Bill Retterath - CFO and Treasurer Jim Morgan - President and CEO

Steve Altebrando - Sidoti & Company Steve Dyer - Craig-Hallum Capital Group Dick Ryan - Dougherty and Company Jim Ricchiuti - Needham & Company

Welcome to the Daktronics Fourth Quarter Fiscal Year 2009 Earnings Results Conference Call. (Operator Instructions) I'd now like to turn the call over to Mr. Bill Retterath, Chief Financial Officer for Daktronics, for opening remarks and introduction. Please go ahead, sir.

Good morning, everyone. We appreciate your participation in our yearend conference call. We intend to make some comments about the year, the quarter and the future after which we'll open it up for a limited timeframe for questions. I'd like to first offer our disclosure cautioning investors and participants that in addition to the statements of historical facts, this call and our yearend news release contain forward-looking statements reflecting our expectations and beliefs concerning future events, which could materially affect our performance in the future. We caution you that these and similar statements involve risks and uncertainties, including changes in economic and market conditions, management of growth, timing and magnitude of future orders and other risks as noted in our SEC filings, which may cause actual results to differ materially. Forward-looking statements are made in the context of information available to us as of the date of this call. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. With that, I'd like to turn it over to Jim Morgan, our Chief Executive Officer, for some highlights on the quarter.

First of all, just a few comments on fiscal 2009 which we just completed. This was a year that consisted of two halves that were quite different from each other. The first two quarters combined we did $330 million top-line, which put us at a $660 million annual run rate. The second two quarters we did $251 million combined, which is about a $500 million run rate. So, our bottom-line for the year ended up just slightly higher than last year, and obviously, the excess capacity we had going into the last half of the year was somewhat problematic for us. So, as we look back, it was an okay year with a great start and a tough finish as the economic situation made its effects known toward the end of the year. I want to thank all employees for their efforts this past year. We certainly can point to many accomplishments in fiscal 2009. The sports theme for us for the fourth quarter is baseball. It's always exciting when a new ball park opens, and Daktronics was an inevitable part of opening of both of the new ball parks in the Major League here in April, the New York Yankees and the New York Mets namely. The Cincinnati Reds also opened their season with a New Daktronics integrative scoring and video system and these will all be great showcases for Daktronics products. Daktronics also has displays front and center at the opening of the new traveling Star Wars show which debuted in London in April, and they will start a world tour in September. This is their second order of our PST-10 product, which is a new product we've introduced here in the last six months. This order came from ScreenWorks, the video screen and rental company that is providing displays for the show. This order followed a successful use of the same product by ScreenWorks with the AC/DC tour in the past six months. So we're really excited about the great reception this product has had and the progress we're making in that mobile modular area. Again, this PSP-10 is 10-millimeter surface mount technology. It's a very high resolution indoor, outdoor transportable display system designed for transportability and ease of set-up and tear-down. This product provides unsurpassed accurate color representation, in this case, the film content which is being displayed as the Star Wars film content. We are able to not only provide this accurate color representation when the product is new upon delivery, but we can maintain that through calibration overtime. For this show, the PST-10 is configured to a 27-foot by 60-foot screen. It's a truly awesome video display. Again, another great showcase for our product and for this mobile and modular display system capability. During the fourth quarter, we continued our focus on cost reduction. We consider this an ongoing work in progress as we work to match our cost structure to our evolving order and sales outlook. Our general approach to managing through the downturn remains very straightforward and basically unchanged. We continued to, first and foremost, aggressively pursue orders and simultaneously pursue cost reduction. We'll continue to provide a quality product at a competitive price. We're continuing with strategic product developments that are essential to our future. Looking forward, our orders were down this quarter, both on a sequentially and on a year-over-year basis. However, it is noteworthy that the drop in orders is not across the board in all of our business units. The commercial and international business units were down significantly, while our other business units were up for the quarter. As we've discussed before, much of the drop in commercial is due to the decline in our digital billboard business. International is always a very lumpy business and the most difficult to predict because it depends on a wide variety of large projects and the variability with the geographies, although we do have some nice opportunities in the pipeline for International that we're working on. Notably, our transportation market orders were up significantly in the fourth quarter. As we see, our transportation business headed for a very strong 2010. Transportation revenues account for about 10% of our business just to put that in perspective. During the quarter, we reduced backlog by $8 million from $128 million to $120 million with revenues of almost $122 million. Given the current rate of order bookings and the fact that some of the backlog isn't workable in the quarter, we estimate it may be difficult to achieve $120 million top-line in Q1. On the competitive front we are seeing some extremely competitive pricing from some competitors, some of which we believe is not sustainable. At the same time, we are launching a renewed effort of reducing the cost, both the product cost reduction and streamlining some of our project processes to continue to be aggressive in our cost reduction. We will be working with our entire supply chain to achieve cost reductions in that regard. We expect the price pressures will continue for at least the near term and this could have adverse impact on gross profit margins. On the longer term outlook, we expect all of fiscal 2010 to be challenging and we are planning accordingly. As we have discussed before, based on comments from some of the major players in the outdoor billboard industry, we see the digital billboard business as remaining very slow through calendar 2010 and possibly end to 2011. Other areas of our commercial business are also down somewhat, but on a positive note we were just selected as the supplier for new corporate signage program for a regional convenient store firm. That will be in the $2 million to $3 million range initially and could grow from there. So there are some good things happening out there. Our live events business has a nice pipeline of projects. Our year will really be defined by how we book orders in the next two to three months. The second quarter is typically a big quarter for sales in our live events business. This business, again, the competitive environment is probably right now as much of a factor as the economy. Notably, we're at a strong cash position as we look toward 2010 and to the future. We'll be certainly working to minimize our CapEx spending and overall work hard to conserve cash going forward. Based no our cash position and our cash flow outlook, our Board of Directors hag declared a $0.095 dividend for fiscal 2009. With that, I'll turn it over to Bill for more color on the numbers.

I'll start with a few comments on gross profit, which was less than what we had expected for the quarter. As Jim mentioned, we began to see adverse effects on a competitive front which is hurting our gross margins. For large contract orders booked during the quarter, we saw a noticeable decline in gross profit estimates compared to the order bookings in the third quarter of fiscal '09. So we expect that to impact our gross margins in fiscal 2010. The orders booked during this quarter, as most of you can understand, do not have a significant impact on margin in the current quarter, but there is some impact. In addition, and more importantly, we did not perform overall as well as expected on the large contract orders when we recognized revenue for the quarter and saw the base growth profit turn out a lot less than the original estimates we had going into the quarter. We continue to see higher warranty costs, but we continue to believe we're headed in the right direction with our initiatives on quality manufacturing and design for this to decline. As a follow-up to the finishing issue that arose in the third quarter, we took an additional hit of $100 million in the quarter and could see a little more in the fiscal 2010. But based on our information available to us at this point, we believe we have the problem generally contained. To put the forgoing kind of in a better perspective, the largest change in gross profit margin sequentially was the lower overall margin on contracts which cost us a few margin points. And we think that the warranty cost was an additional market point or so on top of that than we expected. Just keep in mind the gross margins in our business, our estimates is not like a standard manufacturing environment where you know is greater certainty what your cost will be with large projects and cost can fluctuate. Given everything that's going on especially with the competitive environment, it's difficult to forecast gross margins going forward. We continued our focus on areas we can't control like our manufacturing and services overhead processes, our labor utilization and other factors. For example, we have reduced our manufacturing staff by approximately 8% over the last two quarters and the total cost of manufacturing for the fourth quarter which excludes raw materials have reduced approximately 1 million from the third quarter and 2.5 million from the second quarter of fiscal '09. So the cost base now is approximately 16 million per quarter which includes a little more than 3 million of non-payroll-related fixed cost. We feel we have made a lot of progress but still have much more to do. Keep in mind that labor over the long term is a variable expense, but in the short term it tends to be more fixed. Within operating expenses, in addition to working at reducing payroll costs, we are also working on many other items in that area. Product development for the quarter was a little bit lower than expected, that was primarily due to some adjustments of accruals, so that really reflects the current run rate. Current run rate was probably 0.5 million or so higher, but we're really focused on overall future declines in operating expenses as a whole. We generated solid cash flow for the quarter and we believe we can continue on this path, as we move forward. For the quarter, our cash grew by almost $20 million. Generating free cash flow is and always has been our top priority. Capital expenditures, this next year, are focused on maintenance only with a few minor exceptions, one being the purchase of the building next to our main facility at Brookings this month for $3 million. This purchase was committed to a couple of years ago and we've been able to put off closing for as long as possible. For fiscal 2010, we're targeting capital expenditures including this building to decline marginally year-over-year. You will notice that income taxes increased as a percentage of pre-tax income for the quarter. This resulted primarily from the impact of losses in foreign jurisdictions and a resulting smaller tax benefit being created by those losses. Effective rate for the fiscal year remains a reasonable rate to assume going forward. Finally, concluding on a few forward-looking items. We find it difficult to estimate what the future holds completely. On one hand, we continue to see a lot of opportunities and live events, as Jim mentioned, but the competitive situation is difficult to forecast. Some competitors seem to be unusually aggressive creating an environment of uncertain order bookings and gross margin expectations. And transportation on the other hand, we remain very optimistic. Commercial and transportation do not seem to leveled off, and although there are some real commercial and international, they do not seem to have leveled off yet. And although there are some real opportunities on the international side, as Jim mentioned, the competitive issues there are impacting margins, if we do earn order. Finally, schools and theaters, we're more focused on right sizing the sales organization, as we believe we can stay ahead of things with slightly increasing sales and gross margins. With that, I'll turn it over to the operator and open it up for questions.

(Operator Instructions). Our first question comes from Steve Altebrando from Sidoti & Company. Steve Altebrando - Sidoti & Company: You talked a little bit about cost reductions in cost of revenue line. Are you seeing the benefits of that yet? Or is that something we should see going forward?

Well, we've realized some cost reductions. The challenge has been that our top line is coming down, has come down as well. So, I think we're realizing the benefits, but we have more to do in that regards, Steven. Steve Altebrando - Sidoti & Company: I guess I just may, was it year-end loaded some of the reductions that you spoke of?

Steve, this is Bill. One of the things I tried to clarify is, it's being a consistent reduction in our manufacture cost. We reduced a 1 million from Q2, we reduced about 1.5 million in Q3 and additional 1 million in Q4. So, it's been on a continuous effort that we'll keep focusing on and there is a whole slew of things that we're doing in that regard. One thing that, we're going to be maintaining our facilities, so that fixed cost doesn't go away which is one of the reasons I emphasize that in my comments. But overall, I think we're making good progress in reducing our cost every quarter and we'll continue to do that. Steve Altebrando - Sidoti & Company: And then I know it's difficult to predict, but going forward into fiscal '10 year, do you think that the gross margins are going to look sort of what they look like in this previous quarter for the full year?

It depends on how things turn out and that was my comment on the competitive front making a tough comparison. But overall, we're committed to seeing it rise certainly over Q4 or it turns out is really a difficult thing to predict because of the competitive environment. But from things within our control, you will see definite improvements in it. Steve Altebrando - Sidoti & Company: And then the last one, the competitive pressure you mentioned is, is it one manufacturer in particular or it's just sort of the environment, the excess capacity that everybody has out there?

Well, it's really not limited to one. We are seeing it in the live event sports area. We are also seeing it in the commercial areas to some degree. So, it's not just 1 or 2 competitors. Steve Altebrando - Sidoti & Company: Okay. All right. Thanks, guys.

Our next question comes from Steve Dyer from Craig-Hallum. Steve Dyer - Craig-Hallum Capital Group: Thanks. Good morning. You talked a little about CapEx and trying to keep it to maintenance CapEx, plus the new building. What do you think maintenance CapEx looks like in the next fiscal year?

Well, we said marginally decline, it was just over 22 million. I mean, if you factor out that building, you are going to be under 20 and our approach to CapEx and it's the way we handle that this last fiscal year. We take it item-by-item. And so at this point, we are saying that it will marginally decline in total. I am optimistic that our employees are pretty darn good at keeping that in check. So I am optimistic that there's opportunities to make it last, but I think for planning purposes, now it will be under the 22.8 million we have this year. Steve Dyer - Craig-Hallum Capital Group: Overall or just maintenance excluding building, right?

That includes the building, so I think it will be 19 or so, and that is 80% maintenance or so. We committed that also includes $1 million for this building in Shanghai that we had committed to about a 1.5 ago. And so, on the first half, we have got $1 million of cost there, that's not maintenance and that was an obligation we had committed to at least 1.5 ago. Steve Dyer - Craig-Hallum Capital Group: Okay. Thanks, Bill. Next question: Can you give us any color on sort of your live events pipeline. In other words, how much, for example, the Meadowlands and the Twin stadiums have been booked and have yet to be booked? And then in terms of new deals on the horizon, is it primarily upgrades at this point in time, and what have you seen on the HT front, have you seen any of those pushed out because of the economy or are those hanging in there pretty well?

On the Meadowlands, we've got roughly $18 million to $20 million to recognize as revenue over the first half of this fiscal year, and we still got another $3 million to $5 million change order that's included in that and that will book as anticipated in the books this quarter. And I think that's in that number. We still got work left to do on the Chiefs transaction that will be primarily in the first quarter. We've got a nice project at the University of Florida, that's coming in. The University of Missouri which I believe we announced that earlier in the quarter that will be completed in the first half. A nice order that we booked during the quarter was some displays for the Cowboys new facility, the exterior of the facility that will be in the first half, that was about $4 million. So we've had a number of nice projects. With that, I'll turn it over to Jim to answer the rest.

Yes. Just in terms of the general mix of what we're seeing, we look at the contracts booked in Q4. Some of the Bill mentioned, actually the two largest contracts were university contracts, Florida and Missouri. And then we had the Cowboys and the project with the St. Louis Rams so there is some professional activity there. We just announced here just yesterday, the day at the Oklahoma City Thunder, Daktronics has been awarded that new scoreboard system, the video system and that's the new (team) that will be down to the Oklahoma City. So those are the kind of things that are going on and I see the mix of things is, hasn't really changed that much from historical there, I mean we're seeing a mix of professional and college and things happening at all levels yet. So the pipeline is still active, still there.

This Friday at the beginning of the last quarter's conference call, we are worried about the economic pressures and live events and how we see that shake on. Our pipeline, as Jim mentioned, looks pretty good. It is competitive environment that's become more of a factor as opposed to the economic environment, the economic factors on our customer. It's turned out to be more of a factor of what is causing our competitors to do in the business plan, in the marketplace Steve Dyer - Craig-Hallum Capital Group: Okay. So the only real difference is, there seems to be kind of lack of these big megaprojects that you've seen in the last couple of years?

Yes. Probably, the $20 million on up kind of projects that we don't see any of those on the horizon right now, we had a few of those this past year. So, that level of megaprojects we don't have in the pipeline at this point. Steve Dyer - Craig-Hallum Capital Group: And then you had indicated that there is some nice opportunity internationally in the pipeline, can you elaborate on that at all, is it billboard or something else?

There is some billboard opportunity project actually that we have been given a verbal on. It's in the 2 million to 3 million range. And there is some other projects, there is a projects kind of related in the transportation side of things, that's also a very nice size project. It's a little further out billboard project that should, we actually expect that to book here this quarter. The other one is a little further out, but there are some things out there. There is some transportation projects in China, also some railroad station type projects that we've had success in that area in the past, and so we were well positioned there. Again the challenge here will be the competitive environment and how that continues to evolve. Steve Dyer - Craig-Hallum Capital Group: Okay. And then finally on the operating expense line, Bill what are your thoughts as to sort of the ability to, you've been bringing it down by call it 700,000 a quarter? Is that something you can continue to do, can you do it faster than it, how much more can ring out?

There is more things we can do definitely. In terms of selling the bar to say, okay, at the end of Q1, we're going to be down another 700,000. On one hand, I don't like to lay that at all, I just want to challenge our people they do as much as they possibly can do. We're still basing our staff reductions on an attrition approach and that can flow and speed it up and we will see how that goes. So, it's hard to say what the absolute quarterly reductions will be, but we have got more to do. Steve Dyer - Craig-Hallum Capital Group: Okay. That's all for me. Thanks guys.

Our next question comes from Dick Ryan from Dougherty and Company. Dick Ryan - Dougherty and Company: Back on the competitive landscape, can you give an order of magnitude what you are seeing as far the price impact? I mean, is it preventing you from going after some jobs out there, based on what the competitors are doing at this point?

Well, it's a wide range there. On extreme cases, there have been jobs where the competitors have offered prices that are actually below our cost. Obviously, we just walk away from those. That's not a common situation, but it has happened. And there is kind of every situation in between there I guess. So our approach is, generally in the industry we have very good relationships and we have a very large customer base to start with, so often we are working with existing customers on these projects. So, we believe, in many cases, we have a favorite position, but there is of course a limit of how much the customer can value that if the competitor wants to get extremely aggressive they can buy jobs. So that's kind of what we've seen in some cases. And we just have to, even the companies will have the last look and we will just decide that it's not something we want to do at that level. So, it's a wide range of things. Dick Ryan - Dougherty and Company: Okay. Good. Hey, Bill, I didn't catch your comment on the taxes for the quarter, what do you anticipate for this year?

We can anticipate that our annual rate for the year is a good planning rate on a go-forward basis. Dick Ryan - Dougherty and Company: Okay.

And what happened during the quarter is, unfortunately earnings were brought down internationally, which the US is still our highest tax rate jurisdiction. And, so the benefit we get for losses is not as great in those foreign jurisdictions. We work our planning in trying to maximize that. In addition, I'll just say, there's some opportunity, maybe. We ended up doing a lot of work this last fiscal year in some high tax rates states to that cost our state rate to go up, maybe a 0.5%. So there might be slight chance that we can improve on the rate going forward, but I think you should assume our annual rate on a go-forward for now. Dick Ryan - Dougherty and Company: Okay, great. Thank you.

Our next question comes from Jim Ricchiuti with Needham. Jim Ricchiuti - Needham & Company: Hi, good afternoon. Bill, with respect to the comments that you guys made about the price competition not being sustainable. To what extent, how confident are you that some of your competition just hasn't put in place just a lower cost manufacturing operation where it is going to be more challenging for you guys to compete?

Well, first of all, our product is very material-intensive, so the big part of our cost is on the material side. It's possible that the competitors have product that has some lower cost but not, I guess we believe if it's truly an apples-to-apples product capability that we're delivering, we are competitive. And so, I think we're at least within the range of all competitors from apples-to-apples thing. So, with they are quoting something that we see as below our cost, we don't believe that's truly a sustainable thing. Jim Ricchiuti - Needham & Company: And Jim the pricing, it sounded like intensified as you went through the quarter, what are you seeing off-late? Are you seeing any sign of it easing or is it look like it's going to remain this way for the next one to two quarters?

At this point, we don't have any reason to think it's going to ease up in the near term. Jim Ricchiuti - Needham & Company: And just separately on the transportation business, it looks like you guys have a decent pipeline of business. You talked internationally. Can you talk a little bit about the transportation business here in the US, and to what extent, you might see some benefit from stimulus spending?

We believe that the stimulus bill has freed up some, maybe even some funds that were already there, maybe the states we are holding up maybe released from some of those just, maybe due to some uncertainties. And so, we believe that has been a positive factor in the transportation business. But yes, we've had our orders for the year, we are up significantly in transportation and we have about a six-month backlog in our transportation business and nice work. So, yes, we're well positioned there. We're very pleased about that. And I guess I mentioned transportation opportunity, that's international that would end up getting classified in our international business, even though it's kind of a joint effort with our transportation group helping to win that business, sort of a side note. Jim Ricchiuti - Needham & Company: Okay. Thank you.

The next question comes from the Steve Altebrando with Sidoti & Company. Steve Altebrando - Sidoti & Company: Hi, just a real quick follow-up. Could you give a little more color on, you spoke about contract cost impacting I think couple percentage points on the gross margins in to what that is, is it referring it's a rework on some projects or the cost estimates being off and is that a separate from the warranty issue?

Yes, it is separate from the warranty issue and essentially would, but the biggest part of it as we get into the tail end of the primarily the Mets and Yankees. There is a lot of what more I will call fine tuning in things that we have to work out at the end. And in New York when you do that kind of stuff, you end up with a lot of higher cost from sub-contractors, the labor market with you are sub-contracting is not inexpensive in New York. So, there was focus for the most part on some of these big projects just some issues that arise. It's a nature of our business and those were exceptionally large projects, so it will have a greater impact. Steve Altebrando - Sidoti & Company: Okay.

Offsetting that too though, we didn't see typically in our business we can book a contract, let's say at 30% margin and as we get through, we are recognizing a higher margin. And during the quarter, we just didn't see that upside overall on the contract as a whole. And so maybe there is still some upside to come yet on those existing contracts, but the biggest part was those big contracts.

I just might add to that. In terms, I mentioned, our cost reduction initiative that we have a real focus on that. And one of the areas that is certainly we are looking at the product side and the actual product cost, but a big area that is big focus is the site process, the installation and commissioning process of our product, that's also going to get a lot of attention there because on big projects that's where the biggest variables are actually. Steve Altebrando - Sidoti & Company: Okay. That's very helpful. Thanks.

Okay. Well, thanks everyone for your question this morning and thanks for your time. And again, we are all very focused here at Daktronics and we are well positioned from a financial balance sheet perspective. We are in a solid position. We still continue our focus on product development, keep bringing new products to the market place, so that's a one of our fortes and our keys to success. So, we are remaining focused here and move forward. So thanks again for your being with us this morning. Operator, you can close down the call now. Thanks.

Great. Thank you. This concludes today's conference. Thank you for your participation.