Bright lights of Daktronics flickering

The digital billboard business has gone mostly dark for Daktronics Inc., the South Dakota company that has been a major force in digital signs for 40 years.

A slowdown in advertising caused billboard giants Clear Channel Outdoor and Lamar Advertising, two of Daktronics' biggest customers for digital billboards, to put their projects on hold. As a result, Daktronics' digital billboard revenue slowed to a trickle, said chief executive Jim Morgan. Other LED digital display markets also declined during the recession, although less dramatically, and Daktronics' first-quarter earnings plummeted 85 percent while sales dropped 30 percent.

But Daktronics is still throwing a lot of light on sports arenas (including the new University of Minnesota and Twins stadiums) retail stores (Walgreens and Holiday) and roadways (Minneapolis-St. Paul International Airport). Analysts say the company will recover because it is either the top supplier or one of the top vendors in all of its digital display markets.

Daktronics is the market leader in providing huge video screens for professional and college sports stadiums, regularly outselling Japanese giant Mitsubishi. When Daktronics lost the bid to supply the gigantic $40 million video display at the new Dallas Cowboys stadium in Texas to Mitsubishi, it went on to win a bigger prize: a $50 million contract to provide all the digital signs in the New Jersey Meadowlands stadium for the New York Jets and Giants that opens next year. Daktronics also goes after smaller venues; its tiniest display is a baseball scoreboard for city ballparks costing about $2,000.

Still, even slight improvement in the company's finances is at least three quarters in the future, Morgan said. The company's stock has dropped from a little more than $17 a share a year ago to about $8 last week.

Steve Dyer, an analyst at Craig-Hallum Capital Group in Minneapolis, expects Daktronics to earn $5.1 million this fiscal year, down from $26.4 million a year ago, on revenue of $441.5 million, down from last year's $581.9 million. Jim Ricchiuti, an analyst with Needham & Co. in New York, predicts Daktronics will earn $4.9 million this fiscal year on revenue of $438 million.

Employees over profits

Daktronics has laid off only 25 of its 2,300 employees. The layoffs have been only at the digital billboard manufacturing plant the firm opened in Sioux Falls, S.D., in 2006. The company's other products are built at three plants in Brookings and one in Redwood Falls, Minn.

For now, Daktronics is relying on attrition to gradually whittle down its workforce, which Morgan says is more in the company's long-term interest.

"We try to be thoughtful and strategic about how and where we downsize," Morgan said. "I think you can do things knee-jerky in the short term that are not good for the long term."

Analysts wonder if the company has been aggressive enough about cost-cutting.

"They probably waited too long to take costs out," Ricchiuti said. "But they had a fairly large backlog of business, and I think management was anticipating a turnaround that didn't happen."

"They run Daktronics like a private company," Dyer said. "Time will tell if that's the right strategy."

Analysts say the firm's past success has hinged on three factors: its longevity in the market (it was founded by two South Dakota State University professors in 1968), its reputation for service, and a made-in-America advantage in building huge LED displays. What Daktronics doesn't have is much of a technological edge; it buys LED components in Asia and assembles them into large displays controlled by Daktronics' own software.

"Daktronics tends to be viewed as the best at what they do," Dyer said. "As a result, they can sell products for 5 to 10 percent more than competitors can."

Chief adversary is economy

In addition, Daktronics has some built-in protection against competition from the Asian firms that have traditionally dominated the video screen business.

But these days, Daktronics' chief adversary is the economy.

"Digital billboards ramped up very quickly and turned down very quickly a little less than a year ago," Morgan said. "Our billboard revenue went down to just a trickle." The billboard business isn't expected to recover until at least 2011, he said.

Even so, the market for digital billboards will come back because they represent an untapped advertising market, Dyer said.

"There's half a million billboards in this country, and only about 1,500 have been converted to digital," Dyer said.