Daktronics, Inc. (DAKT) Earnings Call Transcript

Hi, everyone, and welcome to our private client call with Daktronics and CFO Sheila Anderson. We've got a great morning ahead, and Sheila will present Daktronics, and then we'll have some one-on-one meetings after that. So Sheila, are you there?

Good morning, Chris, I am here. Thank you.

Okay. Great. We could hear you well. So yes, we can hear you. So please go ahead.

Okay. Great. Good morning, everyone. Thank you for attending. My name is Sheila Anderson. I'm the Daktronics Chief Financial Officer. At Daktronics, we help our customers inform, entertain and persuade audiences through dynamic audio-visual communication systems. Here are examples of displays and solutions that we design, we manufacture and service for our customers over the lifetime of those displays. Our displays and solutions are used by a variety of customer types. They can include sports venues, transportation, operators and can be used in indoors like at corporate headquarters, museums, retail stores, military applications and control centers to name a few. As a reminder, we are going to be talking about forward-looking information here that, that information may change. Please refer to our Securities and Exchange Commission filings for further information and risk factors. Daktronics is the #1 North American LED video display provider and the third largest by market share globally. We just completed our fiscal year in April, and we've grown to and generated $818 million in revenue for that fiscal year. So why should you invest in Daktronics? Our mission is to support our customers to inform, entertain and persuade their customers and audiences. We are the best-in-class in our industry and are the only U.S. manufacturer of scale with a global footprint. What differentiates us from our competitors as our U.S. base, our technology leadership, the high quality of our solutions and our high-touch service. Our target markets are large and growing with resilient demand driven by audience experience and customers and sports fan engagement. After addressing the operational challenges we experienced during the pandemic and refinancing our balance sheet at the beginning of last fiscal year, we are poised to drive financial results by capturing growth and market share on the strength of our long-term customer relationships, our global sales and service infrastructure, our continuous innovation on displays, control systems and content creation, and that content creation and services are becoming a greater component of the visual communication experience. Daktronics provides interconnected systems to help our customers engage their fans. Here you can see in our Live Events segment, we sell into major arenas like the Detroit Tigers facility as well as into colleges and universities and other venues that showcase live performances. These sales are generally direct. Our High School Park and Recreation segments sell increasingly sophisticated traditional scoring and video displays for enhanced sporting applications and other curriculum usage that emulate those used by the bigger sports teams and that are more and more often incorporating content and local advertising. These relationships are maintained directly and through reseller and other sales channels. In our Commercial segment, we serve large projects like in Times Square; in Las Vegas like the Circa display in Las Vegas; Times Square, there's Morgan Stanley system, for example, and others also in the billboard dynamic applications and self-promotion, both indoor and outdoor. We leverage an existing reseller network and AV integrator channel for our distribution in the segment. In transportation, we are prequalified in all 50 states to offer displays to manage traffic on roadways and to communicate in railway stations and airports. Our international segment focuses on these markets that are outside of the U.S. and Canada, with the exception of China itself and for displays like an HSPR. Our control capabilities enable our customers to operate and run the displays, show content that is inviting and engaging and maintains the physical health of the display. So here are how those segments break down by revenue and gross profit. Live Events is roughly 40% of the business, and we earned a 28.4% gross profit in fiscal '24. In commercial, that gross profit was 21.2% and is -- roughly equates to 20% of our overall sales volume. In transportation, that's roughly 10% of our business and a 30.5% gross profit. International is, again, outside of the U.S. and Canada from a geographic perspective and around 9% of our business at 14.2% gross profit. And in high schools, we earned a 33.7% gross profit and about 21% of our sales for fiscal 2024. To earn that revenue, we have this global footprint. That's a differentiator that puts us close to our customers to maximize quality, support and service. We're headquartered in Brooking, South Dakota with manufacturing here and Sioux Falls, South Dakota and operate a factory in Minnesota. These factories provide approximately 80% of the revenue. We also have manufacturing capabilities in Ireland and in China. We have sales and service team members across the country and around the world to effectively reach and support the long-term market needs. For fiscal 2024, we had a terrific year. We executed on a number of strategies and made progress towards our long-term initiatives. Some of our highlights included: we refinanced the company to ensure we have the resources available to serve our customers and build long-term value for our shareholders, we executed consistently to incrementally raise the base profitability of the business by allocating resources to growing business segments and the most profitable projects, we also generated substantially higher cash flows through our increased profitability and our management of working capital and through efforts such as reduction in inventory levels post the supply chain correction. On the product front, we continue to innovate to maintain our technology leadership as senior releases like the additional narrow pixel pitch product lines used primarily in indoor applications. With respect to our end market penetration, our teams deepened our relationships with AV integrators and new customer areas to reach growing markets. As an example, we delivered displays to a number of military sites this past year. We laid the essential groundwork for our digital transformation strategy, making progress in our services systems areas and investing in enterprise performance management software. In our facilities, we've further optimized our operations and manufacturing and site fulfillment processes as we've returned to serving customers within market lead times. As we look ahead, we continue to see profitable growth. This slide describes the exciting and durable opportunity we enjoy in the global LED market as measured by future source. Our market share in North America is roughly 45%. And outside the North American geography, it's roughly 5% excluding China. Future source predicts that our market will grow to roughly $20.8 billion by calendar year 2027 from $9.3 billion for calendar 2023. They predict growth in all areas and products for Daktronics dose business or has the capabilities. To highlight the chart that shows narrow pixel pitch growth, NPP, we've invested in those product lines from fiscal year 2018 to fiscal 2020 and continue to release new derivatives of that product. Those were available just prior to the pandemic and now are also highlighting that there's much growth to be expected post pandemic. This chart also highlights growth in our standard displays. Overall, our target markets are large and growing with resilient demand drivers by our customers' desires to improve their audiences’ experiences in the sports, commercial and transportation environment. More specifically, we are focused on profitable growth by capturing more of our serviceable available market, by expanding our share of customer spend, adding new customers, developing control options and expanding the services we offer. Of course, future growth is subject to lumpiness and seasonality for our business. Our industry leadership and market share derive from the diversity of the customers and applications that we serve and are growing ubiquity across our addressable market segments. Here are some examples. Like the Seattle Kraken arena has a unique display. In Times Square, we have this unique display as well. The traffic displays through Minneapolis are located on this slide and in high schools and businesses in your local communities. There's lots of examples here. Another best-in-class differentiator for Daktronics is our full-service offering. This slide shows that our business cycles that are -- that we nurture our global relationships with repeat customers. These processes start with our innovative designs often developed in collaboration with our customers that are then proven in our reliability lab that rigorously tests our products under the conditions to which the display will be subject to ensure peak performance over the life of the product. It then proceeds to manufacturing in our strategically placed facilities under strict quality controls by our highly skilled teams and then to installation and ongoing support to ensure our customers are knowledgeable about how to use the display and ensure its operating well. Our delivery of innovation, collaboration, quality and high-touch service solidifies our customer relationships around the world, many of whom come back to us time after time, sometimes over decades, or they come to us after having tried a lower-priced competitor. Our customers use our displays for an average of 7 to 10 years, sometimes 15, and then come back to us for replacement as technology and customer experience needs to evolve. We continue to foster our relationships with our repeat customers and resellers and have and are building out ways for them to engage through automation and online solutions. Over time, we have been successful in driving our growth through innovation and technology leadership, either ahead of or in lockstep with our addressable market’s growth, development and increasing sophistication as visual communication has permeated every aspect of the customer experience. Today, we are enjoying the growth and earnings returns of our investments in our narrow pixel pitch line as well as high-resolution outdoor solutions. We are investing in future potential technologies deployed less for growth in furthering narrow pixel pitch and micro LED as well as with reflective low-power displays, intelligent power management systems and Software-as-a-Service control systems. Future opportunities include transportation, international and street-level advertising markets, along with furthering AV integrator applications. The pandemic created a dynamic environment for our company. At the beginning, there wasn't a lot of people gathering, but we turned them from fiscal '23, improving the profitability at the end of that fiscal year to fiscal '24 furthering profitability. And then into fiscal '25, we continue to build on our accomplishments from fiscal '24. We've implemented a set of initiatives for fiscal 2025 to continue to drive future revenue growth and returns. We're not done with our efforts to enhance the return on invested capital that our business can deliver. We're focused on different initiatives and priorities on the backbone of commitments to improve return on capital and consistently earning returns above our cost of capital. These priorities include taking the next steps in our digital transformation to enhance our internal systems. These include modernizing our field service systems, enterprise performance management tools and automating quoting and sales processes. Our digital transformation will provide greater insights into our business and end markets, allowing us to continue to guide our investments to our most profitable business segments and to pursue growth through expanding our share of these customer spend. Our second initiative is to continue to further penetrate our addressable markets through innovation, allocating resources and capital to our most profitable opportunities and adding professional services, control systems and other content to drive MRR, ensuring that we're driving returns as we help customers achieve success on our investments in our offerings. And third, we're taking steps in parallel to lower our overall cost to operate the business and increase market competitiveness. This includes increasing the flexibility of our capacity and our plant manufacturing allocation and utilization, adjusting our production capabilities to smoothly manage order flow and boost operational effectiveness. With these initiatives, we will continue to advance many -- also continue to advance many existing elements of our strategy and our competitive differentiation, including our premium value proposition, our U.S. design, fulfillment and high-touch services, our key investments in control systems and our unique culture of lifetime services to our customers. In conclusion, we are the global industry leader in video communication with best-in-class products and service offerings. We're differentiated by our U.S. scale, our global manufacturing and servicing footprint and our technology leadership. Our markets are large and growing with resilient demand drivers. And we're poised to accelerate our growth, profit expansion and cash flow generation after addressing the challenges of the pandemic years. With that, I would open it up for any questions.

Okay. Thanks, Sheila. If you do have a question, you could please ask it in the go-to webinar questions section. We'll start with some questions of our own, and then we'll hand it over to the -- if there's any questions. Can you share anything with your relationship with Stan Druckenmiller and its approximate 5% position in Daktronics?

We -- like all of our investors have meetings with investors, and it's a standard relationship that we've given them the same information we're providing today about Daktronics.

Okay. Thanks. Are you seeing other opportunities comparable to the large video boards that Steve Ballmer is incorporating into his new Intuit Dome in Los Angeles?

I've got a picture of the Intuit Dome here that Daktronics did provide that solution to Steve's team and facility. We do see the use of technology like this continuing to evolve and be used, and we do expect in the future that there will be systems like this that we will work on.

Great. Are you seeing recurring revenue opportunities in some -- in control systems and content? And would you expect that over time to be a meaningful part of the business?

We do. We currently have recurring revenue in our control systems and some of the content creation -- and the content creation that we provide. It's a small portion of our revenue today, but we do expect that we can make -- find ways to continue to offer valuable services that would be provided in a recurring revenue format. And likely, that will grow to not a significant portion of our business but a more meaningful, profitable part of our business.

So when -- you've mentioned about military. So when you're -- how would you think about that as far as continuing expansion in military?