Q2 2021 Daktronics Inc Earnings Call
[music], good day, ladies and gentlemen, and welcome to the Daktronics fiscal year 2021 second quarter earnings.
<unk> conference call.
As a reminder, this conference is being recorded today Wednesday December 2nd 2020, and it's available on the company's website at Www Dot Daktronics dotcom.
At this time, all participants on listen only mode.
After the speaker's presentation, there will be a question and answer session cash.
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Oh no. It's it's on 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 on plans about our future financial performance on 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.
Such risks include changes in economic condition changes on the competitive and market landscape, including impacts of global trade discussions on policies the impact of governmental laws regulations on orders, including those resulting from Pandemics disruptions to our business growth 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 on margins the introduction of new products and technology and other important risk factors as noted and detailed in our 10-K and 10-Q FCC filings.
With that let me highlight some of the financial.
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 acquired 21 of 26 weeks.
Sales orders in all areas of operating expenses were impacted with that additional week and the six month comparisons.
In the near term the COVID-19 pandemic have caused various changes on our customers core businesses impacting their investments and audio visual systems for example businesses, which rely on revenues from out of home advertising or who our reliance on customer traffic to drive sales have been adversely impacted by or stay at home orders or corn.
On orders this was delayed their discretionary spending 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 on the part of the recovery to drive an increase to their locations venue.
Venue, So think sports entertainment on other events I've 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 to students parents and other visitors have had varied impacts their investments and audio visual systems.
Some customers on 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 call, but 19 pandemic and in the long term roadway projects may be impacted by reduced tax revenue that potential impact will increase as the duration and read.
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We expect the COVID-19 pandemic to continue to have an adverse impact on our revenue on our results of operation you Mountain duration of which we are currently unable to predict.
I highlight these trends as the COVID-19 pandemic impact.
I have been the primary cause of the changes on our order bookings and sales decline 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.
Well the contraction due to the pandemic caused the decline in orders, we have that customers place multimillion 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.
Or on premise display business remains strong and is comparable to last year.
Sales for the second quarter 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, causing order booking declines and due to the very timing and the related conversion to sales based on our customer needs and our ability to install solutions.
Gross profit for the quarter as a percent of net sales was 26.2% as compared to last year's 22.9% and gross profit for the year was 25.5% as compared to 24.1% in fiscal 20.
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 fiscal 2020, we experienced additional project delivery costs and higher tariff related expenses decrease in the gross profit rates in that period.
Our warranty as a percentage of sales decreased to 6.6% for the quarter as compared to 2.2% in the second quarter fiscal 2020 and decreased to 1.4%.
As compared to 2.2% for the six months ended the 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 million 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 Cosby COVID-19 weeks.
We conducted a reduction enforcement, both first and second quarter's to a line the size of our team to anticipated order levels.
Operating expense declines were attributed to lower personnel costs offset by severance costs lower.
Lower travel and entertainment activities and lowered marketing and convention events, along with that focus on reducing spending in all areas.
We also reduced our planned investments in our IP and product development areas. Our teams have come together to do a great job, serving our customers, while reducing capacity on costs.
The provision for income taxes during our interim reporting periods as calculated by applying an estimate of the annual effective rate to be ordinary income or loss from the reporting period adjusted for discrete items.
Due to various factors, including our estimate of annual income and operating in multiple states on foreign jurisdictions, our effective tax rate is subject to fluctuation the effective tax rate for second quarter, 21 was 41.1% as compared to a benefit of 63.8% a year earlier.
On on a year to date 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 or percent of estimated current fiscal year pre tax income.
Our cash and marketable securities position with 74.4 million at the end of the quarter, we generated 40 million of cash from operations correlating with a focus on customer collections decreasing inventory levels Loring personnel on operating expense outflows as we manage our operations through this call, but uncertain times weighted.
We reduced capital spending and have suspended our dividend and share repurchase programs also during this time.
We used $5.8 million for investments on capital for new production system capabilities built.
Building improvements and information system infrastructure and used $14.3 million in product development.
Capital expenditures for the 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 fiscal 21 to be lower than last year's third quarter due to the COVID-19 uncertainty but.
But of course sales could change pending project project bookings on customer schedule changes, our third quarter has historically been a lower quarter for sales due to seasonality in our business on holiday breaks.
I'll now turn it over to Reece 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 cold at 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 on.
We also believe the underlying trends are still strong and investments in ABS systems will continue over the long term.
We have carefully reduced and continue to strategically make choices on levels of investment in capital assets on 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 in interactions with us customers choose tektronix 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 system.
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 simplification.
What 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 in different businesses have different drivers and we'll move on their own time line, 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 the ability to grow over the long term.
This belief is really because in that international our establishment of localized sales and service channels. Our sales force. 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 debt.
With the Ria realization that this business is lumpy, primarily consisting of larger contracts, which can be highly competitive trading variation from year to year.
We expect sustained demand from 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 multimillion dollar projects that are discretionary choices by customers, which can cause ups and downs and timings and trends.
The transportation and business in the US 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 cycles and strive to serve our customers with their needs today as well as in the future. We are expanding our neural pixel pitch offerings and see a receptive market for these products across our business units, we continue to foster and build out indirect sales channel.
Our range of solutions and global capabilities make us the industrys most experienced digital display provider.
To conclude.
We enter the second half from 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 ABTS 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 on 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 audio visual 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 and market conditions.
Even though we face a challenging fiscal 2021, we intend to emerge as a stronger organization.
With that I would ask the operator, please open the line for questions.
Thank you.
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And our first question comes from Greg Pendy from Sidoti Your line is open.
Hi, guys. Thanks for taking my questions. Just first I wanted to just understand I know, we have a change in.
Administration here, but.
There was some news on maybe what the plans where with the trade deal can you just remind us have we anniversary most of I believe it was roughly 10 million uptick due to tariffs is that going to be sort of neutral on a year over year basis at this point.
We actually will see a bit of a decrease because of the decline in our inventory part ordering we've had some.
Uh huh.
Forgiveness on some of the tariff implication sold will end as well at the end of the fiscal year, so a little bit down from.
20 to 21, but still with an over underlying theres still some costs that we have going forward in our in our view.
Maybe if I were right.
Color to that is that we're we're not expecting right now a dramatic change in the tariff situation.
An increase in new or a pullback in existing and that's that's our thinking as we.
And if you are a better guidance on what the New administration would do we're all ears for that [laughter].
No.
Understood understood.
And then also you seem cautious I think well on a lot of the segments and that you know I understand that the large amount of uncertainty, but just wanted to hover in baby on sort of the outdoor Billboard on.
Retisert it seemed like there transition and maybe a couple of the major ones, where at least looking for year over year growth into 2021 on in terms of their digital.
From a static to digital is that fair to say or do you think that maybe the overall market will actually still be cautious.
I think that what we've seen in the out of home advertising is that when uncertainty looms that are one of the first to pull back but as they see positive signs there one of the first back in to make investments. So we think that as the.
Variable recovery is maybe how we think about the different segments will come back in different ways. We believe out of home will come back faster and we've seen some out of home companies continue to invest during the downturn. So on some variability there as well.
Great and then just one final one if I can.
Just you made a significant investment in micro Ali D does that kind of does does that investment help on shoot some of I guess, the R&D spend in some of the new technologies given the partnership.
Oh, we are we believe in the microbiology business and continue to invest in that.
But we don't have a product on the market yet today that has a micro ltd. In it so with that is on maybe is not reflected in.
And our operating side, but yes, we do believe that this will give us a stronger entry into micro early deals in the coming quarters in fiscal years.
And now to our it fits into our picture of our development spend in our forecast of our development spend.
Got it alright, well, thanks, a lot for taking my questions.
Thanks, Greg.
Thank you and I am showing no further questions from our total mines on I'd like to turn the conference back over from Reece Kurtenbach for any closing remarks.
Well, we appreciate everybody joining us. This morning, we know these are strange times, but we hope that you have the best holiday season possible and that we all into the new year and.
Have a more positive outlook and we look forward to talking to you next may.
Thanks, everyone Bye bye.
[noise], ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.
[music].