Daktronics, Inc.

Welcome to the Daktronics Fiscal Year 2021 Second Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Wednesday, December 2, 2020, and is available on the company's website at www.daktronics.com. At this time, all participants are on the listen-only node. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star and then 1 on your telephone. If you require any further assistance, please press star and then zero. 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. Good morning, everyone. Thank you for participating in our second 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 conditions, changes in the competitive and market landscape, including impacts of global trade discussions and policies, the impacts of governmental laws, regulations, and orders, including those resulting from pandemics, disruptions to our business caused by geopolitical events, military action, work stoppages, natural disasters, or international health emergencies such as the COVID-19 pandemic, management of growth, timing and magnitude of future contracts, fluctuations of margins, the introduction of new products and technology, and other important risk factors as noted and detailed in our 10-K and 10-Q SEC filings. With that, let me highlight some of the financials. As a reminder, fiscal 2020 was a 53-week year and fiscal 2021 is a 52-week year. The extra week of fiscal 2020 fell within the first quarter, resulting in the six months ended being 27 weeks versus the FY21 of 26 weeks. Sales, orders, and all areas of operating expenses were impacted with that additional week in the six-month comparisons. In the near term, the COVID-19 pandemic has caused various changes in our customers' core businesses, impacting their investments in audiovisual systems. For example, businesses which rely on revenues from out-of-home advertising or who are reliant on customer foot traffic to drive sales have been adversely impacted by our stay-at-home orders or quarantine orders. This has delayed their discretionary capital spending in many cases. Many businesses using our displays for self-promotion or on-premise advertising have reduced budgets for the foreseeable future, and some have pulled back spending. But we have also seen businesses choose to utilize displays as part of their recovery to drive an increase to their locations. Venues hosting sports, entertainment, and other events have seen limitations on the number of people allowed to gather, causing reduced attendance or cancellations. This has adversely impacted many sources of in-venue revenues and subsequently delayed expected spending on display projects. Educational campuses using displays for communication with students, parents, and other visitors have had varied impacts to their investments in audiovisual systems. Some customers in the mass transit and airport segments of our transportation business are expected to delay spending as a result of the limited use of the infrastructure and the impact on their financial stability during this COVID-19 pandemic. and in the long term, roadway projects may be impacted by reduced tax revenues. That potential impact will increase as the duration of the reduction of infrastructure usage continues. We expect the COVID-19 pandemic to continue to have an adverse impact on our revenue and our results of operations, the amounts and duration of which we are currently unable to predict. I highlight these trends as the COVID-19 pandemic impact have been the primary cause of the changes in our order bookings and sales declines for the quarter and for the year. For the second quarter, overall orders decreased 10.2% as compared to last year's second quarter and decreased 23.9% as compared to the first six months of fiscal 2020. While the contraction due to the pandemic caused the decline in orders, we have had customers place multi-million dollar orders for live event venues, transportation signage, and out-of-home advertising in both of our domestic and international business units during this recent quarter. Our on-premise display business remains strong and is comparable to last year. Sales for the second quarter of fiscal 2021 decreased 27.2% as compared to the second quarter of fiscal 2020 and decreased 23.7% as compared to the first six months of fiscal 2020. Net sales decreased in all business units for the same reason, Thank you for joining us. The improved gross profit rates were the result of lower warranty costs and a change in the mix of higher profit service agreement sales in fiscal 21 as compared to fiscal 20. In addition, during last year's second quarter of fiscal 2020, we experienced additional project delivery costs and higher tariff-related expenses, decreasing the gross profit rates in that period. Our warranty as a percent of sales decreased to 6.6% for the quarter as compared to 2.2%. in the second quarter of fiscal 2020 and decreased to 1.4% as compared to 2.2% for the six months ended of fiscal 2020. Operating expenses for the second quarter of fiscal 21 were $26.7 million compared to $35.3 million or a decrease of 24.4%. On a year-to-date basis, operating expenses were $52.9 million compared to last year's $73.2 or a decrease of 27.7%. These declines are attributed to our focus on managing our expenses to expected order volumes as a result of the economic downturn caused by COVID-19. We conducted a reduction in force in both first and second quarters to align the size of our team to anticipated order levels. Operating expense declines were attributed to lower personnel costs, offset by severance costs, lower travel and entertainment activities and lowered marketing and convention events along with that focus on reducing spending in all areas. We also reduce our planned investments in our IT and product development areas. Our teams have come together to do a great job at serving our customers while reducing capacity and costs. The provision for income taxes during our interim reporting periods is calculated by applying an estimate of the annual effective rate to the ordinary income or loss for the reporting period adjusted for discrete items. Due to various factors, including our estimate of annual income and operating in multiple states and foreign jurisdictions, our effective tax rate is subject to fluctuation. The effective tax rate for second quarter of 21 was 41.1% as compared to a benefit of 63.8% a year earlier, and on a year-to-day basis, we recorded an effective tax rate of 26.2% as compared to a benefit of 14.6%. The change in the effective tax rates are primarily driven by a decrease in tax credits and other permanent differences as a percent of estimated current fiscal year pre-tax income. Our cash and marketable securities position was $74.4 million at the end of the quarter. We generated $40 million of cash from operations correlating with the focus on customer collections, decreasing inventory levels, lowering personnel and operating expense outflows as we managed our operations through this COVID uncertain times. We reduced capital spending and have suspended our dividend and share repurchase programs also during this time. We used $5.8 million for investments in capital for new production system capabilities, building improvements, and information system infrastructure, and used $14.3 million in product development. Capital expenditures for fiscal year 21 are expected to be $10 million. Our product backlog is $201 million, which we expect to convert to sales over the coming two to three quarters. We expect our third quarter of fiscal 21 to be lower than last year's third quarter due to the COVID-19 uncertainty, but of course sales could change pending project bookings and customer schedule changes. Our third quarter has historically been a lower quarter for sales due to seasonality in our business and holiday breaks. I'll now turn it over to Reese Kurtenbach, our Chairman, President, and CEO, for a few comments.

Thank you, Sheila. Good morning, everyone. As Sheila highlighted, for the first half of the year, we have managed operating expenses and working capital to align with expected declines in orders and sales as our customers adjust to the economic and business implications of COVID-19. Even in these challenging times, customers have placed orders and continue to invest in their businesses. and we are hearing promising news on different vaccines and treatments that we believe will improve conditions for all over the coming months. We also believe the underlying trends are still strong and investments in AV systems will continue over the long term. We have carefully reduced and continue to strategically make choices on levels of investment in capital assets and development while focusing on positioning ourselves for a strong recovery when the crisis is over. Our sales teams have continued to engage our customers, often virtually, across new and existing markets through this time. We also have continued to invest in systems to improve our customers' overall experience and interactions with us. Customers choose Dektronix for new and leading technologies, our broad range of solutions, the reliability of our products, and our commitment to serve them over the lifetime of their systems. We are focusing on developing and releasing innovative solutions and services tailored to different applications for both existing and new markets. We do remain positive regarding the overall long-term outlook of the business and growth in the industry as the world and our customers work through and get past the pandemic's implications. But we will have greater uncertainty in the foreseeable future due to the impact of the pandemic on different customers. As the availability of treatments and vaccines increase the willingness of people to gather, many normal activities will resume and our customer businesses will also become more normal. We believe that different types of gatherings and different businesses have different drivers and will move on their own timelines, creating variation in a return to what normal looks like. With that said, for fiscal 2022 and beyond, We continue to see positive signs and believe we have ability to grow over the long term. This belief is really because in Nat International, our establishment of localized sales and service channels, our sales focus is on increasing market share in sport, out of home, spectacular, and transportation areas. Looking into the live events business, we expect to see some continued growth over the long term. with the realization that this business is lumpy, primarily consisting of larger contracts, which can be highly competitive, creating variation from year to year. We expect sustained demand for larger sized orders due to the adoption of video and sporting applications in the high school, park, and rec market. In our commercial business unit, we see growth opportunities because of expansion of solutions for indoor applications, The continued replacement and new investment in the out-of-home and retail segments and opportunities in the spectacular segment. This segment includes multi-million dollar projects that are discretionary choices by customers which can cause ups and downs in timings and trends. The transportation business in the U.S. and Canada remains strong due to continued investment in the U.S. transportation systems and stability in federal funding. and increased advertising on on-premise promotional application needs in mass transit facilities. In all our markets, we have a natural replacement cycle and strive to serve our customers with their needs today as well as in the future. We're expanding our narrow pixel pitch offerings and see a receptive market for these products across our business units. 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. To conclude, we enter the second half of fiscal 2021 with a strong backlog and signs of promising vaccines that can lead to stabilization in the world's economy. We continue to see some uncertainty, but generally a more positive outlook for customer willingness to purchase AV systems. We have taken actions to position ourselves for a strong but variable recovery as the crisis eases, with a greater focus on reacting to the new realities of this uncertain environment. We continue development of new solutions and new customers and are investing in development areas to further enhance our customers' experience when working with us. Over the long term, we believe the audiovisual industry fundamentals will drive growth for our business. We are focused on positioning Daktronics for long-term success while carefully managing our cost structure to reflect the near-term uncertainty in market conditions. Even though we face a challenging fiscal 2021, we intend to merge as a stronger organization. With that, I would ask the operator to please open the line for questions.