Q4 2024 Daktronics Inc Earnings Call

Participants

Carla Gatzke; Vice President - Human Resources, Secretary; Daktronics Inc

Reece Kurtenbach; President, Chief Executive Officer, Director; Daktronics Inc

Sheila Anderson; Chief Financial Officer, Treasurer; Daktronics Inc

BJ Cook; Analyst; Singular Research

Anja Soderstrom; Analyst; Sidoti & Company, LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Daktronics' fiscal year 2024 fourth quarter earnings results conference call. As a reminder, this conference is being recorded today, Wednesday, June 12, 2024, and is available on the company's website at www.daktronics.com.
I would now like to turn the conference over to Ms. Carla Gatzke, company Secretary for Daktronics for some introductory remarks. Please go ahead, Carla.

Carla Gatzke

Thank you, Siobhan, and good morning, everyone. Thank you for participating in our fourth quarter earnings conference call. I would like to review a few disclosure, cautioning investors and participants that in addition to statements of historical fact, we will be discussing 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 concerning future events. All forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from our expectations. Such risks include, but are not limited to, changes in economic and market conditions, management of growth, timing and magnitude of future contracts and orders, fluctuations in margin, the introduction of new products and technology, availability of raw material, components and shipping services, and other important factors.
This identified factors could cause actual results to differ materially from those discussed in this call in the company's fourth quarter 2024 quarterly earnings release and its most recent annual report on Form 10-K. Our fourth quarter 2024 earnings release contain certain non-GAAP financial measures and was furnished to the SEC on a Form 8-K this morning. We will also make slides available for today's call. All of these documents are available on the Investors section of the Daktronics' website, www.daktronics.com.
I'll turn the call over to our CEO, Reece Kurtenbach.

Reece Kurtenbach

Thank you. Good morning, everyone, and thank you all for joining us today. I would like to start by saying congratulations to the Daktronics team for an amazing year. We began and finished fiscal 2024 strong, demonstrating the increased power of our more profitable business model resulting from the operating improvements we've made over the past two years. We achieved record revenue and solid expansion in our operating profitability and cash flow generation.
As you can see on our slide presentation on page 3, fiscal 2024 was a year of terrific accomplishment as we executed on a number of strategies and made progress toward our long-term objectives. Some highlights of our year: 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 generated substantially higher cash flow through our increased profitability and our management of working capital and through efforts such as reduction in inventory levels post supply chain correction.
On the product front, we continue to innovate to maintain our technology leadership as seen in releases like additional Narrow Pixel Pitch product lines used primarily in indoor applications. With respect to our end market penetration, our teams deepened our relationship with AV integrators in new customer areas to reach growing markets. As an example, we delivered displays to a number of military sites this past year.
We laid essential groundwork for our digital transformation strategy, making progress in our services systems area and investing in enterprise performance management software. In our facilities, we further optimize our operations in manufacturing and site fulfillment processes as we return to serving customers within market lead times.
These accomplishments serve as evidence of the success of the actions taken over the last 18 months to capture and leverage lessons learned from challenging business conditions to improve our customers' experiences, to increase our profitability, and to optimize working capital levels. The results also testifies to the resiliency and strength of Daktronics teams to execute our strategy of capturing demand in diverse markets and creating differentiation by innovating across technology platforms.
I invite you to turn to slide 4, titled fiscal fourth quarter 2024 highlights to follow the fourth quarter's financial outcomes. Our quarterly performance was terrific, particularly in comparison to last year's growth and was a great end to a great year. Our teams continued with strong performance and we exceeded the outlook we described last quarter. In the fourth quarter, we were able to fulfill multiple sports related projects as teams ready for summer and fall sports. In fiscal Q4, we generated sales volume of $216 million, a 2.9% growth from last year. Full year sales grew 8.5% for the year. The robust increases are attributable to our drive to capture a greater share of our SAM.
Operating income was up over four times fiscal 2023, and we generated over $63 million in cash flow from operations. We continue to efficiently decrease backlog from last year's built-up levels as we recognize the anniversary of the resolution of many supply chain challenges and utilized our capacity to deliver customer orders at market expected lead times.
As we primarily compete with companies that obtain their products from China and compete on price, we continue to evaluate our price position in the market and carefully consider pricing adjustments to achieve our order attainment goals at profitable levels. Given our results to date this year and the momentum in order flow, we feel good about our positioning to drive profitable growth and cash flow generation into fiscal 2025 and beyond.
For additional details on the financial results for the quarter and year, I'll now turn it over to Sheila.

Sheila Anderson

Thank you, Reece. Please turn your attention to slide number 5 FQ4 FY 2024 financial highlights for the quarterly overview. The quarter over quarter comparisons in this slide and related discussion, our outlook, and for fiscal quarters ended April 27, 2024, and April 29, 2023, unless stated otherwise.
Orders increased by 14.6%, primarily driven by strengthening in live events and international business unit orders, strong demand in the live events business unit with the result of success in capturing SAM from projects for colleges and universities. International orders are starting to rebound as some stability and economic improvement has increased customers' desires to move forward on projects.
Our commercial business unit continues to see softness in large projects, and there was some slowing in the high school park and recreation and transportation business units in the quarterly comparison. We generated sales of $216 million for the fourth quarter of fiscal 2024 as compared to $210 million last year. This 2.9% increase in sales volume is the result of fulfilling college and university orders and live events, transportation order delivery, a solid win rate, and on-time deliveries. This was somewhat offset by a sales decline in international.
Gross margin as a percent of net sales increased to 25.7% as compared to 24.8% in the fourth quarter of fiscal 2023. The increase in gross profit percentage is attributable to our strategic focus on profitable markets and projects, manufacturing efficiencies, and stability in our diversified supply chain.
Operating margin was 9% of sales as compared to last year's 8.7%, Fiscal 2024's fourth quarter positive operating margin rate is attributable to our continued careful management of operating expenses while investing in our digital transformation and product innovation.
Please turn to slide 6 for the highlights year to date performance. The year over year comparison, this slide and related discussion are as of and for fiscal years ended April 27, 2024, and April 29, 2023, unless otherwise stated. For the year, orders were up $59 million or 8.7% as compared to the prior year. Order volume growth is attributable to a stable macroeconomic environment in North America to the continued use and market adoption of digital display technology and to our success in capturing existing and new customers orders for larger project-based sports and transportation business.
As we are a project-based business, large-sized project orders can impact levels of orders. During fiscal 2024, fewer large sized projects were booked to orders in commercial and international as there were fewer larger projects available in the marketplace this past year. However, we believe our market share held.
For the year, sales increased $64 million or 8.5% due to the stable operating environments and supply chain combined with our past investments in capacity. We continue to invest in operating improvements to offer sustainable utilization of our capacity. These conditions resulted in more efficient fulfillment processes and a return to market expected lead times and paired with the strong order volume resulted in growth of net sales.
For the year, gross margins improved to 27.2% as compared to 20.1%. This gross margin percentage increase is attributable to continuing strategic pricing actions, the record sales volume over fixed manufacturing cost structure, stabilization of input costs, and fewer supply chain and operational disruptions during fiscal 2024 as compared to during fiscal 2023.
Please note that all expense lines increase for executive variable compensation and employee profit-sharing achieved because of our operating margin level attainment during fiscal 2024. These expenses totaled $6.4 million, of which $3 million was recorded in cost of sales, $1.2 million in selling, $1.4 million in general and administrative expenses, and $0.8 million in product design and development.
After investing in operational areas, margin base compensation related expenses and organic growth the resulting operating margin was 10.6% of sales in fiscal 2024 as compared to last year's 2.8% or 3.4% of goodwill impairment [removed] from the calculation. It is a non-GAAP metric, but helpful to compare the improvements.
We strengthened the company's balance sheet during the year end quarter. Our cash position at year end was $81.7 million compared to $24.7 million, with the increase of $63 million due to cash flow generation from the profitable year and efficient management of working capital and $15 million from debt net. We used $21 million for investments in property and equipment and our investments in affiliates, restricted cash, and marketable securities totaled $81.7 million at the end of the year. Debt at fair value was $53 million. Our working capital ratio improved during the year. At fourth quarter end, the ratio was 2.1:1 as compared to 1.6:1 last year. Now I'll turn it over to Reece.

Reece Kurtenbach

Thanks, Sheila. Please reference slide 7 titled market verticals update. Our mission is to support our customers as they inform, entertain, and persuade their customers and audiences. Let us look more specifically into our business areas.
In live events during the quarter, we completed the Detroit Tigers project along with a number of other college and university projects. We expect live events demand to remain strong as venues enhanced facilities to entertain fans and attract athletes. We see this trend continuing and more focus being placed on entertainment areas and the experience outside the ball in places like entry ways, atriums, concourses, and adjacent entertainment areas. Our Narrow Pixel Pitch line of products match the needs of customers for these places.
Commercial orders, especially from customers in the out-of-home advertising space can be sensitive to economic conditions and they can rebound quickly as conditions improve. This market is also sensitive to the large national advertisers spending decisions, which is why we also focus on winning other independent billboard sales and have seen important increases in this market vertical over the last year. We continue to innovate and provide competitive differentiation in the marketplace to reach the needs of our customers.
We continue to build out our AV integrator network to market our Narrow Pixel Pitch product lines, especially in control room applications used by military, utility, and transportation agencies. To date, we have installed 131 displays on 43 different bases globally. And in FY 2024, the American Transmission Company in Wisconsin purchased two large screens, one 8.5 feet high by 86 feet wide, and another 6.5 feet high by 52 feet wide.
In transportation, our teams are focused on winning projects for intelligent transportation systems, airport projects, and other mass transit systems projects. Other highlights of our Q4 performance include orders from Texas and North Carolina, Department of Transportation's, as well as an order from Southwest Airlines.
International: during the quarter, we won a stadium project for orders for -- and orders for transportation areas, a stronger finish to a year in which orders were slow, which we believe is due to economic and geopolitical uncertainty. Customers continue to demonstrate interest in projects but have been delaying buying decisions. Our sales teams continue to be responsive to customers and are actively quoting opportunities, and we are starting to see signs of more quotes converting into orders.
High schools: the trend going forward in this end market continues to be a conversion to full video. In fiscal 2022, our sales were $112 million in this market and have grown to $170 million in fiscal 2024. We are well positioned to meet this demand and believe we are in the early stages of that transition. We are looking to speed up and simplify the sales processes and increase our market reach by deploying sales strategies to make certain items able to be purchased online.
We also continue to develop our e-sales channel, and these efforts are going well so we are continuing to offer more products through these online and partner channels and have improved systems to make the buying process more efficient.
Our customers use our control capabilities to create, manage, and schedule content for engagement with fans and audiences. We continue to make progress in our multiyear strategy to create more capabilities to aid in the service and maintenance of our systems and plan to upgrade our solutions by the end of the calendar year as well as continually add to the feature set of our cloud-based and locally hosted system.
For example, we recently launched a four-output media player that is compatible with our Venus Control Suite, a cloud-based software, our displays use, which improves our control features. These capabilities are increasingly offered through software as a service, and we are investing in people and capabilities to grow these higher margin and less capital-intensive opportunities.
Turning to slide 8, titled FY 2025 strategic priorities. Overall, we have a unique leadership position in our target markets, which are large, growing, and enjoy resilient demand, driven by our customers' desire to improve their audience experience in sports, commercial, and transportation environments. Based on our accomplishments in fiscal 2024, we are implementing a set of initiatives in fiscal '25 to continue to drive future revenue growth and returns. We are not done with our efforts to enhance the return on invested capital that our business can deliver.
As highlighted in our press release, we are focused on different initiatives and priorities on a backbone of commitment to improve our return on capital and consistently earn 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 customers' 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 we are driving returns as we help our customers achieve success on their investment in our offerings.
Third, we are 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 and capabilities to smoothly manage order flow, and boost operational effectiveness.
With these initiatives, we will continue to advance many existing elements of our strategy and our competitive differentiation, including our premium value proposition; our US design, fulfillment, and high-touch services; our key investments and control systems; and our unique culture of lifetime service to our customers. We will keep you apprised of our progress as we implement our strategies and move through the year.
In conclusion, our summaries on slide 9 recaps our key highlights. Fiscal 2024 was a terrific year, and our results demonstrate that our teams have built the foundation for a resilient business model and overcame the challenges caused by the constrained supply chain and other impacts from the pandemic. We are focused on a multiyear journey to drive our profitable growth and are committed to consistently earning returns above our cost of capital.
These strategies include focus on allocating resources to capture the growth in our existing SAM and develop growth in other areas, and are poised for durable revenue, earnings, and cash flow generation. We seek to utilize our position as a global industry leader in best-in-class video communication systems to grow profitably.
We are differentiated from our competitors by our US base, our global footprint, our technology leadership, the high quality of our solutions, our large, entrenched customer base, and our services. We are extending our technology leadership in high-quality, high-touch solutions, serving our large, demand-resilient, growing markets. We are very proud of our results and grateful to our teams who work together to deliver them, and we look forward to a solid end to our year.
With that, I would ask the operator to please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
BJ Cook, Singular Research.

BJ Cook

Hey guys, great quarter, and thanks for taking my call. But just a couple of questions. You're targeting some recurring revenue opportunities in control systems and content. I just kind of curious, are you marketing these services to new orders going out at existing customers and projects that are on the market now? And would you expect that over time to be meaningful part of the business?

Reece Kurtenbach

BJ, thanks for joining us on today's call, and I appreciate the question. Yes, to all of that, I guess is the answer. The services we offer are especially important as a new customer takes on a system and grow as their capability to them operate program, understand what they're trying to accomplish with their systems. And that is in sports, that is in commercial, that is in transportation.
And then as they get through their first year in subsequent years, they often benefit from refreshing and there's a changeover and staffing off and so that future years is a continual opportunity to sell different services. And the displays themselves are often up projected to last 10 years or sometimes more, but the control capability, computers run at a different cycle. So there's often a desire to refresh the software capabilities and in systems where we provide dedicated on-site processing the computer systems, sometimes in year three and sometimes in year five as they go through the system lifecycle.

BJ Cook

I got you. That makes sense. You highlighted a couple, new military shipments in products there. I guess typically the military thing was -- it's a big deal just to get in the area of certifications, get to kind of know somebody. I'm just wondering if these are -- kind of went through that process or they do customers and would you expect that to be kind of that opportunity to expand into more military business?

Reece Kurtenbach

But we see the military business is very good. We have a differentiated product line with Made in America control system and control path as well as modules and displays. And we partner with AV system integrators that are focused on that market and provide what you described these kind of special requirements to even get on a base plus many of the other elements that go around to display to make one of these spaces successful.
And this product, we have, the Narrow Pixel Pitch product is increasingly what they go to replace LCD or projection type of technologies. And it unlocks uses that they previously maybe desire to have something, but the technology was just not quite right. And so we see that all of those are potentials for this kind of Narrow Pixel Pitch product for military and really other applications and control centers and elsewhere.

BJ Cook

Okay. Thanks a lot, guys. Appreciate it.

Reece Kurtenbach

Thank you, BJ.

Operator

Anja Soderstrom, Sidoti.

Anja Soderstrom

Hi. Thank you for taking my question and congratulations on the strong quarter. I'm curious about the new flip-chip, has that been received? And what can we expect in potential contribution in terms of revenue and margins from that?

Reece Kurtenbach

Thank you, Anja, for attending the call. We are very excited about this Chip On Board that's enabled partially through this flip-chip technology and it provides a really a lot of enhancements in our NPP product line. Oftentimes, we use that as a at a higher pixel picture or a tighter resolution. We use it. It's more rugged and durable. So it's more friendly. If somebody can now reach out and touch the face. It has a very high contrast. So it responds well in high-brightness sorts of situations. So we've seen a high receptivity to this product line in our customer base and our partner channels.
As far as a prediction on impact on profitability or revenue, may be it's too soon for us to estimate that.

Anja Soderstrom

Okay. Thank you. And I have a follow-up on the return revenue question. Is that a higher margin, then the overall?

Reece Kurtenbach

It is at a higher margin and it adds significantly to our customer satisfaction, which we think it increases the likelihood they'll buy from us again. As of today, it's a smaller portion of our overall revenue, but we think it's an exciting area and there's room to grow in the future.

Anja Soderstrom

Okay. And what are you thinking in an international markets. It seems like the orders were increasing there at least?

Reece Kurtenbach

We're hopeful that the geopolitical situation across the world will be less dynamic in the coming years. And it appears that the market is picking up. We still and we've had considerable interest during these times, but as described, it was hard to get that interest to convert into orders. But in the last few months, we've been seeing increasing indications that that's easier and easier. So we're hopeful that the international market will continue to pull out of the situation that it's in.
Overall, we're very excited about our international markets. A lot of this, the buying -- thinking from those customers is similar to what we have in the US and our market share is relatively small internationally, allowing us room to grow in those areas as well as we've invested a lot in the sales, service, and fulfillment teams, and we believe we can handle growth with our current footprint.

Anja Soderstrom

Okay. Thank you. That was all for me.

Reece Kurtenbach

Thank you.

Operator

Thank you. I am showing no further questions at this time. I would now like to turn the call back over to Reece Kurtenbach for any closing.

Reece Kurtenbach

Yeah. Thank you, everyone, for attending today's conference. Appreciate the questions, and we'll see you in a few months when we have our first quarter earnings call. I hope you all have a great summer and we'll see you later in the early fall. Bye-bye.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.