Planar Systems Inc. F2Q09 Earnings Call Transcript

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 |  About: Planar Systems, Inc. (PLNR)
by: SA Transcripts

Operator

Good day ladies and gentlemen and welcome to the second quarter 2009, Planar Systems earnings conference call. My name is Erica and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Gerry Perkel, President and CEO. Please proceed, sir.

Gerry Perkel

Good afternoon and thank you for joining us for Planar’s second quarter earnings conference call. With me this afternoon is Scott Hildebrandt, Planar’s Chief Financial Officer.

Before I begin, I do need to say that the press releases we issued today contain forward-looking statements. On this conference call, we will comment on our strategic business and financial outlook and make other forward-looking statements based on our current expectations, estimates, assumptions and projections. Words such as expects, anticipates, intends, plans, believes, sees, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements.

All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. I will refer you to the press release we issued earlier today and to our periodic filings with the SEC for a description of factors that could cause actual results to differ materially from the results described in the forward-looking statements. The forward-looking statements we make today speak only as of today and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.

With that behind us, let me start by saying that I am pleased with the continued progress we have made strengthening our balance sheet in the face of the global economic slowdown. Our cash balance is increased each quarter this fiscal year and while our revenue levels declined in the second quarter. We believe that revenue will increase in our third quarter based on our expectations for increase demand and most of our business segments.

Specifically, revenues in the industrial business were $10.9 million of the global economic slowdown negatively impacted our customers demand and in turn their demand on us. While experience 21% sequential decline, a revenue declined in this unit. Our improved order rate subsequently into the second quarter gives us confidence that we should see sequential growth in both the third and fourth quarters of 2009 in this segment.

In our commercial segment, revenue was down 29% sequentially as demand for general purpose monitors was weak and our strategy to keep inventory is lean and focus on better margin opportunities also contributed to this decline. In spite of the decline, I am pleased that the commercial business was able to generate nearly identical profit contribution as they did in the first quarter of 2009.

In our control room and signage business unit, sales were down 22% sequentially partially due to the absence of the digital signage software revenue as we sold that portion of our business last quarter. While revenue was down in the quarter, orders for new video wall solutions were relatively strong with a book-to-bill and excess of one. The resulting growth in video wall system backlog exits in Q2 was a positive indicator for sequential revenue growth in Q3 in this segment.

In our Home Theater segment, revenues were down 30% sequentially as demand for high-end home theater systems continued to be fairly soft. However, we were able to improve the profitability of the business substantially in the second quarter.

Looking forward while we see continued challenges generating revenue growth, we believe we can leverage our improving cost structure and working capital management to generate continued improvements in the cash flow from this segment.

In summary, given the extreme challenges that the current economic environment have presented, I am very pleased that we have been able to both keep losses to a modest level and to have an increase cash aggressively to improve our business stability. With approximately $1.28 per diluted share in cash on hand at the end of the quarter, we are much better shape to whether the current economic storm and we work the beginning of the fiscal year.

With that, I will now turn the call over to Scott who will review our financial performance in a bit more detail. Scott?

Scott Hildebrandt

Thanks Gerry. Let me start with the income statements. As you are aware, we reported a modest non-GAAP loss for our second quarter of 2009 earlier today of $0.06 per share, which was in line with our earlier communicated guidance for the quarter. Non-GAAP gross margins increased to approximately 25.4% of sales in the second quarter compared with 23.1% reported in the second quarter of 2008.

During the past quarter, gross margins were favorably impacted by a number of items; first, cost reductions implemented in our global production operations a few quarters ago act to reduce the overall product billed cost. Secondly, the strategic changes made in our commercial business segment to focus on profitable product line; and third, a better makes of higher margin, industrial, and control room and signage business unit sales versus lower margin commercial business unit sales.

Non-GAAP operating expenses from continuing operations declined $5.7 million to $11.3 million for the quarter, compared to the second quarter a year ago. Total operating expenses are down 34% from a year ago with reductions and all expense categories driven by cost reduction actions put in place over the last several quarters.

In addition, the sale of our CoolSign software business in the first quarter of 2009 resulted in reduced sales and marketing as well as R&D expenses in our business during the second quarter of 2009. This lower level of operating expense at Planar is anticipated to continue into the immediate future.

Non-operating income was approximately $380,000 for the quarter compared to expense of $234,000 in the second quarter of 2008. This improvement was primarily driven by our transitions from a net borrower in the second quarter of fiscal 2008 to a positive net cash position this year. In addition, fluctuations and foreign exchange rates contributed to a net gain of almost $400,000 for the quarter as a result of our hedging strategic in place during the second quarter of 2009.

Shifting to some GAAP items, our results were positively impacted by the $2.9 million GAAP gain on the sale of certain non-strategic intellectual property that was not being used in our current product offerings and was not being critical for future research and development projects. Additionally, GAAP earnings were negatively impacted by a net, $1.3 million restructuring charge primarily related to the most recent cost reduction plan undertaken during the second quarter of 2009.

The majority of this charge will impact cash in the third and fourth quarters. The net charge was favorably impacted by $500,000 credit in the second quarter of 2009, resulting from the reversal of previously recorded restructuring charges that in the end were not required. Or at least of this net or GAAP reconciliation items, you can refer to the tables in our press release.

Turning briefly to our balance sheet, cash increased $5.7 million to $23.5 million at the end of the second quarter, compared to the cash balance at the end of the first quarter of 2009. Cash increased during the quarter primarily due to the receipt of the proceeds from the second sale transaction involving the CoolSign software asset as well as receipt of the proceeds from the sale of the intellectual property I mentioned earlier. Cash was also positively impacted by favorable working capital management during the quarter. Since the end of last fiscal year, cash was increased almost $8.6 million.

As an additional note, we had not borrowings outstanding on our line of credit at the end of the second quarter.

Looking forward while our balance sheet has been strengthened, the weak global economy continues to adversely impact the rate of improvement we expect in revenue over the next few quarters. Even so, we currently believe we will experience some sequential revenue growth and small profit improvement in the third quarter of 2009. As some of our market segments occurred to be improving and previous cost reduction actions continued to favorably drive increases in our margins and profitability.

In addition, if we are able to continue executing our strategic plan as intended, our cash balance sheet increased slightly by the end of fiscal 2009 as compared to the balance at the end of the second quarter.

Shifting to some additional forward-looking information, fully diluted shares outstanding should be approximately $18.6 million for the third quarter of 2009. Also we are projecting capital expense of $100,000 in the third quarter and depreciation should be in the range of $800,000 to $900,000 in the third quarter of 2009.

With that I will turn it back over to you Gerry.

Gerry Perkel

Thanks Scott. The strategic shift we ended took last year, which included actions specifically aimed at stabilizing the Company’s balance sheet that delivered nicely. As I said earlier, we are happy with the progress we have made in growing cash in the pace for pretty challenging economic climate.

We are in a much stronger position balance sheet wise than when we began the fiscal year and continuing that effort as a priority for us. But we see the broader economic challenges continuing, we do see some signs in our revenue forecast that indicates sequential revenue improvement in the third and fourth quarters this fiscal year.

However, with that said, we are continuing to undertake efforts to drive more efficiency in our organization and to lower our breakeven point. Our goal is to improve our profitability while at the same time continuing some key spending necessary to drive future growth where we see good market and growth opportunities.

Balancing how fast we increased profitability with how many future opportunities we can pursue as the economy improves over time the decline in line we are trying to walk.

In summary, we are committed to strengthen our balance sheet and we remain committed to further dispositions of underperforming or non-strategic assets. Improving working capital management and proactive cost reductions to improve our profitability and conserve cash as we look into the future.

With that, I will now open up our conference call for questions. Operator, if you could come back on the line?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Ricchiuti - Needham & Company.

Jim Ricchiuti - Needham & Company

I was wondering if you could maybe elaborate on which of your vertical market segments you are seeing some improvement, Gerry.

Gerry Perkel

Well, I think historically, we have seen the first calendar quarter to be sequentially a tougher quarter in both our control room and signage business unit and our commercial business unit.

The commercial business unit partially just because of the number of holidays depending on when the actual New Year’s holiday and stuff falls and the control room and signage business just a historical shortfall there.

In the first quarter, we saw a good strong or greater than one book-to-bill in the control room and signage business unit. So, we have more backlogs entering this quarter than we had entering the last. So, we see some promising things there. We see some good order rates in the commercial business unit as we begin the quarter and then we are starting to see some improvement in the industrial business unit as we start to see some orders coming in from either beginning to pick up some of the demand that was slower from our customers or those customers that are a little bit more seasonal in nature.

On Home Theater front, we continue to see that to be fairly challenging and not seeing looking that to be by more flattish.

Jim Ricchiuti - Needham & Company

In the market segments that you just talked about, I am just curious, if there are some specific industries where you are seeing the demand, for instance in the control room and signage market, is that some of that coming from government, just in light of the economy, I am just curious where are you seeing the strength.

Gerry Perkel

Well, we are seeing it across multiple sub segments of those business units if you will. But in a sense to some degree, for control room applications in that business unit that is really oftentimes related to infrastructure investments and you hear a lot in the press about infrastructure investments being part of some of the things that governments both local and state and all the way up to the Feds are trying to push.

So, we are seeing some infrastructure investments. We are seeing some investments from a government and military standpoint. So, we are seeing it in multiple different segments.

Jim Ricchiuti - Needham & Company

Okay. On the control room and signage segment, assuming you see a reduction in the operating loss as you see the revenue starts to pick up this quarter, any sense as to how much improvement you might see?

Gerry Perkel

Well, it depends on how just how fast we can get those orders in and convert them to revenue. But in general, the gross profit in this business tends to be fairly strong and there is not much incremental expense associated. We are driving incremental revenue. So, as we can drive some incremental revenue, we should get some pretty good flow through to the bottom line in that business unit.

Jim Ricchiuti - Needham & Company

So, just in general, we should see some gross margin expansion in the June quarter or all else being equal if the business tracks where you are thinking.

Gerry Perkel

If the business expands the way we are thinking you mean?

Jim Ricchiuti - Needham & Company

Yes.

Gerry Perkel

Yes, I think total gross margin dollars we would expect to probably increase as well. Obviously, exactly what that percentage is depends quite a bit on exactly what the mix turns out to be at the end of the quarter but we are looking to see the gross margin dollars expand as we see revenues go up.

Jim Ricchiuti - Needham & Company

As you are doing a nice job on the expense side, on OpEx, any change in the June quarter and some of those expense lines?

Gerry Perkel

Well, some of the actions we have put in place continued to have a little more impact but I think we are going to continue to be very aggressive in managing that and look to find ways to become even more efficient. I think being agile at this point and trying to be able to rapidly make sure that we have got our expenses in line is important given the all the changes that go on given this economy.

Jim Ricchiuti - Needham & Company

Yes. Last question for me, I am just wondering if you see the Home Theater market beginning to stabilize or is it still at this point a little tough to call.

Gerry Perkel

Well, I would say over the first few months of this year, we have seen it be relatively stable or be it at a lower level than what we saw that last year. But that is still a discretionary purchase, so it is a little tough to sort it through. There is some linkage to housing starts, which I guess in the last few days has been a little bit a good news but we have not seen that flow through yet and then kind of the final piece is the overall health of the folks to participate in that market. A lot of our dealers are small businesses and making sure that they have got the capital to continue to operate their businesses.

So, for now, we are not counting that it is starting to turn around. We are going to try to prepare to be able to meet our goals without that and yet hope that we do start to see some improvement and if so that would be beneficial to us.

Operator

(Operator Instructions) There are no further questions at this time, sir.

Gerry Perkel

Well, let me just close by saying once again that we are very pleased with the progress we have made in the balance sheet, the amount of cash that we have now. It gives us a lot more flexibility and we also are starting to see some improvement from a revenue standpoint as we look forward. Those are all positive signs for us and we look to continue to aggressively pursue our strategies to continue to increase value in the Company.

We look forward to talking to you next quarter. Thanks very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone, have a great day.

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