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WIKI ANALYSIS
Daktronics, Inc. (NASDAQ: DAKT) is the world’s leading supplier of electronic LED and LCD displays for sports, commercial, and transportation markets. The company has grown revenue by an average annual rate of 25% in the past 4 years, culminating in over $400 million in FY 2007 revenue. Daktronics is a vertically integrated company, meaning that it controls everything from the design, manufacturing and servicing for its products.
Headquartered in Brookings, South Dakota, the company spent its first three decades dominating the sports scoreboard niche. However, while this segment has recently seen double-digit growth, its Commercial division has been fueling the surge that has seen DAKT more than double revenues in three years. This is attributed to the company seizing a leading position as a maker of large digital billboards, in what is likely to a growth industry with a long runway, as only 450 of 450,000 billboards in the U.S. have been converted to digital (a 0.1% penetration rate).
Business Overview
Founded as a scoreboard manufacturer in 1968 by two electrical engineering professors from South Dakota State University, Daktronics now sells electronic scoreboards, large electronic display systems, marketing services, digital messaging solutions, and related software and services for sports, commercial, and transportation applications. The company is a vertically integrated display manufacturer, performing almost all of the sub-assembly and final assembly of its products; these activities include designing, marketing, manufacturing, installation, and servicing of systems that display information and graphics (e.g., real-time data, graphics, animation, video).
LCD displays are favored for small indoor displays, while LED displays are favored for large outdoor displays. LED displays make up the vast majority the displays Daktronics sells. With its products use around the world, Daktronics is the world leader in all display product categories. The company recorded revenues of $309 million during FY 2006, an increase of 34% over 2005.
To remain competitive and anticipate changes in an often changing industry, Daktronics has traditionally invested 4% of its revenues in product design and development. Product development expenses ranged from $10 million to $16 million from FY 2005 to 2007.
Besides occasional acquisitions of complementary businesses, Daktronics's core growth strategy has been to enter new markets by opening sales and servicing offices (it has 60 offices around the globe currently). Daktronics builds only a fraction of its lower-cost standard products to inventory, focusing instead on larger-scale custom products, cross-selling opportunities, and providing product enhancements for current customers. Local sales agents provide a high level of product customization and after-sale support on its entire product line.
The two principal components of most Daktronics display systems are the display and the display controller (whose hardware and software controls the display graphics). Daktronics display systems range from small scoreboards and digit displays priced at under $1,000 to large and complex display systems priced at over $20 million. Standard catalog sales have historically accounted for about 24% of annual revenues. The rest are customized in terms of size, configuration, and installation type but are generally built using standard technology platforms.
Margins on large orders tend to fluctuate more than margins on smaller, standard orders. Large product orders that involve competitive bidding and substantial subcontract work for product installation generally have lower margins.
Key Market Segments
Daktronics reports four product families: Sport and Theater, Commercial, Video, and Transportation. Daktronics has seen galloping growth over the last few years, with its revenues increasing 144% from FY 2003 to FY 2007 (25% annualized). Digital billboards have driven a large chunk of this growth in the Commercial section (45% in FY 2005 and 65% in FY 2006) while growth in the other segments, especially Sports, continued at a fast clip. In FY 2006, international revenues represented 10% of net sales.
Sport and Theater
This product family includes indoor and outdoor scoreboards, timing systems, digital displays, sound systems, statistics software, and hoist systems. Daktronics's integrated video and scoring systems can be seen in many professional, college, and high schools facilities across North America and at international sporting events such as the Olympics. This segment made up about 54% of FY 2007 revenues and grew 18% in FY 2006.
Products include All Sport (a controller for portable scoreboards), OmniSport (a timing system for sports events, primarily swimming and track), DakStats (a sports statistics software integrated with scoreboards), and Vortek hoists (automated rigging systems for arena center hung scoreboards). Products in this section mostly favor LED technology over other technologies due to its comparatively lower power consumption, longer life, and consequent lower maintenance costs.
DAKT's primary markets in this product family are:
- large sports venues (large colleges and universities, professional sports teams and facilities, Olympic games, national and international sports federations, civic arenas and convention centers, and motor racing)
- schools and theaters (elementary and secondary schools, small colleges and universities, local recreation centers and theaters, primarily high school).
Commercial
The company's video, digital billboard, and graphics displays can be seen from Las Vegas and Times Square to roadsides, retail establishments, and major stock exchanges around the world. All commercial products are made with LED technology. Recently becoming DAKT's fastest grower with 45% growth in FY 2005 and 65% in FY 2006 largely thanks to big orders from outdoor advertising customers, this segment made up about 39% of FY 2007 revenues. The Commercial family holds promise for future growth as outdoor advertisers like Clear Channel Outdoor, Lamar , and CBS Outdoor continue converting their traditional billboards to digital.
Products include Galaxy and GalaxyPro indoor and outdoor text and graphic displays and Venus 1500 control systems. The Galaxy product line has become one of Daktronics' fastest growing product lines.
DAKT's primary markets in this product family are: retailers, outdoor advertisers, hospitality providers, fast food chains, financial institutions, casinos, and racing.
Transportation
The Transportation product family includes a wide range of LED-based products for road management, parking, mass transit, and aviation applications. This segment made up about 7% of FY 2007 revenues.
Products include Vanguard displays, which are used in numerous jurisdictions across North America to direct traffic and inform motorists, with customers including many state departments of transportation.
DAKT's primary markets in this product family are: state and local departments of transportation, airlines, airports, parking facilities, and transit authorities
Video
Video products consists primarily of displays comprised of a large number of pixels and capable of creating various levels of video, graphics, and animation as well as display controllers. While reported as a separate product family, video products are integrated with products from the other three families, which correspond to actual market segments.
Products include:
- ProStar is capable of producing 4.3 trillion colors and is available with pixel spacing as close as three millimeters, resulting in high resolution video
- ProTour is the mobile modular display line used for tours and events
- ProAd is used for stadium and arena ads as well as scoring and statistics displays
- Venus 7000 controller
Production Constraints May Slow Growth
With the surge of digital ad displays, capacity constraint issues have limited Daktronics' ability to meet demand for its products. During fiscal year 2006 and 2007, Daktronics began expanding its production facilities. Headquartered in Brookings, South Dakota, the company has expanded its manufacturing capabilities there and opened new ones in South Dakota and Minnesota as well as moving some production to China.
Business Drivers
Digital Outdoor Advertising
In FY 2007 orders from outdoor advertising companies more than doubled over the previous year, and they drove the 65% growth seen in FY 2006 in the Commercial product family.
The outdoor advertising industry, until now dominated by large roadside billboards, is experiencing a paradigm shift as static ad displays are being converted to digital displays. Digital billboards allow the outdoor advertisers to rotate ad images from several different advertisers throughout the day and "day-part" ads along optimal time blocks at the click of a button. The digital outdoor ads have so far proven quite profitable for the outdoor advertising industry, with initial results showing that they have increased revenues by a factor of 6-10x on converted ad displays. Given this success, it is likely that the outdoor advertising companies will continue replacing outdoor billboards with digital displays, and Daktronics is currently their largest supplier. In the past, approximately 45% of capital expenditures on digital ads by LAMR and CCO have gone to the company.
The pool of static displays awaiting conversion to digital is potentially very great and not likely to be exhausted any time soon, with only about 450 of roughly 450,000 U.S. billboards converted to digital so far (a penetration of 0.1%). It should be noted, however, that the growth spurt in display orders from the outdoor advertising industry may represent the one-time conversion of an existing fixed stock of displays which is limited in number by legislation. New legislation may also adversely affect the adoption of digital displays in the future. For a more in-depth discussion about the outdoor advertising industry, see Digital Outdoor Advertising, as well as Clear Channel Outdoor Holdings (CCO) and Lamar Advertising Company (LAMR) to read about DAKT's two biggest outdoor advertising customers thus far.
Sports Industry Drives Core Business
While digital advertising has caught the attention of many, Daktronics' main money-earner is still the scoreboard and videoboard market. Thus, Daktronics' revenues are very much tied to spending on college, professional, and minor league sports.
With today's arena projects embracing high definition displays, jobs that once netted $5-10 million for DAKT can now bring in $20-30 million.
Revenues Have Historically been Seasonal and Driven by Large Orders
DAKT's revenues have historically fluctuated due to the impact of large product orders, such as display systems for sports facilities and large commercial systems. This has at times resulted in orders outgrowing capacity, with production and personnel growth sometimes not keeping up with timelines for large orders in the Sports and Commercial families. DAKT ended FY 2006 with a record $93 million backlog on orders.
With Sports products accounting for half of revenues, the seasonality of the sports market has also played a part in sales fluctuations. Sales related to facilities for football and other fall sports take place in the summer and early fall, basketball and hockey sales take place in the fall, and baseball and other spring and summer sports bring in revenues in the early to late spring. As a result, first and second quarter sales are typically higher than third quarter sales, while sales are up again in the fourth quarter leading into the first quarter of the following fiscal year. As Daktronics' Commercial segment grows, seasonality in outdoor advertising could also contribute to seasonality.
In addition, margins on large orders tend to fluctuate more than margins on smaller, standard orders. Large product orders that involve competitive bidding and substantial subcontract work for product installation generally have lower margins, with greater margin variability.
Business Cycles Drive Advertising Budgets, Which in Turn Drive DAKT Revenues
Because DAKT customers’ budgets for the purchase of electronic displays is often part of those customers’ advertising budgets, DAKT products often compete with other forms of advertising, such as television, print media or fixed display signs. Advertising spending, in turn, has historically been more sensitive to business cycles than many other industries. Ad spending increases considerably during economic upturns and decreases substantially during recessions as demonstrated in the chart below.
Competition
Daktronics is the leader of a highly fragmented and competitive large electronic display industry otherwise populated by considerably smaller players. While the company competes with many others across its many product lines, no single competitor offers a similar breadth of products. Many competitors operate in only one or a few of the market niches and product categories Daktronics serves, with more competitors present at the less complex end of the graphic display product spectrum and fewer competing for larger, more complex orders.
Daktronics has positioned itself upmarket as a technology leader and provider of strong customer support to less price-sensitive customers. It does not compete on price with lower-cost competitors, who offer more basic products and more stripped-down service.
| Segment | Daktronics % Market Share | Major Competitors |
|---|---|---|
| Sports | Professional Sports: 70-80%
Division I College: 60-70% | Mitsubishi (Japanese company) |
| Digital Advertising | 40-60% | Yesco (privately held): 50% of orders from Lamar
SACCO: recently purchased by LSI Industries |
| Transportation | 40-50% | Skyline
Ledstar (privately held) |
As purchases of digital displays often come from companies' advertising budgets, Daktronics' products compete with other forms of advertising, such as television, print media, radio, Internet, and fixed display signs.
References
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