Daktronics' Q2 2026 Earnings Call: Contradictions Emerge on Backlog Conversion, Revenue Cadence, and Margin Drivers

Date of Call: None provided

Financials Results

• Revenue: No single revenue dollar disclosed; management stated sales revenue grew at the top end of the 7-10% target range and described "double-digit year-over-year growth in new orders, in sales revenue, and in operating income"
• EPS: $0.35 per fully diluted share (net income after tax $17.5M); management noted net income rose 25.4% on a fully adjusted basis versus adjusted prior-year net income of $13.9M
• Gross Margin: 27% in the quarter, improved from the prior year (no prior-year percentage disclosed)
• Operating Margin: 9.4% in the quarter, improved from the prior year; operating income $21.6M versus $15.8M in prior-year quarter; described as "within striking distance" of 10%-12.5% target range

Guidance:

• Targeting operating margins of 10%–12% and ROIC of 17%–20% over the plan horizon
• Targeting a compound annual revenue growth rate of 7%–10% by fiscal 2028
• Expect third-quarter seasonality to be soft (holidays/fewer workdays) though targeting year‑over‑year revenue growth
• Mexico facility to begin production late April 2026 to add manufacturing optionality (complementary to U.S. footprint)
• Continuing product launches and investor day in early April to outline strategy

Business Commentary:

• Revenue and Order Growth:
• Daktronics reported a 12% fiscal second quarter order growth compared to last year.

• This growth was fueled by strong demand in the transportation and international segments, as well as large-scale installations in major sporting and transportation facilities.

• Operating Income and Profitability:

  

• The company achieved an operating income of over $20 million for the second consecutive quarter.

• This was driven by value-based pricing strategies, operational efficiencies, and a focus on reducing structural costs.

• Backlog and Revenue Runway:

• Daktronics ended the quarter with a product backlog of $321 million, up 36% year-over-year.

• This provides a multi-quarter revenue runway, supported by strong order growth and a diversified backlog across segments.

• Innovation and Product Launches:

• Daktronics introduced several new products, including an enhanced narrow pixel pitch offering and a new billboard product series.
• These innovations are aimed at addressing evolving market demands and expanding competitive positioning in key segments.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted a "third consecutive quarter of top-line growth," product backlog of $321M up 36% year‑over‑year, operating income of $21.6M vs $15.8M prior year, improved margins (gross 27%, operating 9.4%), and net cash of $138.3M (up ~20% YoY), while noting transformation initiatives and new manufacturing capacity in Mexico.

Q&A:

• Question from Aaron Spychala (Craig-Hallum): How do you expect backlog to convert to revenue over the fiscal year and what is the margin profile; how should we think about book-to-ship and conversion timing?
  Response: Backlog is now skewed to live events (~50% of backlog) which are customized and convert over multiple quarters (some projects start next spring), providing a multi‑quarter revenue runway; expect a seasonally soft Q3 due to holidays.

• Question from Aaron Spychala (Craig-Hallum): Can you quantify margin improvement drivers between value‑based pricing and operating initiatives, and comment on the Mexico plant capacity and tariff benefits?
  Response: Operating margin gains are primarily from value‑based pricing and structural cost efficiencies offset partially by ~ $8.8M of tariff expense this quarter; the Mexico facility is a small, complementary operation (leased, limited initial capacity) to add optionality—not to replace U.S. manufacturing.

• Question from Anya Soderstrom (Sidoti): Given strong backlog growth, how should we think about the third-quarter softening and what is the capacity impact of the Mexico plant?
  Response: Third‑quarter softening is chiefly seasonal (fewer working days around holidays) despite a strong backlog; the Mexico site is a small complementary expansion and will not materially shift the ~80% U.S. manufacturing footprint.

Contradiction Point 1

Backlog Conversion and Revenue Cadence

It involves differing expectations regarding the conversion of the backlog into revenue and the revenue cadence, which are critical for financial planning and investor expectations.

Can you explain how the backlog by segment will convert to revenue this fiscal year and what the margin profile is? - Aaron Spychala(Craig-Hallum)

2026Q2: The backlog, skewed towards live events, ensures recurring and predictable revenue. - [Howard Atkins](CFO)

What is the outlook for the order growth pipeline in the Live Events segment and the revenue timing expectations? - Aaron Spychalla(Craig-Hallum Capital Group LLC)

2026Q1: Growth expected in both in-bowl and out-of-bowl opportunities. Pipeline looks strong, with exciting potential in college and university projects. Continuous expansion in product and service offerings. - [Bradley Wiemann](Interim CEO)

Contradiction Point 2

Gross Margin Improvement Drivers

It highlights differing perspectives on the primary drivers of gross margin improvement, which are crucial for understanding the company's financial performance and strategic focus.

Can you discuss the margins in the backlog and year-over-year margin improvements? - Aaron Spychala(Craig-Hallum)

2026Q2: Value-added pricing and operating efficiencies have contributed to operating margin improvement. - [Howard Atkins](CFO)

What drove the gross margin improvement? - Anja Soderstrom(Sidoti & Company, LLC)

2026Q1: Improved fixed cost leverage and favorable revenue mix contributed to margin improvement. Value-based selling and improved purchasing power also played a part. - [Bradley Wiemann](Interim CEO)

Contradiction Point 3

Backlog and Revenue Conversion

It involves differing expectations regarding the conversion of backlog to revenue over the fiscal year, which impacts investor expectations about future revenue growth.

Can you explain how the segment-specific backlog is expected to convert to revenue this fiscal year and the expected margin profile? - Aaron Spychala(Craig-Hallum)

2026Q2: Howard Atkins explained that the backlog conversion depends on factors like order types, starting dates, and holidays. Live events orders take longer to start. The backlog, skewed towards live events, ensures recurring and predictable revenue. - [Howard Atkins](CFO)

How does FY '26 revenue growth potential align with FY '28 targets? - Aaron Michael Spychalla(Craig-Hallum Group)

2025Q4: We expect growth across all markets in FY '26, which aligns with our 7% to 10% compound annual growth target by FY '28. The business has strong backlog and order growth, supporting a positive outlook for FY '26. - [Bradley T. Wiemann](Interim President and CEO)

Contradiction Point 4

Margin Improvement

It involves differing explanations for margin improvement, impacting investor understanding of the company's financial performance and strategies.

How are backlog margins and year-over-year margin improvements trending? - Aaron Spychala(Craig-Hallum)

2026Q2: Howard Atkins highlighted that value-added pricing and operating efficiencies have contributed to operating margin improvement. The extra tariff expense impacted margins, but overall, the margins are up year-over-year. The improvement is attributed to value-based pricing, order growth, and structural cost efficiencies. - [Howard Atkins](CFO)

What measures have been taken to address tariff impacts on margins, and how will margins perform in FY26? - Aaron Michael Spychalla(Craig-Hallum Group)

2025Q4: We are implementing value-based pricing and driving costs out of operations to improve efficiency. New markets and services are expected to contribute to margin expansion in FY '26. - [Bradley T. Wiemann](Interim President and CEO)