Reece Kurtenbach - CEO Sheila Anderson - CFO.

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

Good day ladies and gentlemen and welcome to the Daktronics Fourth Quarter 2016 Financial Results. 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 reminder, this call maybe recorded.

I would now like to introduce your host for today’s conference, Ms. Sheila Anderson, CFO. Please go ahead, ma'am..

Thank you, operator. Good morning everyone. Thank you for participating in our fourth quarter and yearend 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. At this time, I would like to introduce Reece Kurtenbach, our Chairman, President and CEO, for a few comments..

Thanks, Sheila. Good morning everyone. Fiscal 2016 has proven to be a challenging year financially for Daktronics. Global macroeconomics factors including low oil prices, strong U.S. dollar, slowing GDP, political instability and other uncertainties affected order volume.

Orders specifically slowed for the year in the commercial segments of billboard and spectacular and also in our international business.

In our billboard segments orders declined due to the decreased demand from our large national billboard customers although we continue to maintain good relationships with these customers and estimate our market share remain strong.

Spectacular marketing commercial is generally comprised of large projects those with prices ranging from 0.5 million to a few million dollars. From time-to-time, megaprojects could exceed $10 million in this area. Many of the large projects we expected would convert orders in fiscal year 2016 were delayed and caused a decline in order year-over-year.

However this variability is not an uncommon occurrence in what we've describe as the large project business. In addition to economic conditions effecting orders we continue to see aggressive pricing in many of our markets from competitor, especially those from Asia.

Industry mergers and consolations incurred and we continue to learn how the new joined forces will compete. These combination of factors most effected orders in the international business. During the last 15 months we discovered and allocated resources to a display performance issue.

The issue consumed and continued to consume resources that would otherwise have been focused on value-added activities such as developing new products releases or providing services to our customers. We have qualified our new designs to higher levels of long-term reliability to avoid these issues in the future.

However the change in priority delayed certain product releases and caused us delayed production on some orders decreasing sales for the year. We incurred a reserve of approximately 9 million to direct the issue and we expect the remaining reserve will see us through the foreseeable future.

However, this is an estimation based on the best information and analysis that we have today and will be monitored closely in future quarters. Both the decline in order or sales volume and this warrant issue reduced our gross profits for the year.

Order bookings were down for the fourth quarter with the biggest decrease in our international Live Events business units. Both units have unique multimillion dollar project orders last year during the same period and as stated above order bookings in our large projects and account based businesses are inherently volatile.

This creates unevenness in order flow creating difficulties to make meaning comparison over short-term periods. Orders rose for the year in the High School Park and Recreation markets due to demand for large display systems and in transportation partially due to increased funding availability because of the Federal Highway funding bill passed.

While this past year was not stellar Daktronics continues to be the world leader in the marketplace and we strive to maintain this leadership through ongoing investments in our future performance in products, in services, in processes and in systems. Even with our challenges we had a number of significant accomplishments.

One of these was the development of a family of outdoor products that provide more competitive pricing along with performance levels targeted at specific applications. One such application is for out of home advertisers that have short term operating requirements [ph] of three to five years which drives similar expectations of product life.

We also released new outdoor designs which will improve lifetime, reliability and visual quality as we continue to lower the overall cost. We completed an exciting acquisition with ADFLOW in March.

ADFLOW is an industry leader in delivering digital signage, interactive kiosk and marketing solutions some of the most recognized retailers and brands in North America. Their interior and interactive offerings complement our current commercial business unit on premise solutions and they bring to us an impressive list of existing customers.

The acquisition of ADFLOW provides Daktronics an opportunity to grow and strength our solution offerings and digital media coverage. Teas throughout Daktronics also contributed to continuous improvement and built various capabilities throughout the organization this past year to reduce waste and improve profitability.

For more detail on the financial results I'll turn it back to Sheila..

Thank you Reece. Sales for the year declined approximately 7.4% from $616 million to $570 million. Approximately 2% of this decline is due to the decrease of one week in fiscal 2016 and the remaining decline was primarily due to decreases in sales and live events, commercial and international business units.

Live events declined due to the timing of orders converting to sales based on customer delivery expectation and needs, and due to slight order decline in year. Backlogs for Live Events increased $14 million going into the New Year and we expect to realize [indiscernible] sales for fiscal '17.

The commercial billboard niche sales decline was driven by decreased demand from our customers during the year for the factors we've noted. Spectacular was down slightly due to order timing. Our on-premise business had a successful year for sales and experienced increases with national account activity.

International orders declined nearly $44 million for the year and in turn impacted sales. Overall global market conditions, strong U.S. dollar, competition and the timing of large project orders caused the decline. Sales for the fourth quarter of fiscal 2016 declined 12.4% to 138 million as compared to $158 million last year.

Sales declined in the international commercial billboard and Spectacular niches and Live Events business units. The decline was due to the factor already noted, due to the timing of orders, production schedules to align with customers’ needs by days and lower order volume.

Gross profit for the year declined to 21.2% as compared to 23.5% in fiscal 2015. The decline is attributable to the impact of warranty expenses which impacted gross profit by 1.6%. Gross margin levels were unfavorably impacted by volume levels, changes in the mix [ph] of business and increased competitive bids.

For the fourth quarter gross profit was 20.2% compared to 22.3% last year, the warranty charge in the quarter affected gross margins negatively by 2.2%. Total warranty as a percent of sales was 3% for the quarter and 4.1% for fiscal '16 as compared to fiscal 2015 rates of 1.6% for the fourth quarter and 2.2% for the year.

The increase in rates is primarily due to the warranty issue noted. We have accrued our best estimate and the most probable ultimate cost for the issue based on the estimated failure [ph] rate, prevention measure, performance of designs and [indiscernible].

Our balance sheet includes reserves of approximately $5 million to cover costs of future warranty activity. We will continue to monitor and adjust this reserve as necessary. Commercial market was primarily impacted by this warranty charge. In addition commercial gross profit was impacted by the decrease in sales volumes and the billboard niche.

For the year gross profit improved in transportation by 1.4% primarily due to increased volume. Live Events gross margin remained relatively flat, but was impacted by decreased volumes mostly fixed cost infrastructure and offset by improved sales mix [indiscernible] contracted installation activity this year as compared to last.

High school park and recreation business unit gross profit decreased approximately 25% as compared to last year. After removing the impact of the fiscal '15 non-recurring theater rigging division sale. This base decline is attributable to the sales and exchange.

International gross profits were impacted because of lowered volumes and the impact of competitive bidding. Operating expenses increased 4.6%, $180 million for the year or approximately 6.6% when adjusting for the extra week at fiscal '15.

Product design and development increased approximately $2.3 million, for work performed on new or enhanced video display model and in control systems. General and administrative expenses increased by $2.1 million, primarily due to increases in information technology maintenance, personnel related costs and in professional fees [ph].

During the quarter we consolidated ADFLOW for a portion of the quarter which included sales of less than a $1 million with the slightly loss of approximately $0.2 million.

Our overall effective tax rate was 34% for the year due to our lower income and the continued research and development credit offset by $0.9 million international deferred tax asset valuation. We forecasted the forward looking effective annual tax rate to be approximately 34% of the research and development restatement.

Our tax rate can fluctuate depending on changes in tax legislations and geographic mix of taxable income. We reported negative free cash flow of $3.6 million for fiscal 2016 compared to a positive free cash flow of 35.4 million for the same period of fiscal 2015.

The cash usage was primarily due to lower cash provided from operating activities due to the lower net income level, timing increases in working capital due to project cash receipt and payments for inventory. And we incurred $70 million of capital expenses for the year.

Looking into fiscal 2017, we began the year with a $181 million of backlog which is down approximately 4.9% or $9 million as compared to the beginning of fiscal 2016, because not all backlog is expected to convert to sales in the first quarter due to customer delivery expectations primarily in Live Events and Transportation units as well as uncertainties due to order timing, we believe Q1 sales volumes will be similar to slightly down from fiscal 2015's first quarter -- fiscal 2016's first quarter.

Gross profit predictions also remain dynamic pending the conversion of sales but we expect gross profit to be similar to last fiscal year first quarter.

We anticipate operating expenses in dollars to be slightly up as compared to the first quarter of fiscal '16 due to general increases in personnel costs, information technology expenditures and increased design and development activity.

For the year we are expecting modest sales growth, we expect Live Events, High School Park and Recreation to continue to grow slightly. We believe Transportation has grown [ph] nicely with demands experience [ph], ability and funding.

While it is more difficult to predict, the Commercial spectacular segment, there are opportunities in our pipeline, that's position us for increase year-over-year. For Commercial billboard niches we expect similar volumes. In our commercial on-premise activity we'll be actively promoting our outdoor network solutions and new product lines.

Internationally, we see opportunities to grow but find it difficult to know how the year will shape up due to the macroeconomic factors Reece mentioned.

Because of the uncertainty as Reece will further discuss we will work to constrain cost growth and fixed costs in manufacturing selling, services and general administrative areas in the coming year as to manage our expenses to expected sales volume.

We also plan to allocate additional resources to our design and development areas to complete developments and enhance our designs in our display and control systems. Our cash and marketable securities positions remain positive at $53 million at the end of the quarter. We expect our capital usage to be approximately $19 million for fiscal 2017.

Uses of capital expenses is for manufacturing equipment for new or enhanced product production, expanded capacity, demonstration equipment for new products and continued information infrastructure investments. With that I'll turn it back to Reece for additional comments on our outlook..

Thanks, Sheila. As Sheila mentioned we plan to accelerate activities in our design groups to complete developments for a number of solution areas.

Few examples would be to continue the improvement of our control platforms to allow customers better experience as they operate our best-in-class systems as well as lower our overall costs in maintenance and upgrade. We also continue to focus development efforts on the video hardware capabilities for higher and higher resolution displays.

Finally, we are focusing efforts on achieving lower cost target systems for certain applications to meet varied expectations around the globe. While this will increase development expenses we believe this will drive our ability to capture continued global market share and meet the request of our customers.

While we continue to see digital as a growing global segment, our outlook for orders and sales in the coming year is for modest growth. We have maintained our U.S. market share over the years and our customers remain pleased with our solutions.

Our pipeline of boarding activity is strong in the Live Events, Commercial spectacular, Transportation, and High School Park and Recreation units. In Live Events our customers continue to focus on providing a unique experience to those attending sporting events and our products are a key element to create this atmosphere.

There are a number of projects expected for the upgrade or replacement of existing equipment. A number of uniquely designed mega projects ran the marketplace in the Commercial spectacular business with the desire to attract customers through advertising or creation of a destination.

Our on-premise and out-of-home customers continue to turn to digital messaging solutions to advertise and communicate information to their audiences. In transportation holding in the North America remains strong, heavily influenced by the passing of the U.S. Transportation Bill this past year.

This allows for longer term planning at the state DOT levels and more availability of projects for the foreseeable future.

The number of larger sport complexes at the high school has been on the rise as this market continues to adopt video technology for sporting events, also high school continue to use message centers to communicate with parents, teachers and students throughout the year. This demand continues to grow as well.

We continue to consolidate ADFLOW into our revenues and have seen some recurring revenue modules with this platform. Our strategy is to continue to serve ADFLOW’s existing customer base well and expand ADFLOW’s reach throughout our on premise business and commercial.

While the business has historically been under 10 million in sales, we expect to grow over the long-term as we integrate both interior and exterior signs and solutions for this market. The commercial billboard markets expected to be at similar levels as last year. In all business units, we continue to have returning customers.

Our solutions in these markets have naturally placed in cycles as the products have a known end of life. This provides us the outlook to continue to invest in customer centric solutions, meet demands in the market. Our marketplace is competitive, however, we continue to experience price pressures from Asian competitors entering the U.S.

markets, we also continue to see these low cost competitors target international markets, which we believe has had some impact in our international order volume. This pressure and the dynamic role of the economy seems to have impacted decision timeline and depress orders in some areas which may continue in the near term.

Other economic headwinds such as U.S. Election, proposed [indiscernible], oil prices uncertainty and interest rates, currency fluctuations and regional political unrest has created volatility and some uncertainty for order, timing and forecast in the market place.

While these challenges may have some short-term impacts on orders, our strategy is to continue to focus on the things we can control, serving our customers and a growing market with high quality and reliable solutions which meet their businesses. We believe this is the path to long-term profitable growth.

As the order of picture for short term becomes clearer, we continue to monitor and limit the amount of cost added per personnel, our largest non-inventory cost. We are also carefully evaluating capital expenditures and working to carefully mange our other expenses for this year.

We have challenged our managers to be frugal throughout the Company as we position our organization for success in this fiscal year and beyond. To this end we're supporting our development teams to bring solutions to the market with higher velocity.

We continue to see many opportunities to grow and to be successful in this business and overall are optimistic for our future. With that, I would ask the operator to please open it up to questions..

[Operator Instructions] Our first question is from the line of Morris Ajzenman of Griffin Securities. Your line is open..

Just two questions, the first question is the competitive pressures that you're talking about for a little while already and a handful of years and highlighting this time Asia pricing pressure, which you highlighted in the past, any concern that this is causing market share loss beyond just more difficult price? I know you've touched on say market share appears to be stable, but any immediate divines, any concerns that this hazard [ph] level can lead to market share loss?.

It appears Morris that in the key markets that we participate in, we still have significant market share and are able to maintain to that.

There has been some growth in our Asian competitors in [indiscernible], in ultrahigh def and some of these other areas where our market segments that are maybe interesting to us, but we're not players in those today.

Is that helpful?.

Yes, okay.

On a different front then moving to the income statement and the cost side, in this quarter revenues are down 12.5%, but operating expenses were up 12.1% and even excluding product and design there is still about 10%, is there any sense of urgency that the expenses really have to be called in and brought in dramatically to right size things during the interim until top line starts improving?.

Yes, Morris, we're -- as Reece mentioned and I mentioned, we're working with the managers to be frugal and to really be sensitive to those costs and to control costs. Many areas are meeting regularly to ensure that. We are watching as our orders come in to reduce cost or managing cost levels..

Anything specific you can talk that you've discussing as far as reining in costs or any examples you can give us?.

I don't have anything specific that I would like to describe today, I think to at least provide color to Sheila's statement, we don't see it as one specific thing or few things we see this as a tightening really across the globe to carefully manage our expenses..

Thank you, our next question is from Tristan Thomas of Sidoti and Company, your line is open..

Couple of questions, first on the previous call, Sheila you guided for sales slightly down year over year in the fourth quarter, can you may be kind of explain what changed in the last couple of weeks in the quarter?.

So for the last call that would have been just getting to our fourth quarter. A lot of times timing changes on the customer demand side. But the backlog is still there as I highlighted, it's just the timing of the delivery and production of that revenue..

Okay, and then kind of following up to Morris’s question earlier just regarding some of the increased competition. I know there has been a lot of talk about Yesco can you give one side on maybe if they come up with a little more developed strategies as you're butting heads against them, a little bit more than maybe you thought..

Yesco of course was supported by Samsung in they recently came out with a new naming strategy, they're calling their company Prism View. We've seen some activity by Samsung Prism View worldwide, not anything that I would describe as a strategy that I could articulate, we're seeing how these mergers will impact the marketplace.

There is also the Leyard-Planar acquisition that happened in the last fiscal year as well..

Okay, that was actually, that was helpful thank you and then [indiscernible] question or two kind of questions, one why ADFLOW specifically and then how does it kind of benefit your other segments outside of their core business?.

ADFLOW is a gauging company and they have been very active in what we would call the commercial on premise space, but really inside the store, inside their brick and mortar and we have been active in that same space, but mainly outside on the curb or on the roadside of similar businesses.

So we believe together we can have a stronger value statement and we’ll be able to grow the orders on both sides without significantly adding to the underlying resources..

Okay and was there any new technologies or anything else, what kind of provides that would benefit some of the other segments outside of the OAH [ph] advertising..

Certainly the types of systems that they put in place have application in other areas, maybe in sporting venues and shopping malls and concourses and we would continue to explore those types of applications into the future..

Great, thank you..

Thank you, our next question is from Jim Ricchiuti of Needham & Company, your line is open..

Just want to go back to the question of the weaker revenues in the quarter.

Sheila you talked about the timing of delivery, so are we talking about larger deals that there were some timing issues that caused some of that business to slip in the current quarter? I mean can you elaborate a little bit more on the weaker revenues other than just talking in broad terms..

Maybe yet another factor to that was some of the orders that we talked about that have spilled into future quarters. We had thought maybe they would land into the quarter and be able to be some of that revenue recognized. So it would be a combination of both of those things. .

So, were these orders in Live Events and the professional sports market, in the college market, I'm just trying to get a sense as to where the shortfall occurred and you know how long do you think it's going to take before that is potentially converted into orders revenues going forward?.

We would have a softer second half of the year for international, so there was some of the international, a little bit of spectacular maybe as well in our commercial segment and a little bit of Live Events. Again that timing of when that revenue is recognized seems down at the bit..

So when you look at the current year, do you have much visibility, much line of sight into when some of these push-outs potentially can come back or is it still uncertain as to whether you actually see orders on some of these?.

Some of our orders as we've outlined, we think are keyed up and ready to go, but have been slow this past year and maybe continue -- we’ll continue to be slow with the macroeconomic factors that we've talked about..

We do have the 180 million in backlog and we will continue to work on that as we go through Q1 we will have customers that will come to us with opportunities off and at a shorter than normal lead time and if we have room and timing with other projects we would tend to take those opportunities.

So, the schedule can be a little fluid in our summer, if that's helpful..

Sure, fluid in a sense Reece, that potentially some of the business that you're anticipating for the current quarter, some of that could slip into the fiscal second quarter?.

Yes, especially if we would have an opportunity that would arise for Q1 and have something in our schedules that doesn’t need delivery until Q2..

It sounds like you're characterizing the pipeline in Live Events and I don't want to put words in your mouth, but it sounds like you're seeing reasonably good pipeline for larger deals, is that a fair way to characterize it or is it -- and I wonder if that in fact is true, if you could maybe elaborate on that a little bit?.

In our Live Events pipeline, a fair amount is fluid, we've been seeing a lot of activity over the past few years and that continues into this year.

As Sheila mentioned we had a softening in our International as well as our Commercial spectacular and really the second half of last fiscal year, I would say right now we're seeing more activity in both of those areas, as we enter Q1 and are proceedings through this quarter.

But as we described there are -- especially in International business, there is -- we benefit a little bit from diversity but in every area of the globe right now, they have their own things that are top of line and that's impacted the decision timeline on many of these larger orders..

And Sheila did you say that gross margins are going to be similar to last year?.

That is our current expectation..

In the current quarter?.

Yes, you're correct..

How do we get comfortable with that, just in light of what we've seen with margins over the last couple of quarters, are there some -- is the warranty issue less of a factor this quarter, is it a mix issue that you're anticipating based on the revenues you're expecting for this quarter?.

It would be true that we expect warranties not to be as high in the first quarter, that'll be a factor as well as on, and as you mentioned the mix of what we see available to be built and scheduled out for this quarter..

And just one final question from me just regarding OpEx, I think it was alluded to in one of your prior questions about the decline in revenues and yet the increase in OpEx roughly 12% or so, I'm wondering how much of that was due to the fact that the quarter came in lighter than expected, as you're going through the quarter and you just weren't able to adjust expenses quickly enough, is that -- was that a factor in the weaker earnings and the higher operating expense levels?.

I would say that is true, we had as I mentioned the backlog to produce them, it's hard for us to change mid-quarter those are fixed costs, that's a part of longer term play that we need to make..

So, if we look at your operating expense levels you're going to have it sounds like continue to spend at roughly these levels on the product engineering side, how should we think about your general and administrative expense, which was up quite a bit sequentially and year-over-year..

We expect that, for product development we expect to invest a bit more next year than we did last year to add velocity to the design and development work that we're planning, to bring out new product lines to the marketplace.

For G&A I would expect a slight increase, but we are as Reece mentioned working with the groups to be frugal and to manage their costs and to hold or decline expenses where they can..

Thank you. And that does conclude our Q&A session for today. I would now like to turn the call back over to Mr. Reece Kurtenbach for any further remarks..

Thank you. Thanks everyone for your participation in today's call. As we complete our fiscal year I'd like to add a special thanks to some of our key stakeholders. I'd like to thank our customers for years of support and trust in Daktronics to deliver results for your businesses.

I'd like to thank our employees, they all had a tremendous effort over the past year to provide our customers a high quality experience, even as we asked them to solve many of the problems that we faced as well as capitalize on the opportunities we encountered.

Our suppliers have been very valuable, I would like to thank them for their continued partnership and making our operations run smoothly and their advice and guidance in our future development.

And also to you, the investors on the call for continuing to take your time to learn more about Daktronics, and we realized we're in a lumpy business and to understand the ups and downs that we faced on a year-in and year-out basis.

We’re looking forward to future success in 2017 and we hope to see any of you that are interested to attend our Annual Meeting here in late summer. Thank you. Have a great day of summer everyone..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day..