Daktronics, Inc. F1Q09 (Qtr End 08/02/08) Earnings Call Transcript

| About: Daktronics, Inc. (DAKT)

Daktronics, Inc. (NASDAQ:DAKT)

F1Q09 Earnings Call

August 26, 2008 11:00 am ET

Executives

William R. Retterath – Chief Financial Officer & Treasurer

James B. Morgan – President, Chief Executive Officer & Director

Analysts

James Boyle - C.L. King & Associates, Inc.

Michael Friedman – Noble Financial Group

Stephen Altebrando – Sidoti & Company, LLC.

Steven Dyer - Craig-Hallum Capital Group LLC

Jim Ricchiuti - Needham & Company

Bill Lennon – [Inaudible]

Operator

Welcome to the Daktronics first quarter fiscal year 2009 earnings results conference call. (Operator Instructions) I would now like to turn the program over to Bill Retterath, Chief Financial Officer for Daktronics, for some introductory remarks.

William R. Retterath

We appreciate your participation in our first quarter conference call. I’d like to make some preliminary comments about the quarter after which we’ll open up the line for a limited timeframe for questions. I’d like to first offer our disclosure cautioning investors and participants that in addition to statements of historical fact, this call and our quarterly 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.

To begin the call, just two quick introductory comments to emphasize. First, this quarter includes the one extra week which helped us on the top line. Secondly, keep in mind that the reorganization of our field service organization that we announced last quarter where we shifted a number of employees out of selling expense and cost of goods sold. We’ll talk a little bit more about that later.

With that I’d like to turn it over to Jim Morgan, our Chief Executive Officer, for some highlights on the quarter.

James B. Morgan

It was a great accomplishment to hit $161 million for the quarter and even if you factor out the extra week in the quarter we would come in at around $150 million which is still a notable milestone for us and represents good growth over Q1 of last year.

I would like to start by acknowledging the excellent quarter that our live events and international units had. We serve most of the needs for these two units out of the same factory here in Brookings, and things really ran well there for the quarter. We started the quarter with a solid backlog and the factory did a great job in getting things done. This is worth noting also. This is a team effort that also includes project management and project engineering as well as our installation managers. They all did a great job in achieving what we did there.

We also had better-than-expected margins on our international sales which was good to see.

In addition this quarter we were able to demonstrate the flexibility we have between our Brookings and Redwood Falls plants as Redwood Falls built product for the live events unit as well. This flexibility is an important part of our strategy to help us level loads in our plants to best serve our customers and maximize the utilization of our investment in our plants. To further improve the flexibility between these two facilities we will be breaking ground for a $3 million high bay addition to our Redwood Falls facility this quarter. Currently we just have a lower bay facility there. This high bay ceiling will allow Redwood Falls to manufacturer larger display sections in the future.

I would like to reiterate also that although we announced receiving a verbal on the New Meadowland Stadium project a few weeks ago, it is not in the end of quarter backlog. We expect to finalize this contract any time now.

We did recently receive verbal commitments on two orders for professional sports facilities that will be in the $8 million to $10 million range that will be announced at a later date.

The outlook for live events is at least as strong as we thought it would be going into the year and with the positive reception of our HD or High Definition product and some other factors on the competitive landscape, the outlook remains very positive for the year.

On the product development front in that area we will be shipping the first of our new 10 millimeter outdoor video product in conjunction with a couple of our large major league baseball projects. This is the first product to utilize our new common module platform which is a new platform that we’ll be rolling out and this will have a significant impact on our cost overhead structure due to a higher degree of commonality that it will afford us on the parts between the different pixel pitches.

As a point of interest on the international front, we completed the installation of the $10 million display project for the Beijing rail station a few weeks before the Olympics. This was a project that had a very short fuse and our people did a great job of getting it manufactured and installed on a tight schedule. It is noteworthy that within three years of having opened our China office, we have completed a project of this magnitude in China. Although we had a large market presence in the US at the time, we were virtually unknown in China when we first embarked on the China market and we believe there is much more opportunity there.

Commercial is also up nicely from last year although its growth rate has slowed. We expect the growth rate in both the reseller market and the digital billboard market to be less than last year. We are being told by our two largest billboard customers that they plan to follow through on their rollout plans despite the slowness in the advertising sector. They still digital as providing lift in the markets where they are deployed. It is possible we could see a slowdown from the smaller companies but we remain very optimistic about the long-term prospects for digital given the excellent return on investment that they are providing our customers.

We introduced our 12 millimeter OT Valo product in Q1 to complement our 16 millimeter OT which we introduced last year. It has been well received and we have received orders for that product already.

We will be introducing our next generation of Galaxy display for our reseller niche in Q2. This will offer larger matrix sizes and other improved features, and we believe this will give us additional advantages versus our competitors.

As mentioned, our HSPR or scoreboard factory here in Brookings had some logistical difficulties at the beginning of the quarter and is still in a catch-up mode. We lost a couple million of revenue for the quarter due to delays in production. We have the problems corrected for the most part now but still have lead times longer than our customers would like.

As mentioned, higher-than-expected warranty and inventory right now has brought down our overall gross profit for the quarter. We do have major initiatives in place to reduce our warranty costs as we go forward, and Bill will talk a little more about inventory.

Overall it was a good quarter for us and we believe we are positioned to achieve a similar performance in Q2. As a point of reference, Q2 is historically our strongest quarter of the year with Q3 historically being our weakest due to the holidays and seasonality of our business. But we’re off to a good start in Q2.

With that I’ll turn it over to Bill to give a little more color on the numbers.

William R. Retterath

Starting out I want to go over expectations for changes in our growth outlook for each of our business units.

We still see our sales and live events business unit growing by more than 20%. Based on some recent events this number could look a little conservative as we move ahead when you take into account the deals that have been awarded but not yet booked. During last quarter’s conference call we mentioned that there was approximately $80 million of potential orders in the large sports facilities which would convert to $50 million of sales this year.

As we look at where we are with those orders, we’ve booked approximately $13 million related to the New Meadowland Stadium which will all convert to sales this year. We expect to book the remaining $32 million on a contract soon and that’ll add an additional $15+ million in revenues this year. We received a verbal commitment on a major league baseball facility and an NFL facility that approximate $17 million and should have a significant portion converted into sales. But as usual, until you book the contracts those are subject to change. So we’re getting close to the $50 million mark already that we set at the beginning of the year.

We’ve also seen better results in the first quarter on the $1 million to $5 million transactions which have increased by 18% over last year for the first quarter. If you’ll recall last year, the smaller ticket transactions in live events was a concern for us.

Finally, there are new deals for existing facilities that have come up since the beginning of the year that have potential. It’s hard to predict how they will turn out, if they will turn out, but we’re optimistic on the live events business unit as Jim mentioned.

Moving on to the commercial, we saw order growth of 29% but had expected more than this. A big part of the shortfall is our Galaxy line as we’ve talked about before. To add some detail on billboard orders, if you’ll recall we booked $33 million in orders in Q4 of last year and this quarter we’re back down to just under $23 million. That’s still 27% over Q1 from one year ago. The net result for commercial is based primarily on the Galaxy business. We may not quite hit the 20% growth projections but will be in excess of 15%.

Our international business unit is the most difficult to forecast because of the dependency still on large contracts. The revenue levels are becoming large enough also to be significant to our overall results. We still expect to hit the numbers for the year but the second quarter should be light on sales. That means to hit our goals for the year we need to book some business soon in this quarter and early in the next. We think that the pipeline is there to do it but again large projects can sometimes delay and this adds to the volatility in this business.

Within our schools and theaters market business unit as Jim mentioned we had some logistics problems there, but for the year we think we have a chance to hit the numbers. It may be a little bit tight or it could be down a little bit from our expectations.

Finally, transportation seems to be on track for the year.

So in putting all this together, we think taking into account the possibility for sales and live events and the possible softening in commercial, we’re still on track for our projected growth for the year. We’re comfortable with the current consensus estimates for the top line for the rest of the year.

Moving on to gross margin comments, we’re still doing very well on reducing the direct costs of our products but that benefit is getting eroded by some things that we are investing in, as Jim pointed out, but also by the continuation of additional warranty expenses. We believe that warranty costs will eventually go down because of our investments in quality and product design, and we think we’ll see some improvement there in the second half of the year. In addition, we’re working hard at decreasing our inventory levels and have a project team now working at this along with our materials sourcing to leverage inventory more so. This created some extra write-downs during the quarter, and some process changes down the road could create some more losses in the future as we try our best to get to double-digit levels for annual [inaudible] which may take some time. But we’re at the point where we’re committed now and we can focus on it and move ahead towards progress.

Subject to the volatility on large contracts and other factors we talked about, we see gross profit margins staying near the current level for the second quarter which is lower than we desired and lower than where we expect to be for the long term. On operating margins I think we did well on controlling operating expenses for the quarter but we continue to work really hard on that and it is a challenge especially with regards to personnel staffing needs. We think that overall we’re on track to meet our goals for the year on SG&A but we will see a little bit of an increase in the second quarter, and when I talk about increase for the second quarter that would be assuming that we’re in 13 to 13 week periods.

I’ll mention briefly the sale of our building in Tampa. That was roughly a penny and a half per share after tax. The gain on that was $1 million. We purchased the building a number of years ago and its primary purpose was to give us access to a production studio. Since we acquired it, we found that more of the work was taking place on site at our customers electronically and we could part with the ownership of the building without it impacting our business. So we sold the building and we rent back a relatively small space for our staff down there.

One final note on earnings, within the last two weeks we made a decision to cease manufacturing in our Montreal, Canada facility where we make portable trailers for roadside construction sites. That was a very small operation. But we determined that this business has limited potential for both margin as well as growth so during the second and third quarter we should see some costs associated with closing that down including inventory disposal and severance costs. We’re starting now to get a good estimate as we’re just in the planning phase but our best guess is between $0.5 million and $0.75 million with much of that coming in the second quarter. We’re looking at other products like this but I don’t think we’ll see this level of cost impact.

On the cash flow side, we didn’t do so well but a few things happened that hurt us. First, we had a significant customer that requested a payment delay of approximately $4 million and we’re okay working with them on that. It came in right after the end of the quarter so that added three or four days to our DSOs. Also, with the heavy influence of some of these large projects and the success in the live events area that tends to tie up more cash. On the growth and inventory, our major LED supplier shuts down for a couple of weeks in early August and we get forced into taking on inventory early to accommodate that timeframe. So for the quarter we feel as though we took a step backwards on cash and expect better performance, and we’ve shown that over the long term we can do that.

We seem to be doing well on our CapEx spending. Jim mentioned the Redwood Falls building. That was in our plans. We’re currently retaining our annual guidance but we’re going to work hard to beat our annual guidance in that regard.

With that I’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from James Boyle - C.L. King & Associates, Inc.

James Boyle - C.L. King & Associates, Inc.

The $8 million to $10 million in two orders that you perceive should be arriving. Is that in your guidance for revenue for the year?

William R. Retterath

Yes.

James Boyle - C.L. King & Associates, Inc.

When you were talking about your gross margins in fiscal Q2 be similar to where they were before, was that reported gross margins or excluding the asset sale?

William R. Retterath

That’s including the asset sale. Now keep in mind when we talk gross margins, they do vary significantly. We’ve always said for many years if we were at say for example 28%, there’s a range of +/- a percentage point. And in our business on large contracts you can still have swings outside of that range.

James Boyle - C.L. King & Associates, Inc.

And where do you see gross margins for the full year if you include the asset sale plus or minutes 100 peps? Are you going to beat 30% or be below?

William R. Retterath

For the year as a whole?

James Boyle - C.L. King & Associates, Inc.

Yes.

William R. Retterath

At this point I don’t think that we’ll be over 30% but it’s too hard right now. In short, you’ve got to make up for the 28% this quarter Jim and if we’re saying we’re going to be at the same level, you’d have to in effect the second half of the year be significantly above 30% to average 30%. I don’t see that as happening.

James Boyle - C.L. King & Associates, Inc.

With the digital billboard orders, are you seeing a longer turnaround time in delivery or where are you at now roughly?

James B. Morgan

Again it depends on what kind of relationship we have. If we have visibility with our customers’ needs and some of our larger customers we work very closely with them, so basically we hit their schedules because we have that visibility. If we have an order come in that has no visibility, then we’re probably out in that closer to 10-week timeframe.

James Boyle - C.L. King & Associates, Inc.

But the schedules are typically closer to eight weeks?

James B. Morgan

Anywhere from six to 10 depending on the visibility we’ve had before with the customer. If there are special situations, we try to accommodate customers’ needs. Typically in the billboard business, there’s a lot of site work that goes with each of those installations so typically it takes them a while to turn around the site work too. They have to maybe do some work with structures, they have to maybe get a different electrical, and they have to get the signal there so that can take some time. So that eight to 10 weeks is a good timeframe to be in typically.

James Boyle - C.L. King & Associates, Inc.

Is the larger sports projects that you continue to very successfully win, how are the margins on that? Is it a very competitive price bidding situation still or has it improved in the last year?

James B. Morgan

It’s still very competitive on the large projects and typically the larger the product the tighter and more aggressive the bidding is and again the gross profit dollar is still there but the margins tend to be a little tighter on the percent on the larger projects.

Operator

Our next question comes from Michael Friedman – Noble Financial Group.

Michael Friedman – Noble Financial Group

As far as the SG&A expenses in the quarter you gave us a little bit of color there, you said it might ramp up a little in the second quarter if I remember right. Is that a decent run rate for the year do you think? For the first quarter?

William R. Retterath

We’re really keeping those in line as much as possible. For example, our biggest cost structure is people and that will follow generally our growth in staff and we’re doing everything possible to keep ours staffing levels down. There’s areas that are increasing a little bit so I think sequentially every quarter you’ll see some increases but I think as we announced at the end of the year, for example G&A we wanted to keep it 10% for the year, growth year-over-year as a whole and we’re still in line to do that. Taking in to account that extra week of course.

Michael Friedman – Noble Financial Group

And what about the selling?

William R. Retterath

And the selling was somewhere around the same area for the year as a whole. It might have been a little higher, I’d have to refer back to the call Michael, I apologize.

Michael Friedman – Noble Financial Group

Have you experienced an unusual number of cancellations that you had booked in the back log recently? Is there an uptick there over the last say six to nine months?

James B. Morgan

No, we hardly ever have cancellations. It’s more extensions, more just the process in delays in getting decisions is a factor. And again, in the commercial area we think there’s some just the general economic climate right now is delaying some decisions or affecting some decisions in that area but that’s more a factor than cancellations.

Michael Friedman – Noble Financial Group

So most of the backlog and historically has come through as revenue within a year I would say.

James B. Morgan

Cancellations is not an issue for us.

Michael Friedman – Noble Financial Group

As far as the digital billboard business goes, are you sensing an increased enthusiasm for that product? Has that cooled off a little bit? What’s Daktronics competitive advantage in that regard?

James B. Morgan

Again, as I mentioned, the largest customers are saying they’re planning to continue on with their roll outs and they’re seeing lifts in the markets where they’re deploying the digital and so that’s what we have for visibility in that area. Again, we’re thinking maybe some of the smaller companies might again maybe delay some decisions, that’s I guess to be determined kind of how they’ll perform going forward. In terms of competitive advantage, there’s a couple of things, first of all we continue to work to provide a very cost effective product, price is important because the customers are looking for ROI. Performance of the product is important, service and support is critical, these are 24/7 operations for the most part, maybe in some cases it isn’t 24 hours a day but it’s certainly every day of the week and they’re generating revenue every minute they’re operating. So, we’ve got a very extensive effort on service and support for these customers. Then, just our capacity to delivery product at a level that is required for this market. I think all those things together are not real easily duplicated.

Michael Friedman – Noble Financial Group

Are you seeing more competitors entering that digital billboard space?

James B. Morgan

I don’t know if we’re seeing more, there’s a number of smaller competitors and of course every competitor wants to have a bigger slice of that pie but I don’t think there’s any big change here in the last quarter or two in terms of who is trying to get in to it.

Operator

Our next question comes from Stephen Altebrando – Sidoti & Company, LLC.

Stephen Altebrando – Sidoti & Company, LLC.

Can you put a rough dollar figure on the impact of the gross margin from the warranty issue you had mentioned and write down as well?

William R. Retterath

It was roughly a percent plus on gross profit margin.

Stephen Altebrando – Sidoti & Company, LLC.

And some of the warranty issues you mentioned you were working to clear them up, do you know roughly how long you’re expecting that to persist?

James B. Morgan

Again, as was mentioned, we have a number of initiatives underway to improve that over time and there’s really two factors there, one is just we focus on the design and the design testing, the robustness of testing of the design and then of course the manufacturing side and the quality side. We believe that we are doing better in terms of what we are shipping out of the plan every quarter so we would expect – you know some of the warranty hits we’ve taken were for it could be from back aways actually in some cases that were product that we stood behind that could even been technically a little past the typical warranty date. We feel what we’re doing today and what we’re delivering we’re on track already to have a lower warranty cost but it will be an ongoing effort and the goal there of course is to continue to reduce that over time until you get to zero, you’re always working to reduce it.

Stephen Altebrando – Sidoti & Company, LLC.

Well, you said gross margin you’re expecting to be flat sequentially so I guess could we kind of assume that the gross margins we’re at right now are not really a normalized level, they’re a bit depressed? In other words, there should be room for some upside in a normalized environment?

James B. Morgan

We think there’s a little room for some upside there. Again, as Bill mentioned there’s a lot of variability in gross profit margins in our different projects and different size of projects so just in terms of the general outlook there we feel there’s room for some upside.

Stephen Altebrando – Sidoti & Company, LLC.

In terms of international demand for billboards, anything new on the that front, particularly Europe?

James B. Morgan

No new developments there. Of course, we installed the displays for JCDecaux in the spring and they’re up and running and so no new developments there.

Stephen Altebrando – Sidoti & Company, LLC.

Then the two sports projects you mentioned, are they upgrades or new construction, or one of each?

James B. Morgan

One major upgrade and one new construction.

Stephen Altebrando – Sidoti & Company, LLC.

Then I think you had mentioned during your opening address something about some positives on the competitive front in the sports market. Can you elaborate on that a bit?

James B. Morgan

Well, first of all, the reception of our HD product and two big installations we did there last spring, the HD-16 in particular in both of these was the Kansas City Royals and this was a display that is about 100 feet tall and about 80 feet wide, it’s just a phenomenal display and then down in the Diamondbacks stadium in Phoenix also went in, we have a large display there and these are true high definition displays. The feedback that we’ve gotten – first of all, the feedback just from spectators and fans has been extremely positive and a lot of good press out of that but there’s also consultants in the industry and they have been very impressed with our technology there and the display itself and the video processing that drives the displays is a big factor in the quality image and we introduced our new V-Link 4500 is our model name for that and I think just the kind of perception in the industry with those, I think its stepped up and I think some of our competitors have had a couple little hiccups and I think those things all taken in to account we believe we’ve been in a strong position. We believe our position has slipped by it even a bit more perhaps.

Operator

Our next question comes from Steven Dyer - Craig-Hallum Capital Group LLC.

Steven Dyer - Craig-Hallum Capital Group LLC

Circling back to the competitive landscape surrounding the digital billboards, is it still you and [Niesco] to your knowledge at Lamar] and Clear Channel? I’ve heard some chatter about a potential third entrant at Lamar.

James B. Morgan

To our knowledge the vast majority of the business for both of those is still split between Daktronics and [Niesco]. I believe that some other companies may be given a trial here or there but at this point we’ve not seen any change based on that.

Steven Dyer - Craig-Hallum Capital Group LLC

Jumping over to the big stadium business, there’s a lot going on and it’s obviously a very cyclical industry. Can you quantify the percentage of your business, the revenue that will come from big stadiums this year versus say last year or next year ballpark?

William R. Retterath

It could be up in the upper 30% from live events. The actual percent last year I’d refer you just to the segment reporting in the annual report to get that number.

Steven Dyer - Craig-Hallum Capital Group LLC

Does that break out the so-called megadeals though? I’m trying to get a sense for how much of these megadeals are replaceable next year I guess.

William R. Retterath

I think a better way to state your question as I understand is given the fact that - it’s kind of an interesting thing going on and I alluded to this in my comments - the interesting thing is there are new large projects that are coming up on our radar screen recently that weren’t on our radar screen three and four months ago. Maybe it’s one of the exciting things going on in that business but we’ve always said that replacing contracts like the Jets/Giants contract is going to be tough next year to do that and it’s probably too early to understand and really have the visibility on the impact that it’ll have next year. On a positive side, more deals are appearing over a short period of time but there’s no certainty that those deals will happen but there’s momentum out there in these sports facilities that’s exciting to see.

James B. Morgan

And certainly just the fact the bar keeps getting raised is the fact that the New Meadowland Stadium is a project on the order of $45 million and is indicative of how the bar keeps getting raised and that tends to go down to the smaller venues as well. So that’s one of the underlying things that’s driving the business.

William R. Retterath

I know have actually those numbers. It turns out I do have just to give you an indicator and it’s kind of interesting. On my prepared comments I mentioned that the small deals are up 18%. I’ve just got the first quarter. All of last year the deals in excess of $10 million were roughly 33% of that business, 30% to 35% for deals in excess of $10 million. For this year I expect that could be a higher percentage. That’s what you’re asking, correct?

Steven Dyer - Craig-Hallum Capital Group LLC

Yes. And any thoughts on next year where Jim and you said it’s a little bit too difficult to say at this point.

William R. Retterath

That’s hard. But I’ll just say that those mega-projects when you figure in the Jets and Giants, the gut feel says they can go down.

Steven Dyer - Craig-Hallum Capital Group LLC

As it relates to the digital billboards, what’s the pricing environment been like there?

James B. Morgan

It’s competitive. We’re par to continue to take the direct costs out of our product while we improve the performance of the product and also one of the things we’ve focused on is reducing the cost for the customer in terms of installation and that side of things as well to minimize their overall cost of using the product and also with our Valo product we’ve reduced the power consumption so that reduces their operating costs. So all of those things together are important but we continue to bring our pricing down over the last few years and in fact we’re bringing the price down actually helps expand the market because it means they can do an ROI in more locations basically. So it’s competitive and we have to continue to keep really owning our designs and our manufacturing processes as well.

Steven Dyer - Craig-Hallum Capital Group LLC

Do you have a sense I guess for how pricing has come down, understanding that you’re taking costs out as well, but how pricing has come down year-over-year for example?

James B. Morgan

I’d say if you look back over a number of years, it’s probably 15+% a year if you go back a ways.

Steven Dyer - Craig-Hallum Capital Group LLC

Just to clarify Bill, gross margins for this next quarter you expect to be reasonably flat with the reported number of 27.5% or excluding the write-down?

William R. Retterath

Gross profit levels I’m saying being flat; the gross profit percentage as reported.

Steven Dyer - Craig-Hallum Capital Group LLC

The other thing that I wasn’t sure that I heard was you had indicated that revenue levels could be similar to this quarter, is that right? Did I hear that?

William R. Retterath

For Q2, right.

Steven Dyer - Craig-Hallum Capital Group LLC

Any currency impact in the quarter?

William R. Retterath

No, nothing significant. That gets below the line. We try to avoid currency risks. To the extent that we have it, it’s only because of maybe some short-term loans of funding operations overseas.

Steven Dyer - Craig-Hallum Capital Group LLC

And lastly Bill, you had expressed comfort in the street’s top line levels. Any thoughts on bottom line consensus right now?

William R. Retterath

We’re sticking with our operating margin range of 8.5% to 9%.

Operator

Our next question comes from Jim Ricchiuti - Needham & Company.

Jim Ricchiuti - Needham & Company

I was wondering if you’re seeing any pressure from rising commodity prices in any areas of the business?

James B. Morgan

Good question Jim. In over time the electronics has been a bigger percentage of our total cost of the parts costs in our product and our product is primarily parts intensive in terms of cost. So the reduction in the electronics has been a big driver in our ability to reduce our costs and reduce our pricing. As the electronics comes down and becomes a smaller percent of the total and there are some of the parts and materials that go into our product that are in fact increasing in price, aluminum being notable in that area, certainly transportation’s not a big percent of our costs but certainly transportation costs are going up. So yes, there are some offsetting costs and the rate of our ability to reduce costs probably will decrease as we go forward because of the fact that the electronics is becoming a smaller percent of the total.

Jim Ricchiuti - Needham & Company

But at this point it doesn’t sound like it’s been a major issue for you Jim.

James B. Morgan

It has not been a major issue up to this point.

Jim Ricchiuti - Needham & Company

With respect to Bill the comment you made about seeing more large projects on the radar screen, is this new construction or are you seeing a pipeline building for upgrades that you weren’t aware of before?

James B. Morgan

It’s upgrades. Our third new construction, we wouldn’t have been aware of it.

Jim Ricchiuti - Needham & Company

Well, just with respect to some of the large project bases, I was wondering in maybe one of the smaller deals in the school end, even the college university market, are you sensing, are you guys sensing any kind of anxiety on the part of the customers with respect to funding issues just given the situation in the credit markets and what-not?

James B. Morgan

Not in those particular markets. Again, for the most part, those are a lot of advertising and sponsorships which given the advertising sector in general is a little bit soft but that hasn’t seemed to have affected those markets. Again, you’ve got there, you’ve got the school, the school loyalties, school pride and all those things that factor in and I think that offsets maybe the softness in the economy.

Jim Ricchiuti - Needham & Company

Just a question regarding your operating expense in the Arrow product design development. The levels there seem a little higher than at least what I was looking for. Where do you see the engineering expense going forward over the next couple of quarters, Bill?

James B. Morgan

I would say historically we’ve stayed really close to that 4% level, plus or minus a few tenths of a point. I would say, if anything, one of the things that’s been a change here in the last few years, we’ve really put a big, with part of this lean manufacturing which again we’ve had great success in evolving our manufacturing but part of that, a key part of that success is how we design our products. And so to the extent we can take some of our engineering resources that were maybe in the past spending time on the contract basis or the one off type of design to the extent we can ship those resources over onto a more standardized product development and then get re-use out of that design, so to speak, that’s a good thing. So I think there is some of that going on. Certainly, there is some of that going on.

We are getting more focused in our ability to do what we did in our Live Events factory this last quarter. The product design itself is a key part of that because we’ve designed it to roll through manufacturing than it was a few years ago. So I think if we can accomplish that and if it’s a few tenths of a point up from the 4% I think that’s still a good thing.

Jim Ricchiuti - Needham & Company

But at least of it, in the next couple of quarters it’s not unreasonable to assume that that is around that 4% area, Jim?

James B. Morgan

Yes, we’re still targeted to keep it in that 4% area, again maybe a couple points above.

Jim Ricchiuti - Needham & Company

I may have, I just want to be clear on something you mentioned that, I think, on G&A expense. You’re assuming, can you just go over again what you think your G&A expense could be up for the year as a whole? I thought I heard 10%. I just wanted to make sure.

James B. Morgan

Yes, I think we’ll be around the $30 million dollar range, sorry for maybe sounding a little confused on that but we should be around the $30 million, hopefully maybe a little bit south of that.

Jim Ricchiuti - Needham & Company

So that really implies that expense coming down over the next couple of quarters. Is there anything that was unusual in Q1?

James B. Morgan

It stays flat, Jim, if you look at it, just do some quick math. You’ve got to factor out the extra week and we’re trying to hold G&A, especially, really flat but factor out the extra week. And let’s just do on that quickly. My calculator doesn’t seem to be, you can figure that out, Jim, but we’re really trying to. And during the quarter, just in terms, it was a little bit higher in the quarter than we thought it was and we just ended up with a little bit higher IT costs primarily from consulting and some infrastructure. To the extent we have problems in G&A, it probably would be in something in the IT area only because there’s so much great initiatives going on here that if we learn that we have to do something to support, for example, something in product development or in our quality systems or something like that, IT just has to partner along. And we’ve got a lot of good initiatives going on.

Operator

Your last question comes from Bill Lennon – [Inaudible].

Bill Lennon – [Inaudible]

I wasn’t sure your answer on the FX related to expenses or revenues. So could you tell us again what the FX impact was on revenue in the quarter?

James B. Morgan

For the most part, we don’t track, for example, the decline if the decline on the dollar and constant currency type metrics like that, what we do is these are custom projects and so when you ask about the revenue we just don’t track it that way.

Bill Lennon – [Inaudible]

You said during the prepared remarks Q2 will be light on sales. Was that referring to consolidated revenue or were you still talking only internationally on that comment?

James B. Morgan

Just international I was talking about. The sales internationally will be down sequentially.

Bill Lennon – [Inaudible]

The $4 million customer that delayed payment. Does that signal that any receivables or future revenue might be at risk from that particular customer?

James B. Morgan

This was a very unusual circumstance but we are fine working with the customer. There wasn’t any risk as we saw it; it was something very unusual I just would rather not get into what the details were though.

Operator

That would conclude our question and answer session.

James B. Morgan

Well, thank you for your questions. We appreciate your time this morning. Just to remind everyone, tomorrow evening Daktronics has an open house and tour starting at five o’clock before our shareholder meeting, which starts at seven o’clock. And so we certainly look forward to seeing some of you there if you can make it. Thanks. I’d like to thank all of Daktronics’ employees for their efforts this past quarter. It was a good quarter for us and we’re off and running for Q2 and with that I’ll again thank you for your time this morning.

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