Daktronics' Earnings Calls: Contradictions in Live Events Growth, Inflation's Impact on Margins, and Revenue Outlook Shifts From 2024Q2 to 2026Q1

Date of Call: December 5, 2023

Financials Results

• Revenue: $199.4M, up 6.4% YOY (vs $187.4M in Q2 FY2023)
• Gross Margin: 27.2% of net sales, compared to 16.9% in Q2 FY2023
• Operating Margin: 9.7% of sales (Operating income $19.4M), compared to 0.8% ($1.5M) in Q2 FY2023

Guidance:

• Expect full-year effective tax rate in the mid-20s (before noncash fair-value impact of convertible debt).
• Plan approximately $19 million total fiscal 2024 capital expenditures, primarily manufacturing and technology.
• Backlog of $307 million provides revenue visibility for coming quarters.
• Continue investing in digitalization, product/platform development, automation and affiliated customers to drive long-term profitable growth.
• Convertible notes will be remeasured each quarter, creating a recurring noncash charge below operating income.

Business Commentary:

• Record Sales and Operating Income:
• Daktronics reported sales of $199.4 million for the second quarter of fiscal 2024, an increase of 6.4% compared to the previous year.

• The growth was driven by strong demand in Live Events, High School Park and Recreation, and Transportation segments, as well as strategic pricing actions and a stable supply chain.

• Improved Gross Profit Margin:

• Gross profit as a percentage of net sales increased to 27.2% for the second quarter of fiscal 2024, an over 10-point increase compared to the previous year.
• This improvement was attributed to increased sales volume, strategic pricing, and reduced operational disruptions due to a stable supply chain.

• Strong Cash Generation:
• Daktronics generated $25.1 million in cash from operations during the second quarter of fiscal 2024.

• This was driven by higher income from operations and effective working capital management.

• Foreign Market Challenges:

• The International business unit experienced a softer market due to macroeconomic and geopolitical factors.

• Despite this, there is long-term optimism for growth in commercial and transportation areas outside the U.S.

• Investment in Technology and Digitalization:

• Daktronics plans to invest approximately $19 million in capital assets, primarily in manufacturing and technology areas, for fiscal 2024.
• The investments are aimed at improving customer and employee experiences, supporting long-term profitability, and advancing critical architecture and design in new technologies.

Sentiment Analysis:

Overall Tone: Positive

• "We have had a record start to fiscal year 2024 in both sales and operating income and had robust operating cash generation for the quarter." Management also noted "cash, restricted cash and marketable securities totaled $73.5 million" and "we drove second quarter fiscal 2024 cash generation to $25.1 million from operations," highlighting improved profitability, cash generation and backlog-driven visibility.

Q&A:

• Question from BJ Cook (Singular Research): Looks like gross margin was down slightly from Q1. I guess still working through some inflationary cost pressures? Or is this kind of more of a return to normalized gross margin?
  Response: Management said margin variation is due to fixed-cost factory infrastructure and quarter-to-quarter revenue leverage (seasonality), not a change in pricing or structural cost issues; backlog and order activity remain strong.

• Question from BJ Cook (Singular Research): You mentioned a great quarter in terms of cash generation... Just wondering if paying down the mortgages are on your radar or if there's other uses for that cash that you guys are considering?
  Response: Paying down debt is one option under active consideration with the Board; capital allocation strategies will become visible in coming quarters.

Contradiction Point 1

Order Growth and Pipeline in Live Events Segment

It reflects differing perspectives on the growth and pipeline in the live events segment, which is crucial for understanding the company's future performance and strategy.

What were the key drivers of the strong gross margin performance, and how sustainable are these trends? - BJ Cook(Singular Research)

2024Q2: We have a strong backlog of orders and are set for success for the rest of the fiscal year and long term. - Reece Kurtenbach(CEO)

What's the status of the live events segment's pipeline and order growth? How might scheduling impacts affect revenue cadence? - Aaron Spychalla(Craig-Hallum Capital Group LLC)

2026Q1: Expecting growth in live events both in-bowl and outside. Pipeline is strong, but specifics cannot be disclosed. - Bradley Wiemann(Interim Pres., Interim CEO)

Contradiction Point 2

Impact of Inflationary Cost Pressures on Gross Margin

It involves differing explanations of the impact of inflationary cost pressures on gross margin, which affects financial forecasting and investor expectations.

Was the slight decline in gross margin from Q1 due to ongoing inflationary cost pressures, or is this a return to normalized gross margins? - BJ Cook(Singular Research)

2024Q2: We have a fixed cost infrastructure with our factories, which means as revenue fluctuates, you might see changes in measured gross profit. However, our pricing and cost structures have remained similar. - Reece Kurtenbach(CEO)

What were the key drivers behind the strong gross margin, and how sustainable are these trends? - Aaron Spychalla(Craig-Hallum Capital Group LLC)

2026Q1: Mix and fixed cost leverage contributed. Benefited from normalizing warranty costs. Future depends on mix and continued efficiency improvements. - Howard Atkins(Acting CFO)

Contradiction Point 3

Gross Margin and Revenue Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations and revenue growth, which are critical indicators for investors.

Was the slight gross margin decline from Q1 due to ongoing inflationary cost pressures or a return to normalized gross margins? - BJ Cook (Singular Research)

2024Q2: We have a fixed cost infrastructure with our factories, which means as revenue fluctuates, you might see changes in measured gross profit. However, our pricing and cost structures have remained similar. We believe we have a strong backlog of orders and are set for success for the rest of the fiscal year and long term. - Reece Kurtenbach(CEO)

What are your revenue growth expectations for FY '26, and how do they align with the FY '28 high single-digit CAGR target? - Aaron Michael Spychalla (Craig-Hallum Group)

2025Q4: We believe we're on track for FY '26 to achieve our 7% to 10% compound annual growth target through FY '28. All markets are showing growth, which supports our revenue growth targets. - Bradley T. Wiemann(Interim President, Interim CEO)

Contradiction Point 4

Inflationary Cost Pressures and Gross Margin Trends

It involves changing explanations regarding the impact of inflationary cost pressures on gross margins, which is crucial for investor understanding of the company's financial health.

Was the slight decline in gross margin from Q1 due to ongoing inflationary cost pressures, or is it a return to normalized gross margins? - BJ Cook (Singular Research)

2024Q2: We have a fixed cost infrastructure with our factories, which means as revenue fluctuates, you might see changes in measured gross profit. However, our pricing and cost structures have remained similar. - Reece Kurtenbach(CEO)

Can you explain the delays in bookings and discuss the impact of tariffs on your business? - Aaron Spychalla (Craig-Hallum Capital Group)

2025Q3: Tariffs mainly affect competitors, as Daktronics has already been paying tariffs on semiconductors. - Reece Kurtenbach(CEO)