Daktronics Inc (DAKT) Q3 2026 Earnings Call Transcript

Thank you for standing by, and welcome to the Daktronics Third Quarter Fiscal Year 2026 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Lindsay Vetter. Please go ahead.

Thank you, Jonathan. Good morning, everyone. Thank you for participating in our third quarter earnings conference call. During today's presentation, we will make 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 about future events based on information currently available to us. Of course, actual results could differ. Please refer to Slide 2 of the presentation that accompanies today's call, our press release, and our SEC filings for information on risk factors, uncertainties, and expectations that could cause actual results to differ materially from these expectations. During this presentation, we will also refer to non-GAAP financial measures. You can find the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure in the appendix to the accompanying presentation slide, which may be found on the Investor Relations page of our website at www.dektronix.com. Our earnings release for the 2026 third quarter, which was furnished to the SEC on Form 8K this morning, also contains certain non-GAAP financial measures. Reconciliation of these non-gap financial measures to the most directly comparable gap financial measures, as well as a discussion of certain limitations when using non-gap financial measures are included in the earnings release, which has been posted separately to the Investor Relations page of our website. I'll turn the call over to Brad Wieman, Interim President and CEO through the third quarter for his review.

Well, good morning, everyone, and welcome to our call. Thank you for joining our third quarter fiscal 2026 call. I'm joined on the call by Howard Atkins, board member and acting chief financial officer, along with Ramesh Jayaraman, CEO and president, who is officially in the role as of February 1st. We will review our fiscal 2026 third quarter, which ended on January 31st, 2026, along with the results and accomplishments and then take your questions. Turning to our slide presentation on slide 3, here are the key messages for the third quarter. The team delivered another quarter of solid results driving revenue growth of 21.6 percent year-over-year despite the effectively shorter work period due to the three major holidays as well as adverse weather conditions throughout the quarter. Our manufacturing team did a superb job in officially converting the order book we have built over the past few quarters. During the quarter we progressed with several large-scale installations, including five Major League Baseball stadiums such as the Seattle Mariner, as well as the University of Illinois football video scoring system. Orders in the quarter were once again over $200 million. dollars. Our sales and marketing team secured large orders in our live event segment. Our transportation segment had a record of order quarters with a good uptake in airport and intelligent transportation system projects. With new order growth in the quarter at 7.6 percent, our product and services backlog grew to 342 million dollars coming into Q4 and is 25 percent higher than it was this time last year. In December we announced our acquisition of the intellectual property and the absorption of associated engineering teams from ex-display companies or XTC, expanding our micro LED and micro integrated circuit capabilities. XTC advances our high resolution narrow pixel pitch product offerings and provides us a cost effective pathway to service small volume display opportunities with medium-sized display solutions. While the Supreme Court decision on reciprocal carrots is now known, the market outcome with respect to refunds is likely to be highly uncertain for the foreseeable future. Turning to slide four. In our live events business, as I mentioned, we won another Major League Baseball project in the quarter, making us six for six a large Major League Baseball project in fiscal 26. Additionally, we won several other stadium and arena display enhancements as customers continue to expand their digital display footprint throughout their venues. We continue to enhance our product and service offerings to align with customer needs such as our narrow product line, advanced control system capabilities to engage fans, and improved seamless control and management of display content from anywhere, giving venue operators greater flexibility and control over their digital asset. Pictured here is the Seattle Mariners project. In our commercial business, on-premise advertising, business remains strong. Customers continue to continue to successfully transition to next generation field type product which was supported by a large order from a national customer. In our out-of-home business we added several new customers this quarter but we're down overall due to purchase delays from a key account which we expect to recover in the fourth quarter. Our pipeline of opportunities continues to expand with independent billboard operators as more and more customers recognize our value proposition based on brand strength, image quality, reliability, service responsiveness, and reputation for innovation with the release of our new billboard products. In our outdoor spectacular segment we booked a large order in Times Square and we grew our pipeline of projects. We also expanded our indoor business sold through audio-visual integrator channels through offerings of narrow pixel pitch ship onboard products. Pictured here is the Miami Beach Convention Center. Transportation business orders for both intelligent transportation systems and aviation were up a record 130% from last year. We secured a very significant project with one of the top five airports in the US along with new orders from Caltrans in California. Pictured here is a rendering of that top five airport win. In international a great after a great order year in the third quarter of 2025 our international business was down from last year. However we secured sizable orders from two stadium customers in Spain and Australia as they are expanding their systems. We also see a strong uptake in indoor solutions across multiple markets, especially government entities through growing our audio-visual integrator channel partners. Pictured here is an indoor video display at the United Arab Emirates University. The High School Park and Recreation continues to have a solid year with third quarter order growth of 13.4% over last year. We expanded our presence among the thirty-some thousand high schools in the U.S. and continue to win projects by leveraging our position in the communities we serve and enhancing our differentiating financial service offerings through Daktronic sports marketing. We expect continued strong uptake in our leading solutions and adoption of professional services, particularly in high school curriculum development and Dak classroom service operating. Pictured here is Marathon High School in Florida. Turning to slide five. Key product releases, our commitment to innovation continues to differentiate us as value provider among our customers. In the third quarter we introduced our next generation indoor video solution for high school arenas as well as a next generation digital audio facade for outdoor audio solutions. For the remainder of fiscal 2026, we have two additional product launches planned. Our next generation LED street furniture, as well as specialized large digit fuel price system offerings, which expands our product line for high-rise signage for long-distance viewability. The photos here show an example of our indoor narrow pixel pitch at Eldon High School in Eldon, Iowa and our new digital audio facade installed at Dallas Independent School District in Dallas, Texas. Turning to slide 6. Our plan to achieve a sustainably higher profit growth for the company remains on track in the third quarter. Here's an update of the third quarter on initiatives and progress. The strategic price adjustments we have implemented align with our value selling approach. The development of our software as a service initiative augments how we serve the market, developing recurring revenue subscription models and simplifying our customer engagement. We are digitizing most aspects of our business to make it easier and faster for customers to do business with us and to improve internal operating efficiency and are actively applying artificial intelligence to improve productivity throughout the company. I will now turn it over to Howard Atkins, our Acting Chief Financial Officer, to review our financials. Thank you, Brad, and good day, everyone.

Thank you for your interest in Daktronics. The Daktronics team produced another solid quarter in the third quarter. We anticipated the usual seasonal pattern with fewer days to complete order bookings and to fulfill revenue and also typical adverse weather conditions that did prevail in the quarter. But because this was anticipated, we took steps in the field and in our manufacturing management to continue the year-over-year growth that we've now produced over each of the last four quarters. As Brad mentioned, orders grew about 8%. But remember, last year in the third quarter, we booked a $30 million stadium order. This year in quarter three, we also had a number of larger orders, including one stadium order on the last day of the quarter. But the single largest deal in the third quarter of this year was $13 million. Importantly, our orders have now been relatively broad-based at or over $200 million in each of the last five quarters, including a record transportation order in the third quarter. As orders have grown, so has revenue, which at $182 million in the quarter, grew more than 20% year over year, mostly due to efficient order conversion by our manufacturing teams during the quarter, which included working more than one shift at times to fulfill the extra order flow around the holidays. Gross profit margin in the quarter was essentially flat to the year-ago quarter at 24%, reflecting a variety of factors. One, the benefit of operating leverage as revenue rose year-over-year relative to fixed costs and our cost of goods sold. Secondly, the efficiencies we've achieved up and down the supply chain as a result of the business transformation initiatives that have been undertaken. Thirdly, mix on new business was a little bit better in the third quarter. These margin benefits were offset by the fact that the backlog fulfillment in the quarter was largely from the lower margin live events business line. And more importantly, last year did not contain any reciprocal tariff or any other of the newer tariffs that were only introduced late in the fourth quarter of 2025. five. We had an extra $6 million, for example, of total tariff expense in the third quarter of this year. The sequential gross profit margin declined from 27% to 24%. The main factor there was fixed cost operating leverage again, which as previously described, when When revenue is going up, it typically goes up faster than our fixed costs and gross profit margin cogs, and on the way down, it just has the opposite effect, so our revenue declines a little faster than the fixed cost side of cost of goods sold. Daktronics' third quarter, 26, net income after tax was $3 million, or $0.06 per fully diluted share. This quarter included non-recurring expenses related to management transition and acquisition expenses of $1.6 million or adjusted net income of $4.6 million. Last year's third quarter net loss of $17.2 million included a $14 million fair value adjustment on the convertible note that has since been converted and also contained $3.6 million of consultant-related expenses associated with the business transformation initiatives on corporate governance matters that pertained last year. Adjusted net income a year ago, therefore, was about a half a million dollars, so we're up quite substantially from there. After removing the non-recurring expenses and non-cash benefit, our third quarter, 2026, net income rose significantly on an adjusted basis. Since we have solid earnings, we're able, starting this year, to take advantage of the new tax laws committing accelerated depreciation for R&D and others. On a pre-tax basis, operating income for the quarter was $1.9 million compared with an operating loss of $3.6 million. In addition to the non-recurring items, the company incurred a $400,000 expense for the first time as it absorbed the expert developers that Brad mentioned before from XDC. The impact of the intellectual property adjustments on the Zactronics balance sheet is negligible. We had a small gain offset by a write-down of the remaining loan that we had to Zactronics. So negligible balance sheet impact, about $400,000 impact on operating expenses for the one month that we absorbed so far the new team. Let me now turn to segment revenue. This table, if you remember, shows at the business line level over a period of time, last year, and then sequential quarters as well, the percentage of our revenue coming from each of our business lines and the margin on each of those businesses. It also shows, as I said, gross profit margin earned in the third quarter, give you some sense of how business mix is impacting our revenue. As indicated a couple of times, most of our revenue growth this past year has derived from the fulfillment of live events projects, which typically are lower margin projects, so that's what's coming through on the revenue line. We did have a small amount of revenue in the quarter coming through from new orders, but as Brad alluded to, this quarter in particular, we had a little bit of a skewing towards the back end of the quarter in terms of the new water growth. And as a result, the revenue contribution from that will land in the fourth quarter as opposed to the third quarter. So again, most of the revenue coming through in the third quarter was from backlog. I should mention that in live events, the fulfillment that we have is heavily engineered with higher dependence on indirect installation costs. Next slide shows you our segment product backlog. and last quarter we highlighted for you again that most of the revenue coming through from the backlog was live events. Product backlog stood at 342 million dollars at the end of the third quarter, continued to be up 25% from a year ago. Particularly with the recent major wins, our backlog remains high and remains weighted towards live events. We're now starting to convert the major projects that we have talked about over the past couple of quarters, which will be a feature of our revenue growth in the fourth quarter and into the early part of fiscal 27. This gives us, as you would imagine, a multi-quarter runway on our revenue and a more predictable, stronger revenue recurrence over the next couple the combination of a high backlog as I've just alluded to coming into the fourth quarter with what we're seeing as a good pipeline already in the fourth quarter with auto momentum sets us up well for good top and bottom line finish to the year let me now move to the next slide and talk about our balance sheet which as you may remember has been potentially strengthened over the last three or four quarters. This slide shows you how we are managing working capital and capital allocation. First, our inventory levels have moderated relative to revenue over the past several quarters, so the manufacturing team has done a really good job officially managing inventory. This is one of the initiatives that we undertook last year, and this reflects, again, better alignment and improving efficiency in our working capital map. During the first nine months of the year, we repurchased approximately 1.3 million shares of common stock at a volume-weighted average price of 17.6. That leaves us with about $17 million worth of open share repurchase authority. Since the company reinstituted its share repurchase program in late 2024, of the companies we purchased 3.36 million shares of stock out of the WAP of about 15.5%. We ended the quarter with a cash balance of $144 million, an increase of 13% in the fourth quarter of fiscal 2025. We continue to run a relatively strong cash balance even with the share repurchase activity, essentially are keeping a very strong balance sheet to give us the resiliency and adaptability to continue to generate strong returns for our shareholders going forward as we do get all the benefit. We have converted our commercial bank backup credit line from an asset-based facility to a cash flow facility. Of course, we have no borrowings under the company's bank line of credit. We now turn the floor over to Ramesh.

Thank you, Howard, and good morning, everyone. It's an exciting time to officially join and serve as Electronics CEO. I'm honored to lead a great company at this pivotal time and to work with a talented team that has accomplished a great deal in strengthening a resilient platform for sustainable and profitable To move to the next slide, I want to start by thanking Brad Wieman who presented earlier today who has served very capably as the interim president and CEO. Brad has been instrumental in my onboarding, and we have completed a smooth transition and handover of the CEO role. I will stay with Daktronics as Executive Vice President and Advisor, and I will continue to rely on his knowledge and judgment as we move forward. Thank you again, Brad. Moving to the next slide. my first priority as I joined first officially was to come up to speed quickly and I've been on a learning journey what I call as a look listen learn tour as I settled into Brookings South Dakota to be closer to the team and to our business it has been an absolute warm welcome by the past management the team and the community as a whole I've had a chance to travel both domestically and internationally visiting sites and bidding as well as completed stage to understand our offerings meet our customers and suppliers including at a global trade show in addition have spent time in some of our factories and repair centers to look at the operational excellence work that's in progress and with our frontline our sales and field service technicians and in addition spend time on reviewing plans for our talent development as we look at the growth that we are planning ahead this journey continues to teach me as we continue to finding our strategies all with an intent of being a market-led technology-driven and customer focus difference maker in the AV market space turning to the next slide I have to say as I get around the company I've been personally able to witness firsthand the dedication the focus and the drive of our team members and the results they can produce as you just solve Q3 results we are entering into the final quarter of the year with very strong momentum strong in-market demand and a strong backlog tailwind we are driving towards a strong finish of fiscal 26 through efficient revenue conversion and expense and productivity management to deliver strong results and continued cash flow generation we're in parallel also formulating our next strategic steps from a customer-led and market first perspective with the lens on growth developing products, services, and solutions that extend our competitive lead, and building a lens on operational excellence to optimize the profitability and cash generation we deliver. I would like to personally invite you all to our Investor Day on April 9th at the NASDAQ market site, where the leadership team and I will present our joint plans to drive the next phase of Taktronics growth. We will offer updates on our vertical market growth opportunities, execution initiatives, innovation priorities, as well as our capital allocation and financial frameworks. We look forward to having you join us. With that, we'll turn the call over for your questions. Operator.

Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. And our first question comes from the line of Aaron Spachella from Craig Hallam Capital Group. Your question, please.

Yeah. Hi, Ramesh Brad. and Howard. Thanks for taking the questions. Maybe first for me on the win rates. They've been really impressive on the large scale side of live events. You talked about six for six. Can you just talk about how that pipeline is shaping up here as seasons wrap up in the next few months? And then just maybe how would you characterize win rates across the overall business versus historical?

Hey, good morning, Aaron. This is Brad. Yeah, we were another Major League Baseball project, which is excellent. Our pipeline continues to be robust, strong going into this next year, so we're happy about that.

Of course, you've seen our backlog, so we have a nice backlog in the business.

And then we have the college-university side. We've talked about that in the past, and some of the headwinds that are in that market but are being worked out, and that's really around the NIL money money that's being spent on coaches and players. We think that all gets worked out. But as you saw, we had the University or the Illinois project that we worked out, largest football stadium build that we had. There's others in the pipeline. So we were excited that that opportunity still exists. So pipeline overall looks good. And win rate, of course, as you mentioned, we were six of six this last year. So we're excited about that. And that's partly to play with one of our competitors, taking a little bit of a backseat in the marketplace this last year, which we talked about before. Is that helpful, Craig?

I'm also able to add to it from my perspective. I mean, I think we've got a strong wins in live events, as Brad just mentioned, but our high school market, our transportation market, they also continue to be strong. And I think it's important to kind of have the fact that as we look at our growth, we are looking at the balanced portfolio and the appropriate portfolio management as we kind of move ahead to gain market share. As Brad earlier mentioned, we had a massive win in transportation that was we just announced and really as you look at our high school markets, they continue to be strong, just driven by this change from scoreboards to video and I think we see that trend continuing to be strong in the marketplace.

So I would say it's balanced overall as we try and look at our growth story, just going through the quarters as they do in terms of how high schools spend in the college uh you know in the football or the nfl or nba teams kind of spend so that's what we're going thanks i appreciate the color on that and then maybe you know on the commercial market um i know you've been making inroads um you know expanding the reseller and integrator channel just maybe you know an update update there um and it seems like demand trends are pretty good in that to mark uh that market as well yeah they they continue to remain strong um i talked about our on-premise as well as our both spectaculars and out-of-home market.

Those are still looking promising. The overall buying position of out-of-home customers that's in the advertising segment is strong. I did mention one customer that's pulled back a little bit in the third quarter that's one of our national customers and we believe that recovers this next quarter. So nothing nothing concerning there. Our products that we're bringing to the marketplace for the on-premise segment continue to help us to win projects there so that we're seeing growth on that side of it but on the spectacular side we had a nice win in Times Square as I mentioned but the signing part for me is the audio-visual integrator space and we continue to see growth in and that's on our indoor product lines which is really a big part of our overall growth strategy and just I mean on that you know kind of reseller and integration integrator channel?

I mean, maybe an update on just kind of efforts there, you know, where you are in kind of that journey?

Yeah. On the reseller side, we've been in that business for some time and we, you know, continued. We have salespeople all across the U.S. continue to work and develop sales channel partners and to promote, you know, more of our products through that channel. so that's going well the AV integrator is a newer area for us and we are seeing continued growth I think this is our I can't quite go back to the numbers because I don't have them top of mind but we're seeing continued growth expansion in that space in both in terms of number of integrators number of orders and the number of quotes so the pipeline continues to grow and that's really aligning around our indoor product lines in this chip on board offering that we that's really doing quite well for us that's helping us both in the AV space as well as some of these large projects which we mentioned across transportation airports and other things so yeah overall we continued we're going to continue to invest in that area to expand our presence in that particular market space or through that channel partner integrators thanks for the caller there and then maybe one last question on margins um you know i know you highlighted the tariff impact so excluding that and another good quarter maybe just talk you know what ending you think you're in from these operational initiatives and just trying to understand you know where margins can go from here and just and then any thoughts kind of more broadly on um you know any

like oil impact and just kind of what's going on macro wise what that you know could mean for for the supply chain if anything on the first issue Aaron in terms of where we are you know we've we've either started or well on the way on the vast bulk of the initiatives that sort of came out of the project we did last year and all of what we've either started or are in the process of completing is has either been built into or is about to be built into our you know regular strategic planning process. So that's how we're embracing everything and sort of tracking to make sure that everything gets completed going forward. So I would say, you know, from a starting and along the way point of view, we're well into the game. In terms of the realization of the benefit, you know, I'd also say we're a year into the, you know, to the effort at this point. And, you know, again, we're more than a third to a half into the actual realization of the benefit but again the important thing is you know where we're taking what we've done and now building it into a more comprehensive strategic plan because the world changes and there's more things that we you know are thinking of doing for sure both strategically and operational efficiency things as well and and we'll continue to talk about that, and we'll have some detail around that at the Investor Day. As far as the geopolitical situation in the world, there is risk out there, a lot of uncertainty. But as we've described in the past, we intentionally keep things in the company reasonably adaptable. The world changes. We'll adapt to the world. We have a factory network that allows us to do that. We have a team that works well, happens effectively. So being adaptable and resilient here is really important.

Thanks for taking the questions. I'm looking forward to the investor day. I will turn it over.

And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. And our next question comes from the line of Anya Saderson from Sudodi. Your question, please.

Hi, and thank you for taking my question. So I have some follow-ups and then I have some other questions. And Sander Brotsmargin, you also mentioned it was due to revenue mix and the live events being softer, and given live events, it's a big part of your backlog. How should we think about the impact of that going forward?

Anya, there is a table in the presentation which shows you, as of the end of the quarter, the revenue, the mix of revenue in the backlog, And we try to give you what might be left of the revenue where it's finished. So we have, you know, somewhat of a hint, if you will, if not a calculation, of what you might expect coming through from the backlog and how live events. So we would make about the revenue of the GP margin declining sequentially, again, has this profit margin. Cost of goods sold side of the margin does have some fixed costs in it. So when revenue is going up.

Okay, thank you. And then in terms of the Mexico facility, is that on track? And would that have any sort of impact on the margins?

I'm sorry, honey, say again, please.

The Mexico facility, is that on track to be up and running in April? And would that potentially have an impact on the gross margin as well?

Yeah, not a significant impact on the gross margin. and our overall capital expenses are capitalized, and we're leasing the facility there. But your question about being on track, yes, it is. We expect to be up and operating in the first quarter of this, of FY27, so this coming next fiscal year. But that's all progressing well, and we expect to be in fully operational, certainly by the second.

Okay, thank you. And then you mentioned the delay from a key account in the commercial. What gives you a confidence that that is temporarily? And do you expect maybe that shortfall in the third quarter to be made up in the fourth quarter?

Yeah, what I'm referencing there without naming the account itself, but there was an acquisition made in this past year, so they're going through that acquisition phase. and we expect that to fully be in place and in order to continue to come in nothing nothing new there will certainly keep you apprised if something changes but we don't expect that to be the case okay great thank you and then just as we have entered 2026 and with what's with everything that's going on and uncertainty have you felt that the sentiment among your customers has changed at

dollar?

Yeah we work in big projects you know large projects that are well capitalized and have been moving along so the the opportunities that are out there we don't we're not foreseeing any any reduction now I'm speaking of the U.S. market which is the majority of our business right so we get to the international side of it and we we do you know some some business throughout the Middle East and in Australia of course and Europe so we'll see how that plays out But overall, I think the sentiment is projects are moving forward, they're funded, we're part of a larger overall project, and we're typically on the back end of the project. So those are usually well-funded and moving forward. So we're not expecting anything to be delayed at this point.

Okay, thank you. And then in terms of M&A, what can we expect there? What are you looking at there, and how is the market?

No, as we've said in the past, Danya, we continue to believe there are opportunities to do tokens and fill-ins in each of our businesses. We're obviously looking at that. But the author's message I would give you on that is just our flexibility. Again, we've got a strong cash position. As you know from everything that we do, we're return-focused. We're not going to do anything that doesn't make sense strategically, doesn't have industrial logic to it, but also it's got to meet our financial return criteria and we have to be able to integrate properly. So those are important characteristics. But along the strategic path, there inevitably will be some opportunities for us.

I think to add to Howard, this is part of our strategic consideration. Clearly, as Howard mentioned, industrial logic has to make sense. And as we look at it through all phases, whether it be product, verticals, or geographies, this is something we are, you know, we are considering actively on a daily basis, just given a cash position. But, you know, at this stage, we don't have anyone that we could go and say we're right behind. but it is clear that you know once one of these comes to fruition we will be able to talk about it history okay great thank you that was all for me sorry thanks Anya thank you and this does conclude the question-and-answer session of today's program I'd like to hand the program back to Ramesh for any further remarks thank you again thank you everyone for participating thank you for joining our call today. We will be appearing, as I mentioned, at the Investor Day on April 9th, but also at the ROC Conference in March. And we look forward to seeing you there. And we clearly look forward to speaking with you all on our fourth quarter call. So thank you again, and just have a great day.

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.