Good day, ladies and gentlemen and welcome to the Daktronics Fiscal Year 2020 First Quarter Earnings Results Conference Call. As a reminder, this conference call is being recorded today, Wednesday, August 28, 2019 and is available on the company’s website at www.daktronics.com.

[Operator Instructions] 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, Scalar. 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 disclosing and 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 maybe out of our control and may cause actual results to differ materially.

Such risks include changes in economic conditions; changes in the competitive and market landscape, including impacts of global trade discussions and policies; management of growth; timing and magnitude of future orders and contracts; fluctuations of margins; the introduction of new products and technologies; and other important factors as noted and detailed in our 10-K and 10-Q SEC filings.

With that, let me highlight some of the financials for the first quarter of 2020 and the related comparisons to fiscal 2019 first quarter. Fiscal 2020 is a 53-week year and fiscal 2019 was a 52-week year. The extra week of fiscal 2020 fell within the first quarter, resulting in a 14-week versus a 13-week quarter comparison.

Sales orders and all areas of operating expenses were impacted by this additional week. Orders are up 17.5% when compared to last year’s first quarter. Orders increased in Live Events, international and commercial business units, decrease in high school park and recreation business units and were relatively flat in the transportation areas.

For comparisons, orders paced at $13.4 million per week in fiscal 2020 as compared to $12.3 million during the same time last year or around a 9% increase using this comparison. Each business unit was impacted by that additional week in fiscal 2020.

Live Events orders led the increase primarily due to the number of projects for professional sports, arenas and colleges and university venues available. In professional sports, we were awarded orders for either upgrades or replacements. Examples includes wins – Example wins include projects for the Cincinnati Reds, The U.S.

Military Academy and TD Gardens, home of the Boston Celtics and Bruins to name a few. We were also awarded several projects on college campus athletics as these customers are looking to increase the fan experience and attract players and fans to their events.

International business unit orders were up due to general variations in timing of large contracts than account-based business. We worked across a number of different customer types and geographies outside the U.S., including transportation and governmental sports and commercial areas.

As an example, we won projects this quarter in Macau, Riyadh and Doha for all these customer types.

We had continued orders success with global and regional out-of-home advertising customers as they build out their digital networks and have had continued success in projects for malls and casinos, sports complexes and other transportation stations around the world. The increase in commercial orders was due to out-of-home and on-premise segments.

These increases were caused by timing of account-based orders for digital billboards and an increase in market demand. We had wins in – for spectacular orders in Las Vegas during the quarter along with other unique installs across the country.

While transportation was relatively flat, we had continued success with state departments of transportation like Colorado and Florida for continued use of our roadside signage products.

High School Park and Recreation orders decrease was related to the variability in order timing and we had fewer larger video system projects as compared to last year at this time.

As a reminder, we derived significant portions of our orders and sales for large dollar-sized projects in the college and professional sports facilities, entertainment venues, transportation market applications and from spectacular niche and account-based business in the out-of-home niche.

This timing and amount of these contract awards and sports and – amount of these contracts awards, sports and construction seasonality and the various schedules depends on our customers needs can cause material fluctuations in our order, sales and earnings across the quarters.

Sales for the first quarter of fiscal 2020 increased 16.9% and were $180 million as compared to $154 million last year. For comparison to the 13-week quarter, sales revenue paced at $12.9 million per week in fiscal 2020 as compared to $11.9 million during the same time last year or around a 9% increase using this comparison.

Net sales increase in Commercial Live Events, High School Park and Recreation and Transportation business units and decreased in the international business units. The change in sales correlates to the increase in order levels as well as the timing of converting orders and backlog into sales.

Our first quarter is historically one of the busiest quarters as we produce, deliver and install for outdoor sports venues and other outdoor systems during the summer construction season.

Gross profit as a percentage of net sales was 25.2% as compared to last year’s 24.8% and with primarily was higher due to sales volumes over a relatively fixed infrastructure costs. Offsetting this increase was tariff-related expenses of approximately $1.5 million for the quarter. Last year at this time, tariffs were just being introduced on U.S.

imports of aluminum and steel and components from China. Our warranty as a percentage of sales decreased to 2.1% as compared to 2.5% quarter-over-quarter and is slightly lower than the fiscal 2019’s rate of 2.3% of sales.

Operating expenses for the first quarter of fiscal 2020 was $37.9 million compared to $34.2 million for the first quarter of fiscal 2019. This increase was primarily due to the additional week and we continue to invest in our development of new or enhanced solutions causing some increase in weekly run-rates and product development.

Selling expenses increased due to the commissions to third-party resellers related to sales this quarter. Operating income as a percentage of sales was 4.2% for the first quarter as compared to 2.6% for the first quarter of 2019. The effective tax rate for the first quarter was 12.6% as compared to an effective tax benefit of 13.1% last year.

During the first quarter of 2019, we recorded a tax benefit, which caused an expected – which was caused by discrete tax credits exceeding our tax expense.

We estimate our effective tax rate to be approximately 13% for fiscal 2020, but this effective rate can fluctuate depending on changes in tax legislation, actual geographic mix of taxable income and the levels of tax credits as compared to its actual taxable income.

Our cash and marketable securities position was $33 million at the end of the quarter.

We used $18.2 million of cash from operations, correlating with the increase of inventory and receivables that are related to contracts and progress and which supports production of backlog and used $5.9 million for investments in capital for new production system capabilities and information infrastructure and used $10.5 million in product development.

We used $2.2 million for dividends and $1.2 million for stock repurchases also in the quarter.

We expect capital expenditures to be between $20 million and $25 million during the year and will be used primarily for new production equipment, which relates to new products and related reliability of lab equipment along with investments in our information technology infrastructure and systems.

One change to the balance sheet to point out this quarter, we adapted the new lease accounting standard at the beginning of the year requiring a right of use assets and a related liability for leases.

The asset and liability was approximately $10 million at the end of the quarter and was related to our lease facilities in Sioux Falls, South Dakota and Shanghai, China along with other leases for local offices around the world.

Our product backlog was $207 million at the end of the quarter, which we expect to convert to sales over the coming two to three quarters. We expect sales for the second quarter of fiscal 2020 to be up slightly as compared to last year and of course, sales could change depending on project bookings and customer schedule changes.

I’ll now turn the call over to Reece Kurtenbach our Chairman, President and CEO for a few comments..

Thank you, Sheila. Good morning, everyone. As Sheila highlighted, we had a strong start to fiscal 2020. Our teams across the Company worked to serve our customers, which translated into top line and bottom line performance in the first quarter.

We’re historically busy at these times as the first half of our fiscal year has many of our sports customers installing facility upgrades or enhancements and this is also the construction season in the northern hemisphere and much of the world uses this time to install outdoor applications before the winter months.

As a result of our increased investments and development over the past few years, we have broadened our offerings to customers. Solutions like our Narrow Pixel Pitch displays are being adopted by new and existing customers around the world.

Especially for these new indoor product lines, we continue to explore and develop new channels to sell through, often with integrators that can incorporate our products into locations like corporate offices, control centers and retail stores.

Our control offerings have also been enhanced, creating demand for both control system upgrades and new system purchases. We have been successful around the globe. We continue to see buyers interested in making decisions to invest in our solutions even while economic concerns linger.

Like many other companies, we are in the midst of a dynamic and volatile global trade environment. Today we are most impacted by the China and United States administration measures to impose import tariffs and the current rhetoric on where to do business.

We continue to monitor and evaluate this situation from multiple perspectives and we will continue to adjust our sourcing and production methodologies to minimize impact to our customers and to Daktronics, while providing high quality, high valued solutions at a competitive price.

However, in our current view, we estimate the tariffs on components could impose more than $10 million in costs for us this year. We do remain positive regarding the overall outlook of the business and the growth in the industry for fiscal 2020 and beyond.

We predict applications of digital solutions will continue to grow and expand in all of our business units.

Specifically in International, with our establishment of localized sales and service channels and our focus on increasing market share, our current outlook on known opportunities, we expect growth in Sport, Out-of-homes, Spectacular and Transportation areas outside the U.S. and Canada.

Looking into the Live Events business, we expect some growth over the long-term. However, we predict a similar sized business as previous years, driven by replacement cycles and new product uses.

One caveat is that this business is lumpy, primarily existing of larger contracts, which can be highly competitive, which will create some variation from year-to-year. We expect sustained demand for larger sized orders due to the adoption of video in sporting applications in the High School Park and Recreation market.

In our Commercial business unit, we see growth opportunities because of expansion of solutions for indoor applications, continued replacement and new investment activity in the out-of- home and retail segments and opportunities in the Spectacular segment, which includes multi-million dollar projects that are discretionary choices by customers, which can cause ups and downs and timings and trends.

The Transportation business in the U.S. and Canada remain strong due to continued investment in the U.S. transportation systems and stability in federal funding, and increasing advertising and on-premise promotional application needs in mass transit facilities.

It is true in all of our markets that we have a natural replacement cycle and strive to serve our customers with their needs today as well as in the future so where there obvious choice for replacement. We have recently introduced indoor Narrow Pixel Pitch offerings and we see a receptive market for these products across our business units.

And so we continue to foster and build out indirect sales channels.

Our range of solutions and global capabilities make us the industry’s most experienced digital display provider; and to support our customers over the long term, we are focused on developing and releasing innovative solutions and services tailored to different application in each of our segment.

During fiscal 2020, we are continuing to invest at higher levels in our development and are making investments in the technologies and techniques of using micro LEDs.

These technologies will open up new markets and create competitive advantages to us, while serving the needs of customers desiring to improve the way they connect and interact with their customers and audiences. We enter the second quarter of fiscal 2020 with a strong backlog and a positive outlook.

During fiscal 2020, we are focused on increasing orders as we serve a growing global customer base in Commercial, Sports and Government markets. We plan to continue to invest in product development activities for new technologies and advancing our manufacturing techniques.

Finally, we are focused on carefully managing capacity and spend on our path of long-term profitable growth. With that, I would ask the operator to please open the line for any questions..

[Operator Instructions] And our first question comes from Greg Pendy with Sidoti. Your line is now open..

I just wanted to – I think in the quarter you said the tariffs were at $1.8 million impact and you’re expecting a $10 million impact throughout this year.

So just – can you help us understand the timing of where there might be some step ups throughout the year, maybe more tariffs coming through and how we should be thinking about that? Because it seems like given a $10 million impact, you’re expecting it to increase a little bit throughout the year..

There was just a recent announcement that there would be a bit of an increase, so there was that – create some of that increase to the $10 million. And then it also goes along with when we utilize the inventory. So there’s some tariff pop-up in our inventory at this moment that we’ll use in future quarters..

Got it. Thanks. And then just moving on – just wondering, you know, I think in the guidance for next quarter, you kind of mentioned you’re expecting revenue to be up slightly. Just trying to understand the Live Events because it looked very strong in this quarter you’re thinking it kind of balances out throughout the year, I take it.

And can you just kind of give us a little bit of color, it was helpful that you pointed out the Cincinnati Reds, the [indiscernible] but just trying to understand a little bit maybe of what you’re seeing environment wise and maybe the NFL, given the attendance problems maybe a few years back and whether people are more comfortable in some of the professional sports attendance trends?.

We continue to see an investment by sports teams across the board in improving the in-venue experience, not just in the bowl, but in all different spaces associated with today’s modern sports venues.

We believe that investment will continue to happen in the NFL and the other pro teams and that without a big stadium construction, that investment tends to be upgrades or enhancements, which are more difficult to predict in time because a customer can choose to do it this season or next season and on their personal schedules and other priorities..

Great, that’s helpful. Thanks a lot..

Alright, next question..

[Operator Instructions] Our next question comes from Lisa Springer with Singular Research. Your line is now open..

Thank you. And congratulations on a good quarter by the way..

Thank you..

I wanted to – could you give us a little bit more color around the surge in orders for the International segment and how soon do you think you’re going to recognize the revenues from those orders?.

I think the International business has its ups and downs, but we continue to grow overall and our presence has been continuing to build over the years as far as the timing of when the business will turn to the sales..

I think in the next two to three quarters, mostly projects that will finish out in the relatively near term here..

Okay.

And just in general, in a given quarter, what percentage of your sales are from replacement sales and what percentage would be new customers and new installations?.

Lisa, I don’t know if we have a number at our fingertips, and it would vary a lot from year-to-year depending on construction cycles. We don’t keep figures like that.

I will say that in North America, especially almost every major team from a college, minor league has some type of video system and so when they choose to upgrade that – really you could consider that a replacement and so then some parts of our business – the whole thing is almost some type of upgrade or replacement outside of new..

And what would be the typical replacement cycle for a college or professional sports board?.

A nominal 10-year replacement cycle for most of what we do is a rule of thumb but not everything [correlates][ph] with that..

Okay, thank you..

No worries..

And at this time, I’m showing no further questions, I’d like to turn the call back over to Reece for any closing remarks..

I would like to thank everybody for attending the call today. For those of you in the U.S., I wish you a great three day end of summer holiday. I look forward to talking to all of you in a few months..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect everyone have a great day..