Daktronics, Inc.

Good day and thank you for standing by. Welcome to Daktronics first quarter FY26 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brittany Jacobson, Corporate Administration Supervisor. Please go ahead.

Thank you, Michelle. Good morning, everyone. Thank you for participating in our first quarter earnings conference call. During today's presentation, we will make forward-looking statements reflecting our expectations and plans about our future financial performance and future business opportunities. These forward-looking statements reflect the company's expectations or beliefs about future events based on information currently available to us. Of course, actual results could differ. Please refer to slide two of the presentation that accompanies today's call, our press release, and our SEC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations. During this presentation, we will also refer to non-GAAP financial measures. You can find the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure in the appendix to the accompanying presentation slides, which may be found on the investor relations page of our website at www.daktronics.com. Our earnings release for the 2026 first quarter, which was furnished to the SEC on a form AK this morning, also contains certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well a discussion of certain limitations when using non-GAAP financial measures, are included in the earnings release, which has been posted separately to the investor relations page of our website. I'll turn the call over to Brad Wieman, interim president and CEO.

Good morning, everyone, and thank you. Thank you for joining our first quarter fiscal 2026 call. I'm joined on the call this morning by Howard Adkins, board member and acting chief financial officer We will review our fiscal 2026 Q1 results and accomplishments and then take your questions. Turning to our slide presentation on slide three. The main message we will be sharing with you today is emphasized here. We delivered a strong beginning to fiscal 2026 and to our three-year plan, ending cash balance of $136.9 million and backlog of $360 million which sets us up well for future revenue generation. Our selling teams are capturing customer demand and drove strong growth led by live events, high school park and recreation, and international. We were successful in winning three of the three large major league sports projects in Q1, along with several college and university projects. In addition, we experienced record order growth from our high school park and recreation business. This supported 35% order growth year over year, strengthening our backlog and setting us up well as we head into the remainder of fiscal 2026. We continue our work to preserve gross margins through improved value-based pricing, strong fixed cost leveraging, as well as cost control. The mix of revenue across businesses also contributed to improve gross margins. The business and digital transformation plan is in place and our execution of that plan is on track and is driving results. We also generated cash in the quarter and expanded our cash flow from operations by 34% year over year. Now turning to slide four. This is our market verticals and I'll start with our live events business. We want three of the three large major league sports projects, two major league baseball and one NHL arena. In addition to multiple college and university orders, driving orders 81% year over year and plus 10% sequentially. These projects include a variety of applications from main video, auxiliary video, fascia, ribbon, and scoring displays. We continue to enhance our products and service offerings as we expect continued growth in the live events business for both in-bowl applications, but also outside the bowl as more emphasis is placed on entertaining and informing fans through digital technology throughout the venue. This aligns with our control system capabilities, our service and subscription offerings, and our narrow pixel pitch product offerings. Our teams continue to focus on winning business aligned with our corporate transformation objectives on long-term profitable growth. Pictured here is David Booth Kansas Memorial Stadium at the University of Kansas. In our commercial business, overall demand for digital advertising solutions across the on-premise and out-of-home advertising markets saw an increase of orders by 5% from last year and a decline of 10% from the fourth quarter of fiscal 2025. This business is conducted primarily through signed company resellers and an AV integrator channel. In the on-premise area, customers are continuing to successfully transition to the next generation fuel price products, which offer quick deliveries and feature-rich enhancements. Demand in our out-of-home has been strong throughout the year, which reflects greater optimism that has been developing in both the national and independent billboard operators who are more often choosing Daktronics due to our recognized brand strength in image quality and reliability, as well as service responsiveness. The new generation digital billboard product released in the fourth quarter of fiscal 2025 is being well received by customers. Our investments in AV integrator channel continue to pay off, which is important to our indoor application growth. Pictured here is from QuickStar, which is part of the QuickTrip chain of full-service convenience stores. In our transportation business, orders tend to be large, which creates order variability from quarter to quarter. Orders decreased 4% from last year and decreased 7% from the fourth quarter of fiscal 2025 due to large order variability. We secured key aviation orders at Philadelphia, Spokane, and Southwest Wyoming airports. We are also strengthening the airport market pipeline developed through strategic partnerships. This growth is being driven by customers interested in our chip-on-board solutions, which provide better overall performance over legacy surface mount technology products. Going forward, we are focused on growing our ITS market by winning new agency approvals. The Buy America Act, or BAA, goes into effect in October 2026. We expect to benefit as a U.S. manufacturer and our teams are actively promoting the Buy America Act. Pictured here is from Texas DOT, El Paso District. Moving on to international. Our international business, which serves all end markets, our domestic segments serve outside of North America, has been an area of concentration and focused development for the past several quarters. These efforts are paying off with orders growing 22% from last year and declining 32% from a strong fourth quarter of 2025. Our largest growing market in this quarter were government and advertising. On the indoor solutions, demand for indoor solutions remains high for both government, retail, and industry customers. Pictured here is a recent installation at El Arabia in Dubai. Moving on to high school park and recreation. High school park and recreation business, we drove record order bookings for the quarter. Orders grew 36% year over year and 7% sequentially. Industry leading value propositions allow the sales team to implement value selling, which separates us from our competition. We are experiencing strong adoption of professional services, particularly in curriculum development and sports marketing. Two notable wins for the high school market include Mobile, Alabama County School District project for nine stadiums across the entire district for video display systems that included audio, Daktronics frameworks, services, and DAK classroom subscriptions. The second project highlighted is for Pat McAfee and his support of his home high school, the Plum Mustangs in Plum, Pennsylvania, through his partnership with FanDuel. This included a video display system for football and basketball. Pat McAfee specifically mentioned how much our employees cared about the project and how much he genuinely appreciated that, an endorsement that is very gratifying for our team. The high school park and recreation market continues to convert traditional scoreboards to full indoor and outdoor video. Schools of all sizes are purchasing video with the help of Daktronics Sports Marketing. In addition, Daktronics curriculum, a SAS product, teaches students career-ready production skills. Pictured here is Plum High School in Plum, Pennsylvania. Turning to slide five. New products and services are essential for continued market growth and value-added differentiation. In the first quarter, we added new models of our indoor narrow pixel pitch product to our offering, and we enhanced our indoor and outdoor fascia ribbon displays. We plan to release additional display products in the fiscal year, including LED street furniture for the out-of-home advertising market, a next generation indoor video display, a large digit fuel price system for convenience store market, and additional narrow pixel pitch products for the U.S. market. Photos shown are for a narrow pixel pitch product from Forextron in Australia, as well as an outdoor fascia ribbon display for the Charlotte Knights baseball team in Charlotte, North Carolina. Turning to slide six. With respect to business transformation, we made progress on these initiatives in the first quarter and our implementation plan is on track and driving results. Action we have taken to date include price adjustments on some products and services aligned with value selling, allowing us to preserve our value-based products and services positioning, launch of software as a service, SaaS trials, to target customers, focused approach on prioritized growth areas, both business verticals and geographies, driving faster inventory turnover and improved inventory efficiency by leveraging our platform designs to reduce complexity. We released a modernized service software system that will help us to enhance customer experience through better service management and enablement of self-service options. Further utilization of previously released artificial intelligence guided troubleshooting and technical services. making increased use of our purchasing power to improve our input costs, and simplifying some of our products, which allows us to bring them to market more quickly. And notably, we improved our operating cash flow in the first quarter, supported by the business transformation efforts. Turning to slide seven. Significant progress was made in digital transformation during first quarter of 2026. We are successfully operating on our modernized service software system that was released in May and continued technical build out of our corporate performance management tooling was accomplished. Our digital transformation goals are to build our systems to scale our operations for our growth ambitions while increasing internal efficiency and improve business engagement for customers and partners. During the remainder of 2026, we have slated these items in the digital transformation journey. Quoting platform tool change as part of our roadmap for driving faster, more efficient quotes while capturing the data that the system generates for capacity planning. An AI experimentation roadmap and governance development. Tool updates for project management to scale our teams for continued growth. continued service platform enhancements for customers, tool update for subscription management, and preparation for an ERP system upgrade. Additionally, we have plans to make further progress in our enablement of subscription management and corporate performance management, initial release for fulfillment performance reporting. and furthering our data and analytics ecosystem's roadmap and making progress on it to enhance and drive data-driven culture and build up data management practices. With that, I will now turn this over to Howard Atkins, our Acting Chief Financial Officer, to renew our financials. Howard?

Thank you, Brad, and good morning. Good day to everybody. Thank you for your continued interest in Daktronics. I will go over our first quarter financial results, including some key references to the year-over-year quarterly comps and, where relevant, the company's sequential trends. This first slide includes both last year's first quarter as well as last year's fourth quarter actual results to highlight these particular references. Working up from the bottom line on this slide, Daktronics net income rose to $16.5 million, or 33 cents per fully diluted share in the first quarter of 26. Last year's first quarter loss was largely the result of the $21.6 million fair value adjustment on the convertible notes that have since been converted. And the fourth quarter of 25 loss was largely a result of an allowance for credit losses on an affiliate loan of $15.5 million, as well as $5.6 million in non-recurring consulting, legal, and management transition expenses as specified in last quarter's release. We did not have any material one-time expenses in the first quarter results just released. Our effective Tax rate continues to run at about 25.9 percent. Now, on a pre-tax basis, our operating results for the quarter were a solid $23.3 million. The prior quarter result was impacted by the same non-recurring items I just mentioned. A key difference between this year's $23.3 million operating income and last year's $22.7 million in operating income is the tariff expense before manufacturing mitigation, which was $6 million in the first quarter compared with only $1 million in the year-ago comparable period. I should also mention that this year's first quarter benefited from having 14 weeks of profit instead of just 13 weeks of profit. If you do the math on that, 14 divided by 13 times the result, you get about a million and a half worth of extra profit in the first quarter of this year. So what drove this year's solid result? A couple of things. First, we had another quarter of strong orders, as Brad mentioned. At $239 million, orders in the first quarter were up 35% from a year ago and were our third consecutive quarter of year-over-year order growth in excess of 10%. Just to mention this, the $479 million in total orders over the last two quarters, that would be the fourth quarter of fiscal 25, first quarter just ended, was the second highest orders for two consecutive quarters in the company's history. Second, as described in last quarter's report, we ended last year and came into this year with a revenue tailwind from the growth in orders that I just described during the last two quarters of fiscal 25. Now, the tailwind benefit that I just alluded to coming into the first quarter of this year was supplemented by two important items. First, as I mentioned, we had strong new orders in the first quarter of fiscal 26. Second, while orders and revenue in the quarter were broad-based, particularly revenue was broad-based, the revenue in the quarter contained a little bit higher percentage of higher margin businesses like HSPR, which had a record quarter, as Brad mentioned. and which also tend to produce their revenue a little bit quicker in relationship to the orders than some of the longer-lived businesses, such as live events. So we had, as a result of all that, a third consecutive quarter of sequential revenue growth, Revenue was down slightly, about 3 percent from last year, but remember that in last year's first quarter, a number of multi-period revenue-producing projects were coming to completion, whereas this year, the order backlog in the first quarter went up by $18.7 million during the quarter. I'll finally mention, while the increase in the orders backlog does maintain now a good revenue tailwind coming into the rest of this year, I would remind you that some of the quarter and backlog won't go into installation and revenue production until later this year or even early fiscal 2027. And again, that's a result of the backlog containing a higher percentage of the longer live, later start projects like in live events. Third, we've made very good progress on completing the business transformation initiatives, including value-based pricing, which is reflected in revenue, of course, and supply chain management, particularly tighter inventory and labor manufacturing capacity. This resulted in improved gross profit margin along with the revenue mix and growth items I mentioned before. Although as revenue comes onboard from the backlog, the amount of inventory and labor we may need may be stepped up to complete the projects and obtain that revenue. As mentioned, gross tariff expense in the quarter totaled $6 million, including pre-reciprocal tariff of about $1 million. Now, tariff expense remains, of course, a highly uncertain aspect of our income statement. We're currently in pause with China, but don't yet know what rates will be or how markets, our competitors, and customers will react post the pause, such as when it occurs. Let me now turn to the balance sheet and investments on slide nine. We ended the first quarter with a cash balance of $137 million, an increase of 7% from the fourth quarter of fiscal 25, and that's after taking into account $10.7 million worth of shares repurchased in the quarter and the conversion of the convertible note since last year. Our operating cash flow is $26 million, 34% on solid earnings and the completion of our initiative to better utilize spare inventory. Inventory sales ratio is now at 49%. Inventory levels are likely to increase somewhat, perhaps as we position for fulfillment of the high backlog. As mentioned, we repurchased $10.7 million worth of shares in the quarter at a volume weighted average price of 16.43. We have had no borrowings, of course, under the company's bank line of credit, and none are contemplated. In terms of investment spend, the combined information technology and product development spend was $17.2 million in the quarter. The combination of IT and product development spend will remain high as the company completes its digital transformation work. and as critical new product development for future growth occurs. Daktronics' legacy was founded on leadership in product development and innovation, and we are carrying that banner forward. CapEx depreciation and amortization in the quarter was $4.8 million, in line with the prior four-quarter average of $4.9 million. On the next slide, on our transformation plan, We embarked on this journey, as you know, to generate better returns for all of our shareholders. We are targeting performance aligned with higher operating margins of 10% to 12% on average over time, operating in the top quartile ROIC target of 17% to 20%, and achieving a compound annual growth rate of 7% to 10% by fiscal year 2018. Our plan is in place, we're executing on it, and we have work to do. Our team is committed to its success. We remain on track with the many, many objectives and initiatives, and most importantly, on track with our growth and margin objectives. We've also continued to introduce new best practice initiatives throughout the company, including improved financial planning protocols, as well as incentive comp plans, as previously announced a week or so ago, that better align the compensation of the company with shareholder value and with that annual operating performance. And with that, I'll turn the call back over to Brad.

Okay, thank you, Howard. Turning to slide 11, we'll talk about our outlook. As for fiscal 2026, demand for our best-in-class dynamic video communication displays and control systems remains strong. Our teams are winning and have created a large and growing backlog, providing for revenue tailwind. We are executing on efficient revenue conversion and successful inventory, supply chain, and manufacturing cost management. Our balance sheet strength supports our growth objectives, including very strong cash position. Although there continues to be tariff uncertainty, we remain agile and ready to pull levers from our management system toolkit to mitigate impacts. We are the global industry leader in best-in-class video display, communication displays, and control systems. We are the only U.S. manufacturer of scale with a global footprint and servicing by geographic market. We remain focused on differentiated leading product introductions and supporting growth through high return product development investment spend. We are excited and committed to our future and are executing toward our growth and return objectives outlined in our transformation plan. I want to thank the entire Daktronics team for their hard work and dedication. And with that, I will now turn this back over to the operator for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Aaron Spakala with Craig Hallam Group. Your line is open. Please go ahead.

Yeah, good morning, Brad and Howard. Thanks for taking the questions. Maybe first for me on live events, you know, good to see the pickup and order activity there. Maybe just talk about the pipeline and what that looks like for order growth the rest of the year, and then any thoughts on just cadence of kind of revenue. You mentioned some potentially in FY27 just given scheduling, but can that segment get to that high watermark we saw a couple years ago given activity levels?

Yeah, so as I mentioned in the call, We were three for three on large projects, two major league baseball and one NHL arena project. And we're excited about that and excited to win all three. And I also mentioned in there that we continue to see growth and expect growth in the live event space, both from our in-bowl opportunities and outside the bowl. So we continue to expand on our product offerings and service offerings to provide that expansion, both in control systems and displays and services that we offer throughout the venue. And we're seeing some growth in that, seeing a nice growth in the out-of-bowl side of it. So our NPP products provide new opportunities to expand and bring the in-bowl experience to the outside of the bowl and throughout the concourse. So we continue to see growth there, our pipeline. Can't get into specifics about the pipeline, but we're excited about what the live events business, both in the college university space as well as the major league sports side of the business, is providing. Howard, anything additional you wanted to add to that?

No, I think that's key. I mean, as you said, the pipeline is good. You know, we'll see how quickly everything comes in.

All right. Thanks for that. And then maybe second, you know, good, strong gross margin performance. Just curious if, you know, you kind of highlighted the mix. Was there any other, you know, any one-time items? It sounds like not. But, you know, just curious on, you know, we have some seasonality, obviously, in the business later this year, but just how sustainable are

Those gross margin trends are as we kind of move forward We did have a mixed benefit as I alluded to so, you know going forward it depends on what the mix is going to look like and You know, we'll have to see about that we did as Brad mentioned continue to have better alignment between particularly our manufacturing expenses and revenue production. That helped, and that's, you know, where we intend to operate going forward. We had a small benefit this quarter. I shouldn't say benefit. We had a benefit. We had a cost a year ago in the margin from some unusually high warranty expenses, which normalized this quarter. So it was a little bit of that. But yeah, I mean, you know, what we saw in the quarter was a combination of kind of fixed cost leverage on revenue as well as the mix effect that I just mentioned.

Understood. Thanks for that. And then maybe last for me, just given the balance sheet. Can you just maybe talk a little bit about thoughts on M&A, what you're seeing in the market, any areas of interest, valuations, just some color there would be helpful. Thanks.

Brad, do you want to start that, and I'll chime in?

Yeah. We've been presented many M&A opportunities in the past, and those continue to come towards us. We're being very strategic about it. about what we want to do, but certainly the cash position puts us in a place where we could take a more serious look at that opportunity. Nothing specific to talk about at the moment, but we continue to be open to opportunities as they come forward.

All right, thanks. I'll turn it over.

Thank you, and one moment for our next question. Our next question will come from the line of Anya Soderstorm with Sedoti. Your line is open. Please go ahead.

Hi, thank you for taking my questions and congrats on the nice progress here. I'm just curious with three live events that you won, how was the competitive process there and did you replace anyone for that or?

Sorry, Anya, I missed that last part of your question, the competitive space and what else?

Yeah, and were they currently using someone else and decided to use you instead?

I don't think they were considering someone else.

question being asked about the competitive factors and our consideration for other companies and whether or not what our competitive factors might be? Yes. Yeah, and that varies across each of our businesses and each of our markets. We, you know, the opportunities and especially when we hit the major league sports markets, there's a lot of competition across all our spaces. We We put a lot of effort in, of course, in the upfront process to get specified and put ourselves in a position for our products and services to win those projects. But there is competition on almost every bid we have out there. Now, in certain markets, we see opportunities where we can lead in with our services and great financial tools through the process, which are highly beneficial. So that reduces that overall competitive thing and improves our margin space.

Okay. Thank you. And then... Sorry, this one. I don't know if that's... I don't think that's on my end. I'm just going to ask about the gross margin as well. You touched on it already in the Q&A, but what's the main driver for the better improvement there, the revenue mix, or was that more deficiencies that you've been implementing?

Yeah, certainly. Howard, maybe I should let Howard talk about this, but the fixed cost leverage is very important, of course. Having plants loaded up and operating at a high rate, that was very positive. The mix was also a key thing and you can see that in our revenue mix as you look back over the quarters. A higher mix of higher profit business was beneficial to that. But not to downplay, the things that we've been working on and improving upon, value-based selling, bringing some of that to the table, both in products and services, not broadly, but across certain areas, have improved that overall gross margin. But the work that we've done in the plants around inventory management, working with our vendors to improve our overall purchasing power, those are all coming into fruition and helping us along that roadmap.

Okay, and then you're still in the process of implementing systems and undergoing this digital transformation. Is that then going to help driving the operating expenses lower, or is it also going to aid the gross margin?

Well, we expect to see efficiency, certainly, and improved benefits to our customers and internal teams. So the efficiency is derived from many of those processes both the business transformation and the digital transformation. There is added expense during these, and we kind of laid out a timeline for that in both our IT as well as product development, and Howard alluded to that in the call. We expect to invest in those as we bring those on, and those are part of our plan that we've laid out. So a little bit of expense increase, but also benefits on the other side of it through efficiencies that we expect to gain.

I'd say, Anya, most of the product development is of a nature of remaining on the leading edge of product innovation in our markets, which has been a hallmark of the company for a long time. And our effort here is to stay ahead of that curve as a means of both making our product more competitive as well as being able to value price for our products on the i.t side i think it's a combination of things like making it easier for our customers to do business with us you know by having front end you know pricing availability and things like that as well as um helping make the company internally more efficient. So you've got the combination of that on the IT side.

Okay, thank you. And then you touched on the strong balance sheets here already in terms of M&A, but how do you think about the buybacks? How much do you have left on the current authorized program, and are you in talks with the board to extend that?

Yeah. As I mentioned in the quarter, we bought back a little over $10 million worth of shares. We have, at the end of the quarter, we had about just under $10 million under that original authority. And, you know, our board has been very open to considering additional authorities as we've requested them, and we'll see how that goes. But we certainly have a cash position to... to have a very flexible approach to managing our capital position and our share count.

Okay, thank you. That was all for me.

Thank you. And as a reminder, if you would like to ask a question, please press star 1-1 on your telephone. Our next question is going to come from the line of Eric Lamarder with Half Moon Capital LLC. Your line is open. Please go ahead.

Thank you. Last couple of quarters, you've had some consulting and other associated costs related to the transformation plan. Were there any of those costs that have residually been born in Q1 here that maybe are one time in nature we should consider planning back?

No. I mentioned that before. The bulk of the transformation consulting costs were connected with a consultant that we had in last year for close to half the year almost, maybe a little bit longer than that. And those consulting fees are now behind us.

Understood. Thank you.

Thank you. And I'm showing no further questions at this time. And I would like to hand the conference back over to Brad Wieman for further remarks.

Dave, thanks everyone for joining our call today. We plan to present next week at the Sedoti Conference and in November at the Craig Hallam Alpha Select Conference. We look forward to speaking with you on our second quarter call. Have a great day.

This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.