Reece Kurtenbach - CEO Sheila Anderson - CFO.

Morris Ajzenman - Griffin Securities.

Good day ladies and gentlemen and welcome to the Daktronics Fourth Quarter and Fiscal 2017 Financial 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 be given at that time.

[Operator Instructions] As reminder, this conference call is being recorded. I would now like to turn the conference over to Sheila Anderson. You may begin..

Thank you, operator. Good morning, everyone. Thank you for participating in our fourth quarter and year-end 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.

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

Thanks, Sheila. Good morning everyone. Overall we had a fiscal 2017 for Daktronics. We increased in volume in three important categories, orders, sales and profits. Orders included a number of high profile or spectacular projects and larger sport video projects, as well as games for standardized solutions or businesses and schools.

Sales exceeded $586 million, an increase of 2.9% as compared to fiscal 2016. The orders and sales volume increases reflect the improved global economic conditions over the year to help with the digital solutions market and fluctuations caused by a large project based business.

International business unit orders increased by 30.1% on a year-to-date basis. This is primarily due to improved global market conditions during fiscal 2016 as compared to 2017 giving confidence for more customers to move forward on projects.

We did well in our account-based out of home billboard space and in sports projects like that of Perth Stadium in Australia and commercial spectacular customers like Piccadilly Circus in London.

We continue to focus on the transportation segment internationally too with new or enhanced offerings for mass transit and intelligent transportation system applications. Orders increased in High School Park and Recreation business unit year-over-year which is primarily due to a strong market demand for large video supporting applications.

We have seen trends in this market similar to college and professional course with increased size and advanced capabilities for these systems and are beginning to see high schools refer to their displays as the largest in the state. HSPR also includes on-premise messaging solutions for parents and those orders were strong this past year.

Commercial business unit annual orders increased 11.6%, our on-premise and spectacular niches in commercial predominantly led the improved order volume year-to-date. The spectacular niches seemed stronger porting activity and more customers are moving forward this year as compared to last.

On-premise orders have increased related to in-store digital media solutions sold through ADFLOW, a company we acquired last year during the fourth quarter. While we estimate our market share at the digital billboard segment held in the national operators and expanded with independent billboard operators, overall order activity declined for the year.

Order activity in the billboard niche is impacted by customer allocation decisions, replacement cycles, permits and general economic conditions. Transportation business unit orders increased this year compared to last, mostly due to increased state procurement project activities and variability caused by large order timing.

Demand includes applications for intelligent transportation systems, transit, airport and parking segments. An example of locations using an ITS system is our multi-million dollar project for Nevada Department of Transportation, Project NEON.

This project will include multiple large full color displays that extend across six lanes of traffic and include dynamic message capability to show incident and speed information.

Live Events business unit orders remain strong reflecting the ongoing trend of professional and college sports arenas increasing the size and capability of their display systems to attract and entertainment their fans.

Our profitability improved over the year, the sales levels and improved productivity in our fulfillment processes increased gross profit as does the decline in warranty cost as a percentage of sales.

Operating expenses increased as we invested more than our traditional spending in our product development area to accelerate the creation or enhancement of customer solutions, including investments in both display and controlled technologies. For more details on the financial results, I'll turn it back to Sheila..

Thank you, Reece. Orders increased 24.4% for the fourth quarter and for the year, order volume increased 9.4% for the reasons Reece highlighted.

As a reminder, orders and net sales fluctuate due to the impact of large project order timing including display systems for professional sports facilities, colleges and universities, spectacular projects and other account based business. Our business also fluctuates based on sports market seasonality and construction cycles.

Sales for the fourth quarter of fiscal 2017 increased to $144 million as compared to $138 million last year. Sales increased in the live events and international business units, decreased in the high school park and recreation business and remained relatively flat with commercial and transportation business units quarter-over-quarter.

Live events contributed to the sales increase as the number of projects for both National Hockey League and other minor league stadiums work was up as compared to last year. International net sales increased for sports and spectacular projects.

High school park and recreation net sales decreased due to the general leg and timing of orders during the quarter.

Sales increased to $587 million as compared to $570 million last year, sales increased in the live events on high school park and recreation business units, decreased in the international business unit and remained relatively flat in the commercial and transportation business units.

Live events contributed to the sales increase for the number of projects for the National Football League was up compared to last year.

We were also successful in our high school park and recreation business units due to the increased size of video projects with larger average selling prices and more custom indoor and audio demand compared to last year. International net sales decrease was due to the timing of the conversion of large orders to sales.

Large project orders can include several displays, controllers and clip contract construction build [ph] each of which can occur on a very schedule for the customer's needs causing timing difference of orders to sales. Gross profit improved to 23.9% during fiscal 2017 as compared to 21.2% during fiscal 2016.

Gross margin percentages were favorably impacted by lower production cost, lower warranty cost of the percentage of sales, higher sales volumes and a favorable mix in sales. So the fourth quarter gross profit was 23.5% as compared to 20.2% in the fourth quarter of last year for similar reasons.

Total warranty as a percentage of sales was 2.5% during the year as compared to 4.1% last year. For the fourth quarter, total warranty as a percentage of sales was 1.7% as compared to 4.6% last year. We continue to serve customers impacted by the warranty items discussed during fiscal year 2016 and monitor those reserves.

We have approximately $3 million remaining in that specific reserve. While many of our contractual warranty arrangements are nearing the expiration for the product with this issue, we may experience additional cost to maintain customer relationships for higher than expected failure rates.

Operating expenses increased $6.5 million or 5.5% for the year and remained relatively flat quarter-over-quarter. Selling expenses increased $2.9 million during the year primarily due to the addition of ADFLOW’s costs in comparison to last year and increases in personal costs and bad debt expenses in other selling areas.

General and administrative expenses increased $1.4 million during the year due to increases in personal costs and professional fees. Product development increased $2.2 million due to additional resources allocated to our product development functions to increase velocity of solution developments.

Our overall tax rate expense was 33.7% as compared to 34.1% last year. We forecast the forward-looking effective annual rate to be approximately 32% to 34%. Our effective tax rate can fluctuate depending on changes in tax legislation and geographic mix of taxable income.

Our cash and marketable securities position was $65.6 million at the end of the quarter. We reported a positive free cash flow of $31 million on the year-to-date basis as compared to a negative free cash flow of $3.3 million for the same period in fiscal 2016.

The increase in free cash flow was primarily due to improved profits for the year, improved operating net inflows with the year due to the timing of receivables and project cash receipts, net of payments out for inventory, the decrease in inventory and reduced capital spending.

We constrained capital expenses to $8.7 million for the year as compared to $17.1 million last year. This spend level is lower than anticipated due to the timing of cash outlays for the capital spend at the end of the year and the overall evaluation and is not at the level previously estimated.

Primary uses of capital included manufacturing equipments, research and development testing equipment and facilities, demonstration equipment for new products and information technology infrastructure. We made no repurchases of stock during the fourth quarter. Looking ahead to fiscal 2018, we are starting with the strong backlog and order pipeline.

We expect most of the $203 million backlog to be converted to sales over the coming year based on expected delivery needs of the customer. We estimate our first quarter sales to exceed last year based on current products and delivery schedules.

We continue to focus on improving gross profit level through customer targeted solution offerings offering them more value and continuing to focus on productivity metrics and continued improvements throughout fulfillment of the operations.

While we continue to manage our cost infrastructure carefully, operating expenses are expected to increase for personnel-related costs. We also expect to invest additional resources in our product development areas for another year to faster products release velocity to the market.

We are projecting capital expenditures for fiscal 2018 to be approximately $20 million for manufacturing equipments, quality and reliability equipments and continued IT infrastructure and needs. We will continue to monitor share repurchase options and other business investment opportunities to utilize cash.

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

Thanks, Sheila. As we enter fiscal 2018, we're confident in the expanding digital marketplace and the opportunities available across the sectors we serve. We begin the year with a near record backlog and while competition remains strong, we expect continued success in our business over the long-term for the following reasons.

We continue to enhance and develop product lines and comprehensive solutions for a broad market base and specific customer needs. This allows for success in markets during natural ups and downs of each segment.

In addition to our comprehensive products lines, we are committed to earning customers for life driving continued investments in quality, reliability and other performance enhancements to meet our customer needs today and over the long-term.

We actively support our customers from initial product planning throughout the intended use of the system leading to satisfied customers and repeat business during the natural replacement cycle. And finally, the market adoption and use of digital, it continues to grow and is predicted to grow.

All optimistic part of our long-term future, various geopolitical economic and competitive factors may impact order growth. Our business will continue to be lumpy. While these areas can effect a specific fiscal period, we continue to pursue profitable growth. For fiscal 2018, we believe in the following trends in our business units.

Our international business unit continues to be poised for growth through expansion and the use of digital systems and increases in market share and our focused segments of sport, out of home spectacular and transportation.

We expect continued demand for larger orders due to the adoption of videos, pouring applications in the high school park and recreation market allowing for growth. Transportation has growth opportunities due to continued investment in the U.S. transportation systems and the stability in federal funding.

In our commercial business unit we see opportunities for growth because of the number of unique digital opportunities in the spectacular segment. New customers and replacement cycles for national account based business, expansion of solutions for indoor applications and improved volumes in the billboard segment.

We expect live event sales to maintain order levels of prior years. During fiscal 2017, we made progress on increasing product development velocity and expect to continue this into fiscal 2018.

While these efforts will increase product development expenses, we believe this investment is necessary to drive forward new solutions to meet customer needs and expand our global market share. Rollouts of products including display and controlled solutions are expected throughout the coming year.

While the path will not always be smooth, the growing market and industry leading solutions position us to generate long-term profitable growth. With that I would ask the operator to please open it up for questions..

[Operator Instructions] Your first question comes from Morris Ajzenman with Griffin Securities. Your line is open..

Good morning; two questions.

One, can you kind of highlight the strength in the orders in Q4; $87 million versus $52 million last year? Can you just kind of discuss some of the strength emanating from that?.

We have a good fourth quarter like you mentioned and part of it is our lumpy business. So we had a nice run in our live events order for the fourth quarter, continued movements on projects there; and then other businesses continued to remain strong..

Okay, alright.

And the other question I have; you know, you have some momentum here now; looking back just over the last eight quarters, I can further back to that -- you only had one quarter where gross margins exceeded 25% and understanding that issues were warranty expenses and many other issues and we know the industry is competitive; and you've always stayed in the past, you would like to get gross margins clearly well north of 25%.

Is that realistic or has the environment changed from the competitive front where higher gross margins on that was in grasp based on the competitive situation? How do you look into next year so far as gross margins seeing improvements there?.

Morris, this is Reece. I believe that we see the gross margins to be stable to climbing. Can we achieve our internal goals for gross margin is yet to be seen but what we feel we are in a competitive position in the marketplace and continue to win orders that we believe are good quality orders and we'll move the company forward..

Thank you..

And I'm showing no further questions at this time. I would like to turn the call back to Reece Kurtenbach for any further remarks..

Thank you. I appreciate everybody on the call. I would like to say that we have a solid 2017, we're optimistic for our 2018. I would like to take this opportunity to thank all the employees of Daktronics that have helped achieve this success, as well as our suppliers that really helped us out and I look forward to working with them in 2018.

I hope everyone has a wonderful summer and we'll talk again near Labor Day. Bye, bye..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day..