Tic-tac-toe, investors want to know: Will big-screen entertainer Daktronics (NASDAQ:DAKT) make it three in a row for earnings beats when it reports its fiscal Q4 2007 numbers tomorrow morning?

What analysts say:

•  Buy, sell, or waffle? All five of the analysts who follow Daktronics rate the stock a buy.

•  Revenues. On average, they expect to see quarterly sales rise 15% to $103.4 million.

•  Earnings. Profits, however, are predicted to fall 56% to $0.08 per share.

What management says:
Reporting sales growth of 50% and profit growth of 74% in the third quarter, CEO Jim Morgan was rightly "very pleased with our top and bottom line performance for the quarter" back in February. That said, he did point out (and quickly proceed to spin) certain facts that were less pleasing. For example, orders were "below expectations" in Q3, and backlog declined sequentially from $121 million at the end of Q2 to $98.4 million three months later.

From one perspective, that suggests weaker sales going forward, as the firm proceeds to fulfill its backlogged orders and collect payment on same. Morgan, however, offered a different point of view: "The reduction in backlog has the desirable effect of reducing our leadtimes, which is one of our stated goals and is welcomed by our customers and sales force. We would like to reduce our leadtimes further in the future especially for our standard products in both our sports and commercial markets."

Personally, I think more orders are good, and I suspect Morgan does as well, which is why Daktronics has been adding capacity to meet them. As fellow Fool Jeremy MacNealy pointed out in last quarter's Fool on Call, the possibility of heavyweight competition emerging from General Electric (NYSE:GE), Hewlett-Packard (NYSE:HPQ), or Sony (NYSE:SNE) is ever-present here. The bigger Daktronics gets and the more of the megascreen display market it locks up before serious competition arrives, the better for its investors.

What management does:
Less confusing are the trends in margins at Daktronics. Rolling gross margins have been declining slowly over the last three quarters, but thanks to management's emphasis on "lean manufacturing," operating and net margins are up.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
What exactly does "lean manufacturing" mean? Judging from the last couple of quarters' results, it means growing sales 57% year over year while holding selling, general, and administrative costs to just a 42% rise. About the only "leanness" here that concerns me is the fact that R&D spending isn't keeping pace with sales growth -- it's up just 32% year over year.

On a down note, one thing that isn't lean about Daktronics is its inventory, which is averaging 63% heavier in the last two quarters than it had been in the equivalent period from the previous year. That rise in inventories, plus the spending on increased capacity mentioned above, has Daktronics burning significantly more cash lately than was the case a year ago. Management highlighted this fact for us last quarter (so kudos to them for full disclosure), warning that the cash burn has caused the firm to "incur debt that we expect to reduce in the fourth quarter." Let's look to see if they succeeded in that effort tomorrow.

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.