James B. Morgan - Chief Executive Officer, President and Director William R. Retterath - Chief Financial Officer, Principal Accounting Officer and Treasurer

Morris Ajzenman - Griffin Securities, Inc., Research Division Neil Chatterji - Craig-Hallum Capital Group LLC, Research Division Richard A. Ryan - Dougherty & Company LLC, Research Division Stephen Altebrando - Sidoti & Company, LLC James Ricchiuti - Needham & Company, LLC, Research Division

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2012 Second Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, November 22, 2011, and is available on the company's website at www.daktronics.com. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to Mr. Bill Retterath, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, sir. William R. Retterath: Thank you, and good morning. We appreciate your participation in our second quarter conference call. I'd first like to offer our disclosure, cautioning investors and participants. In addition to statements of historical facts, this call and our news release contain forward-looking statements, reflecting our expectations and beliefs on 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 the economic and market conditions, management of growth, timing and magnitude of future orders and other risks, as mentioned during this call and in our press release and our SEC filings. Forward-looking statements are made in the context 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'll turn it over to Jim Morgan, our Chief Executive Officer, for some comments, after which, we'll open it up for questions. James B. Morgan: Thank you, Bill. Good morning, everyone, and thanks for joining us this morning. We were generally pleased with our execution this past quarter. We ended the quarter with a healthy backlog, which positioned us for a strong quarter. We did have the challenge that the product mix and our backlog had taken a rather strong shift towards surface mount technology LEDs as opposed to through-hole technology. So we had some execution challenges, adjusting our capacity to meet demand, and thanks to the hard work of -- and the close collaboration of a lot of our people, we were able to meet the many tight deadlines this entailed. I was disappointed to have the cost dips that we described in our press release, which in total reduced our operating margin by more than 2 percentage points. As noted, we do expect most of these to be onetime costs. I would like to shed a little more light on a new market and product family opportunity that we are becoming increasingly excited about. Again, we have mentioned this in the past. That is what we refer to as architectural lighting, also sometimes referred to as LED mesh product, that's M-E-S-H. A key characteristic that differentiates this product from our traditional video displays, is that this product has a degree of transparency. In other words, you can see through it, somewhat analogous to window blinds. This in turn results in some unique advantages in terms of weight, wind loading and power consumption, which makes it the preferred, if not the only solution, in a wide variety of applications. We are excited to have just completed an installation at the WinStar World Casino, located in Oklahoma. That is our first, where we have married our LED technology with the unique mechanical mesh technology provided by our new business partner out of Europe. This mesh design is very robust and has been proven in applications without electronics for many years. We have a nice pipeline of opportunities utilizing this unique mesh design in combination with our LED technology. We do enter third quarter with a relatively strong backlog, considering our third quarter is typically our weakest quarter, so we are pleased about that. How we end up for the fiscal year will, for the most part, depend on our orders booked in the third quarter. A few comments about areas we are investing in. We continue to invest in product development to deliver improved products at reduced price points, as well as bringing new products to market such as the LED mesh product I mentioned earlier. Our increased product development investments are a reflection of aggressive development schedules, along with more thorough prototyping and design testing, which adds to the initial development costs that provides a more robust and more cost-effective design over the life of the product. Our focus for the next couple of quarters in the display development area continues to be in the tighter pixel pictures for outdoor video displays, and the next generation of our high resolution video products for indoor. We're extending our platform strategy for these products, like we did with our larger pixel pitch of our products over the past couple of years. This strategy increases the commonality of parts of the product that share a platform, which in turn reduces inventory handling, as well as setup costs and manufacturing. At the same time, the new designs take cost out of the building materials. We also continue to invest in a control systems and in fact, approximately half of our product development investment is in the control system side of things. We have 2 platforms there: Our Show Control platform for live event applications, such as sporting events; and our Visiconn, for scheduled program in applications, which is typically advertising. We continue to see opportunities for IPTV, that's internet protocol television, in stadiums with the strength of our integrated control systems, controlling and synchronizing displays throughout the stadium. We have now completed several major IPTV installations. Last quarter, we've received on an order for a major IPTV system for the Florida Marlins' new stadium, which will be due for baseball in the spring. All of these product developments will position us to be more competitive, and enable us to improve our gross profit margins. We also continue to invest in expanding our International business, which takes investment both in terms of selling expense and administrative expense. This is a very lumpy business, as it is almost all large-project work. Our orders were down a bit for the quarter, but that was mostly due to project decision dates sliding out. Overall, we are very pleased with how our International businesses performing, although price pressure is always an issue these days. On the cost side. In general, we have opportunities for efficiency gains on all expense line items on the income statement, from the cost of goods sold through SG&A. Some of these improvements will take some time to develop. We continue to be cost conscious in all areas of the business and continue our efforts at streamlining our processes and our procedures to eliminate cost, which typically means time out of our processes throughout the company. So in short, we continue to focus on generating more revenue while curtailing costs, get more to the operating income line. We have the opportunity for leverage as we build the top line. With that, I will turn it over to Bill for a little more insight into the numbers, and then we'll take your questions. William R. Retterath: Thanks, Jim. As Jim mentioned, our sales were strong for the quarter and exceeded the consensus estimate of $129 million. The higher level of order bookings in our Live Events business and the ability to add projects into our manufacturing schedule was the largest contributor to that upside. From a guidance perspective, on net sales for the third quarter, we have a lot of positive things going for us, but we are constrained by the holidays and the capacity complications of the higher levels of SMT product, as Jim mentioned. In spite of that, we expect net sales to exceed the yesterday's consensus of $109 million. The gross margin results for the quarter were laid out in the press release, and essentially involved various items that caused a 200-basis point decline in gross profit that we consider to be non-recurring. The increased cost estimates on the international project involve approximately $400,000 to conform certain equipment to local government regulations, similar to UL-type requirements. But certainly onetime costs, and we believe we excel on cost-estimate execution overall. On our warranty claims, those are primarily adjustments to prior reserves, for an increase in the cost estimate and cover pre-existing obligations, as opposed any new claims, that amounted to more than $2 million. We may still have some risks on some those old items, which are dependent on how product performs in the field, that's still covered under warranty. So we need to watch as we go forward. The good news here is the products we are shipping today are performing much better, and we are making long-term progress. On the new product introductions, we had charges of approximately $400,000 to address new product in the field that had send some design issues, and was one of the first runs of the product, which is not an unusual thing. In summary, we believe that we'll incur significantly reduced issues of this nature in the third quarter. There were a few other less significant items that added to the total reduction. Moving forward, we saw a slight decline in estimated gross profit on large contract orders, booked during the second quarter. Although, that's more a reflection of the volatility of our large contract business rather than a change in market conditions. When you combine the forward going reduction of the onetime costs with these order bookings, and the lower level sales in the third quarter, we think we can get back on track with gross profit improvement, but keep in mind the inherent volatility we have with large projects. On the operating expense side of things, we're increasing our sales infrastructure in International and Commercial business units, where orders are improving. We're also physically expanding in a number of countries as noted in the release, including Singapore, Spain and Brazil. This expansion, especially in complicated trade areas like Brazil, carries with it added costs in G&A and selling expense. But we have opportunities in these markets that we want to exploit that can help overall revenue and bring more to operating margins. Focusing a little bit more on the G&A costs, we've ramped that up more than we would like to. Much of the increase over the first quarter of this year was in our IT infrastructure, and a big part of the increase has been costs associated with improving our service systems and other developments. We're working towards a sequential reduction in G&A, both the IT systems work, international expansion and things like that could be a challenge in the short term. In terms of cash flow, we continue to manage to the non-income statement drivers of free cash flow, which have driven our cash and marketable securities to higher levels, again this quarter, to more than $90 million. The response to uses -- or response to uses of the cash remain unchanged. We continue to study options to return excess cash to stockholders. Historically, dividends have been our method of choice. We also continue to look at acquisition opportunities that come forward, although for the most part they tend to be smaller transactions. With that, I'll open up the call for questions and answers.

[Operator Instructions] And our first question comes from Steve Altebrando with Sidoti & Company. Stephen Altebrando - Sidoti & Company, LLC: So the shift towards SMT kind of from a legacy product, can you talk a little bit about what the margin implications are for that, moving forward? James B. Morgan: I guess generally our outlook for margin, this as I mentioned the product, that we're in the process of redesigning and bringing out a new platform, so we will have an improved product there with an overall lower cost of manufacturing. So our goal is to see the margin come up on that, that's certainly the intent. The other side of that, of course, the price pressure in the industry is still pretty keen, and so that's the offset to that. But we will take costs out of product. We will have an improved product that we are confident of. The other side of the equation are a little harder to predict. Stephen Altebrando - Sidoti & Company, LLC: Okay. And then, as the shift occurs, is there kind of a -- is there a material investment required on the manufacturing side? James B. Morgan: There is. The equipment that places surface mount, is a different -- it is different equipment than what places through-hole LEDs. But we have some of that, and we will be in our -- we have some of that planned in our CapEx, because we anticipate that, that demand will continue to increase. So, and to give an idea, a surface mount line is you have the 1 million dollar-ish type of thing $1 million-plus. Stephen Altebrando - Sidoti & Company, LLC: Okay. So not the -- I mean, your CapEx has actually been trending pretty significantly low. Do you expect that to loop versus prior years to continue for some time? James B. Morgan: Generally, we're expecting to have CapEx contained. I think we had said $16 million for the year. We're still thinking that, that's a good number. Stephen Altebrando - Sidoti & Company, LLC: Okay, last one and I'll hop back into queue. The Live Events orders was a pretty positive surprise. Are you comping -- does the orders, were they comping off of the sports -- the baseball orders you booked from last year, are those -- is that third quarter of last year that they comped? And if you can give a little bit color on what you're seeing in the bid for this year's baseball season? William R. Retterath: Sure. Baseball last year was $20 million or $25 million, last fiscal year was $20 million to $25 million, I think it was right in the middle there for Major League Baseball. We do a lot of minor league baseball, but this is just on the professional level. Remember, last year was coming off a year of very little business, and so it kind of doubled up a little bit. This year, our best guess is it's somewhere south of $10 million. There's one large project out there that I think looks like it will come our way. But aside from that, there's not a lot of big baseball projects out there. Did that answer it, Steve, or was there more to the question? Stephen Altebrando - Sidoti & Company, LLC: That pretty much did. But were the orders in last year, were they booked probably in your third quarter, is that correct? William R. Retterath: They would have been booked primarily in the third quarter, yes. I believe so, I should check that Steve, but I believe so.

Our next question comes from Jim Ricchiuti with Needham and company. James Ricchiuti - Needham & Company, LLC, Research Division: Bill, did you show on that warranty expense for the year, the pre-existing warranty claims. Was that a $2 million hit to cost of goods? William R. Retterath: Yes. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. So that goes the way -- I guess, what I'm trying to get to is, if we assume you have the revenues close to the Q1 levels, can you get back to a Q1-type gross margin in the quarter? Or is that -- are there some mix issues that might make that a little difficult? William R. Retterath: Well that's what's on our sights. There's a lot moving -- there's a lot going on with the holidays and capacity and whatnot. But that's clearly, if I recall, the Q1 was in the 25%, just south of 25% and so that's -- we're definitely shooting for that, but there is volatility in gross profit. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. And I just wanted to, Jim, pursue a little bit more, the comments that you made about that LED mesh product. Is this -- can you give us some sense? Does this fall into both the Live Events and Commercial revenue segments? And what's a typical installation in terms of project size for you? And if you could also comment just in the margins on a piece of business like this? James B. Morgan: So the demand for this, again, that's a new -- it is a new product family for us, so we're still -- I think the market is still developing. The project that I mentioned is in our commercial market and the international is also an area where we see good demand, an opportunity for this. As a matter of fact, international has really led the way on this historically for us. On the other, we have this type of product installed on the arena in Orlando. We did that a few years ago. That's a new arena down there. So there's, it's got application everywhere, probably more so International and Commercial, but there'll be some in Live Events. In terms of margin, I think to the extent we have uniqueness with this new product configuration, I think that will give us some -- maybe some pricing flexibility that we would enjoy there. So we're hopeful for that. Again, it's very new and we're just -- and this project that we just installed, we did a lot of process development along with that. So our costs haven't really come to a stable state on this yet, it's pretty much a new developmental project. But it went through very well, once we get the processes set up, and the installation went extremely well. And I've seen photos of it, it looks great, actually, and so we're excited about it. And certainly, I'd like to think that we could see some improved profit gross margins with it. James Ricchiuti - Needham & Company, LLC, Research Division: And new, would this be, in terms of projects size similar to some of the larger Live Events, not necessarily the big projects that you do for arenas? I'm trying to get some feel for what the revenue potential might be for some of these? James B. Morgan: Yes. So certainly, $1 million projects would be, I think, common in this -- with this product. Certainly, we could do smaller applications for less, but they could be multimillion dollar projects. So I'd say anywhere from some million the multimillion, it's anywhere in there, depending on how big and how much area they're trying to cover with the board. James Ricchiuti - Needham & Company, LLC, Research Division: And then I'm not completely clear on your ability to really differentiate yourself in the market, how competitive is this market, Jim? Is this something where you're seeing -- beginning to see more players in the market? Or do you feel you have some lead here, in terms of the partner you're working with? James B. Morgan: There's a lot of different approaches to do a mesh-type product and for different applications, and I'd say it's too early in the development of the market for us to really maybe understand what it all is going to win it in the end. But certainly, we see a different mix of competitors in this, and there's some mesh product coming out of China. I think the challenge there is, how is that going to be supported. So we feel we have some very strong advantages that we offer with the product and with our support. And it's relatively new, so there's not a lot of history to rely on here. But we're very optimistic about it. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. Last question for me. Bill, could you provide the revenues in the quarter for billboards? And if you have the bookings numbers as well? William R. Retterath: Yes, I can. The billboard orders were somewhere in the $12 million range, and sales were in the 15-plus million-dollar range. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. Normally, you'd see some seasonality in this quarter in terms of the deployments, shipments on the billboards, and then picking up in Q4? William R. Retterath: On the order front, there's volatility on orders. Last quarter, we had a big quarter for bookings, so orders are volatile based on timing, primarily as a big players in the marketplace. James B. Morgan: If I can add to that, Jim, our billboard factory is very well booked right now. We're not -- we've never had a slowdown in terms of shipments this quarter. We're busy in that area, which is okay.

Our next question comes from the line of Morris Ajzenman with Griffin Securities. Morris Ajzenman - Griffin Securities, Inc., Research Division: On your architectural lighting again, you said in the presentation, a pipeline of opportunities. Obviously, you're totally excited about this, but what could you tell us about what this pipeline looks like? Is there anything you can give us some sort of granularity? Does anything that's in your term, where your pipeline is something looking out several years down the road? James B. Morgan: I don't have the details with me here, but I'd say this pipeline, these opportunities, it would be within the next 12 months, anywhere from near term to further out in that time frame. And the wide variety of applications -- the application, just to maybe give a little more insight into how this can be used. The application down at the casino, is actually on the outside of a parking garage. And it's a way to make the exterior of the parking garage to give a little more utility, and make it a little more attractive basically, and give it the functionality. So basically, they can put messages up there, at the same time, it's -- air can move through it, so it doesn't block the air flow through the parking ramp. So that's just an example, and there's just somewhat limitless types of applications like that. And so -- again, it's a new product. We're just getting it out there, but there's a wide range of applications, and there's near-term and further-out pipeline opportunities. Morris Ajzenman - Griffin Securities, Inc., Research Division: Is there any backlog associated with it at this point? James B. Morgan: I don't know exactly what we have. We don't have a large backlog at the moment, we have a -- it's a little in backlog but. Morris Ajzenman - Griffin Securities, Inc., Research Division: Last question, just shifting gears back to the onetime which you discussed in second fiscal quarter. Any of this impact in the third fiscal quarter or is this onetime or done as you look at the third fiscal quarter? William R. Retterath: I'll take it. It's done. The one thing we continue to worry about, is you set up estimates based on how you think products will perform in the field. And for example, one of the issues that we're dealing with is something that was larger, a couple of years ago that's still hanging out there, is we had a paint issue on some products out in the field. And as we went through this, this fall season, when all these outdoor scoreboards business geared up, we found that the problem was bigger than we had estimated it to be. And so that's coming to the end of its life, that's products that went out, I believe, in 2008. And the warranties expire and the products' been out there. So we try to do the best we can on estimating those types of things, and believe, as we sit here and now, that we've got a good estimate for it. But things can change.

Our next question comes from Neil Chatterji with Craig-Hallum. Neil Chatterji - Craig-Hallum Capital Group LLC, Research Division: Calling in for Steve Dyer. I think you actually kind of answered my question partly. Just in regards to the SMT shift and I guess the CapEx spend. I think you mentioned that $16 million, that's still kind of the target for this year. What about, I guess, next fiscal year? I mean, are you anticipating more, based on this quarter? William R. Retterath: I think we're fairly committed, that absent something unusual, that we stick with this 4% of sales as the cap, and we believe that we can do that in normal circumstances. The thing that would be abnormal, I think, is if we'd have to build out facilities, and there's just no need for us to be thinking or talking facilities at this point.

Our next question comes from Dick Ryan with Dougherty. Richard A. Ryan - Dougherty & Company LLC, Research Division: Bill, you mentioned in your commentary on sales and marketing expense, that you moved that up for opportunity, it's International and Commercial, I think, you hit the International side. But what were you seeing on the Commercial side? Is this particular reference to what you're seeing in billboards or just the other side of Commercial, are we seeing a pick up there? William R. Retterath: Good question. In the non-billboard part of Commercial, yes, we're seeing some improvements in that area. And maybe, I'll let Jim talk on the -- our GalaxyPro product and some of that stuff in addition to architectural lighting. James B. Morgan: Well, GalaxyPro product basically is -- Galaxy display is our -- ranges from the smaller displays that you might see in front of retail on-premise advertising applications, and then the GalaxyPro, we've taken that up, sized up to a point where it can operate from our less expensive control system, and have a price point that's basically lower, but still provide very great functionality. And that's been very well-received, so we've seen good traction there. The other thing I might mention, we've had some nice projects in the Times Square recently. We just installed a -- one of our 10-millimeter outdoor displays. We talk about surface mount outdoor as an example of that interesting product at that resolution. We just installed that in here within the last month, and that looks great. We've got some other projects we just installed, at #2 Times Square there. One for Hyundai, that just got completed here a couple of months ago. So that's been some of the interest we've seen lately. Some nice pick up in the -- what we put in Commercial in our contracts, we call our contracts business, so -- also we've had, we just installed some billboards in Las Vegas. That's a first for us, and that's exciting. There's some more going into Las Vegas. So those are some of the kind of new developments and positive developments I would say in the Commercial side. Richard A. Ryan - Dougherty & Company LLC, Research Division: Okay. Back on the mesh question, Jim, you've got the one you've installed at the Target headquarters in Minneapolis here, that isn't mesh here, is it? James B. Morgan: That is -- it's another, it's a variation on mesh, and so that's -- and that's actually what we call our ProStick product. So it's the -- in that case, it's actually constructed out of vertical members or members that are oriented vertically, whereas in the case of the one down in Oklahoma, we just installed, that's got horizontal members on it. But it's the same basic idea, in that you have a strip of LEDs, and then you have a space between that strip and the next strip. So it's arranged differently, but it's the same basic concept. Richard A. Ryan - Dougherty & Company LLC, Research Division: So the mesh replaced the stick version or can you do either one? James B. Morgan: Yes, we can do it. Different solutions for different applications. We'll have a family. We envision having a family of mesh product. Because there are so many different possibilities of applications here that will just require different applications. Richard A. Ryan - Dougherty & Company LLC, Research Division: Sure, sure. What are you seeing on pricing across the landscape? Are there still pressure there from competitors, is it lifting at all? James B. Morgan: Pricing is seen as it's still very keen. That's why we see our competitors doing things we consider a little bit crazy, but that's -- yes, it's keen. And we realize we have to continue to offer improved product at a reduced cost, and that's the direction we're headed, and we wanted to again, offer our product that is at the top end of the quality spectrum in the industry as well, and we think some of the competitors that maybe aren't doing that, it might be starting to catch up with them. Richard A. Ryan - Dougherty & Company LLC, Research Division: Sure. One last one for me. On digital billboards, Jim, are you -- when could you see a refresh cycle start there with some of the new products you're bringing out? I mean, is that a fiscal '13 kind of occurrence or is it later than that? James B. Morgan: Yes. I think in '13 and '14 here, we'll start seeing some replacement cycle starting. Because those -- we have products out there then -- well, let's see, they will be 7-plus years anyway. And that will start, and then that will be an ongoing thing. And certainly, the new product will offer some real advantages in terms of power, efficiency and reliability and overall operating costs, it will offer some benefits for the billboard company as well. So I think that will be interesting to them.

At this time, I would like to turn it over to our speakers for any closing remarks. James B. Morgan: Well thanks, everyone, for joining us this morning. I appreciate your time, and I wish everyone a happy Thanksgiving.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.