I will now turn the call back over to Reece Kurtenbach for closing remarks..

We thank everybody for joining us this morning. We realize this has been a dynamic period in the market and we appreciate you taking some time out to talk to us. Hope you all have a good August and a nice Labor Day..

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day..