Planar Systems, Inc F3Q09 (Qtr End 6/26/09) Earnings Call Transcript

| About: Planar Systems, (PLNR)

Planar Systems, Inc

F3Q09 (Qtr End 6/26/09) Earnings Call

August 4, 2009 5:00 pm ET


Gerry Perkel - President and CEO

Scott Hildebrandt - CFO


Jim Ricchiuti - Needham & Company


Good day, ladies and gentlemen and welcome to the Third Quarter 2009, Planar Systems Earnings Conference Call. My name is Jeanette and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct the question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your Mr. Gerry Perkel, President and CEO. Please proceed, sir.

Gerry Perkel

Good afternoon and thank you for joining us for Planar’s third 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 release 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 say that I am pleased with the performance of the company in the third quarter with expected revenues to grow sequentially, but the 21% sequential growth we reported earlier today was better than our expectations. It is important to note that we experienced strong sequential growth in three of our four units, which I'll speak to in a moment. Along with the sequential revenue growth, we delivered better than expected margins as a very good product-mix acted to increase our gross profits.

The stronger revenue in gross profit performance coupled with our lower expense levels enabled us to deliver non-GAAP earnings per share of $0.04 or over $1.8 million in EBITDA. In addition, to the P&L performance, we were also pleased to report that cash grew $2 million during the quarter to $25.5 million, while accounts receivable increased.

While the challenges from the global economic environment remain stout, we are pleased that our plans and actions have enabled us to not only weather this storm, but in fact to a find a way to improve performance along the way.

Let me now touch on few topics related to the various market segments in our business. In our industrial segment, we saw a nice sequential revenue growth of 24%, but more importantly for the future, the IBU had a strong design win quarter, successfully landing in number of new design wins, which offer the opportunity to deliver up to $7 million in new revenue over the next 18 months to 24 months.

These wins included customized solutions for outdoor digital signage applications, special ruggedized and hardened displays, a new EL application in a radio communication system as well as displays to support new versions of the now popular DVD rental kiosks.

Additional, the iVIEW is working on new opportunities for its transparent EL display technology. Based in part on these new design wins and new opportunities, we expect year-over-year revenue growth in the industrial segment in fiscal 2010. In our control room and signage segment, revenues came in at $12.1 million, representing a 35% sequential growth.

We shipped a number of large orders during the quarter and completed some significant installations. In addition to the strong shipment quarter, we also launched a new product we believe can provide some interesting opportunities for growth in fiscal 2010 and beyond. At the large InfoComm, over this past June, we announced our new Matrix LCD Video Wall product, leveraging some of the latest advances in LCD technology, we have created an innovative design that we believe offers customers the kind of capabilities they are looking forward to create LCD video walls. As LCD Video Wall technology continues to improve, we believe new growth opportunities will exist for us as new applications are developed.

In our commercial segment, we saw a both nice growth and strong product mix, which was a significant driver to our overall improved gross profits. Revenue increased 28% sequentially with a very strong mix of higher margin Touch and other higher margin monitor products. In addition, the unique pricing environment in the third quarter allowed us to sell certain inventory prior to increases in industry-wide product cost adding to our favorable margin performance.

In our Home Theater segment, we saw the continued challenges of the global economic slowdown continue to weigh heavily on our business. Despite of some improvements in our operational performance in this business, revenue was down as demand continued to be impacted by the economy.

Discretionary spending and new home starts are two of the key metrics that linked to demand in this segment and obviously both continue to be soft in this current environment. Since, we don’t expect overall market demand to pick up any time soon, we are continuing to take actions to limit our expenses while we drive several new products into the market with the goal of winning market share and improving the bottom line in this unit.

So, in summary, the third quarter was a major step forward for us in performance. Stronger than expected revenues, gross profits and earnings with some additional cash generation are all positive indicators. Later in the call, I will comment more on our strategy moving forward, but first let me turn it over to Scott to discuss the financials in more details. Scott?

Scott Hildebrandt

Thank you, Gerry. Let me start with the income statement. As Gerry mentioned, we reported non-GAAP income per share of $0.04 for our third quarter of 2009 with sequential sales increasing 21%. Non-GAAP gross margins increased to approximately 28.8% of sales in the third quarter compared with 21.5% reported in the third quarter of 2008.

During the past quarter, gross margins were favorably impacted by a number of items. First, the strategic changes made in our commercial business segment to increase our focus on more profitable niche product lines within the commercial industry. This shift along with some favorable market conditions in the quarter led to the highest gross profit percentage in history for our commercial segment.

Second, cost reductions implemented in our global production operations a few quarters ago, acted to reduce the overall production build cost and finally a better business unit mix of higher margin in industrial, control room and signage business and commercial units sales versus lower margin home theatre sales.

Non-GAAP operating expenses from continuing operations declined $4 million to $11.9 million for the quarter compared to the third quarter a year ago. Total operating expenses are down 25% compared to a year ago with reductions in all expense categories driven by cost reductions actions put in place over the past several quarters, and the divesture of our CoolSign software business in the first quarter of 2009.

Sequentially, expenses rose slightly due to the timing of trade shows and R&D projects in the third quarter of 2009. Lastly on the P&L, we adjusted our non-GAAP effective tax rate to approximately 10% for the third and fourth quarters of fiscal 2009 reflecting the anticipated usage of NOLs which would offset income in the US as well as the forecasted mix of US and foreign profitability. We expect this lower effective tax rate will continue in fiscal 2010.

Turning to our balance sheet, cash increased another $2 million to $25.5 million at the end of the third quarter, compared to the cash balance at the end of the second quarter of 2009 and we continue to have no borrowings outstanding on our existing $20 million line of credit.

Cash increased during the quarter primarily due to the reported EBITDA as well as favorable changes to working capital as inventory declined over $4 million sequentially. In summary, net cash has improved over $39 million since the end of the third quarter a year ago.

Looking forward, while we believe our markets are still being negatively impacted by the global economic situation. We are beginning to see renewed order activity in our industrial business. In addition, we experienced sequential sales growth in all of our businesses during the third quarter with the exception of the home theatre unit. Overall company financial results were improved in the third quarter, and we believe additional opportunities exist to increase cash and profitability.

Finally, we remain committed to our strategy of supporting the business units that are achieving their financial goals and aggressively working to improve or divest the segments that are unable to contribute positively to our financial performance. As such, we currently believe we will experience similar levels of revenue in the fourth quarter compared to the third quarter of 2009, which should result in positive non-GAAP earnings and EBITDA for the fourth quarter.

In addition, we believe that sales, non-GAAP profitability and EBITDA will improve for the full-year fiscal 2010 compared to fiscal 2009 with the similar pattern to fiscal 2009 in terms of the expectation for higher revenues and profits in the second half of the fiscal year than the first half.

Shifting for a moment to some additional forward-looking information, fully diluted shares outstanding should be approximately $18.8 million for the fourth quarter of 2009. Also we are projecting slightly higher than unusual capital expenses of $600,000 in the fourth quarter as we are investing in some important upgrades in our Finnish EL production facility. Depreciation should be in the range of $1 million to $1.1 million in the fourth quarter of 2009.

With that I'll turn it back over to you, Gerry.

Gerry Perkel

Thank you, Scott. A little over a year ago as we saw some of the first signs of challenging economic times, we decided to shift and change our focus in the company dramatically. In the two years prior to this change, we have focused our efforts on aggressively growing our company through both organic investment and acquisitions. While those actions did create revenue growth, they also added debt to the balance sheet.

That debt level looked more risky as we struggle to complete the final integrations of our acquisitions as the beginnings of the economic slowdown began the surface. Given that situation, we decided to take significant actions to reduce risks and to focus on stabilizing the company. Our goal was to significantly improve our balance sheet and to focus our efforts on supporting our profitable segments and to fix or sell our non-strategic or non-performing activities.

We began this process to change our focus over a year ago, a few months prior to the global economic meltdown hitting full swing. I'm generally pleased with our current results given the significance of the global slowdown in the face of the worst economic recession in seven decades, we have moved from a net debt position of over $16 million to a net cash position of over $25 million.

During this transition, we have sold two businesses and some non-strategic assets taking on several restructuring activities and improved the profit performance of our remaining business units. We have driven significant improvements on working capital and as of the third quarter of 2009 delivered positive quarterly non-GAAP earnings and positive EBITDA.

I'm pleased with how our team has improved the stability and performance of the company during these trying times. In addition to improving performance, we have also continued to develop new products and captured new customers to position us to grow as the economic climate improves.

Our overwriting goal over the past 15 months has been to ensure that our balance sheet was strong enough to provide us flexibility and stability in these troubling times. We have certainly made progress toward that goal. However, while we have made a great deal of improvement across the company, we are not yet done. Given the economic uncertainties that still exist, I would like to see a slower or breakeven point even further. To that end, we plan to continue to reduce our expenses as we move forward.

Additionally, while we have accomplished a great deal in improving our utilization of working capital, I believe there is more we can do. As I said earlier, while we have improved the performance of all our business units, we have not yet met our goals of having all of our units positively contribute to profits. Our specific goal of insuring that each and every segment of our business contribute positively to our performances unchanged and we will continue to drive the company in that direction.

Now that we have reached our initial goal of establishing stability and flexibility, we now need to turn our attention to generating profits on a sustained basis and growing the topline. As Scott mentioned earlier, we expect the fourth quarter of this year to take another step in the right direction on the heels of our better than expected performance in the third quarter.

Looking out further, it is difficult given the volatility of the economy and its impact on our customers. I am buoyed however by the recent positive results in the form of design wins and new additions to our [funnel] in our highest profit segment, our industrial business.

This is very important to our future. We are currently in the midst of formulizing our longer-term strategic direction as well as our operating plan for fiscal 2010. Our initial look does suggest, we will likely see a continuation of the seasonal pattern that has been evidenced this year and that revenue will likely be stronger in the second half of the fiscal year than in the first.

Our initial looks also suggest, we should be able to return a delivering growth in our industrial segment on an annual basis as both our ongoing customers are strengthening and our new design win should contribute new revenue. As we develop our plans, we are not expecting a strong economic recovery. But if one comes, we will be prepared to benefit from the tailwind.

In summary, we are pleased with the third quarter performance as it was a positive step in our quest to achieve financial stability, flexibility and profitability. We look to build on that foundation as we move forward.

With that, I’ll now open up the conference call to questions. Operator, if you could come back on please.

Question-and-Answer Session


Thank you. (Operator Instructions). Your first question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed.

Jim Ricchiuti - Needham & Company

It looks like you guys got some particular improvement in profitability in the commercial business and I’m not clear on how much of that is sustainable. Maybe you could talk a little bit of the improvement that you saw on the margins there and going forward would you assume a similar level of operating profit in the commercial business that you’ve seen in the prior two quarters, that is the first and second?

Scott Hildebrandt

Well, I think we have continued to evolve our strategy in that business to continue to put more and more of our energy and focus on higher margin products and to continue to make sure we are not fighting for every piece of market share that’s not profitable, but rather focus our efforts on generating profitable revenue.

I think this last quarter, we did see a very strong set of factors combined to create very strong gross profits in that business and ultimately very strong profit contribution. I don’t expect that we’ll see that kind of combination happen again in this next quarter going forward. But, I do think we are seeing very much stronger gross profits than we did say a year ago at this time. So, much better than say a year ago, maybe not quite as good as we saw just in this last quarter, Jim.

Jim Ricchiuti - Needham & Company

Okay. Gerry, on the other business units, it sounds like you really getting some traction in the industrial business and it's surprising just given the economy, was this a quarter where you began to convert some of these design wins that you've talked about in previous calls, the revenue.

Gerry Perkel

Well, I think what we have seen is that as the economic slowdown hit hard, projects that we have been working with customers and opportunities we have been working also were slowed down. Some were delayed, in some cases even cancelled, but often times people just said, well, we have a new product we are developing, we are just going to put that on a hold for a while.

What we began to see in this last quarter is some of that starting to reenergize and starting to move forward and getting all the way to completion on some of these. So that we maybe even begun to deliver some revenues or at least have orders or commitments from people to deliver revenues as we complete the product development for them.

So, it's really not so much that revenue benefited from it, but just the fact that either backlog in the form of some orders or backlog in the form of commitments if you will and completion of design wins happened in the quarter. That buoys us and makes us feel more confident going forward than maybe we did six months ago when we were at the height of the economic slowdown, a lot of these projects were being delayed.

Jim Ricchiuti - Needham & Company

Fair enough and then on the control room signage business, very nice sequential growth although the March quarter is seasonally a weaker quarter. How's your visibility in that business going forward?

Gerry Perkel

Well, in our various businesses, we have different levels of visibility, the industrial business probably the most visibility and in our commercial business, obviously we don’t get a lot of backlog. This one is some place in between. So we have some good visibility for the next couple of months.

But as you get out further in time, it’s a little bit more challenging to understand exactly how many of the big deals, we are working on will come in et cetera. We had a very good quarter, you are right as the sequential growth off was typically the weaker seasonal quarter of Q2, and we are looking forward continuing to see good opportunities in that business. But it’s a little harder to be quite as confident, quite as far out in that segment because we don’t have quite the visibility we have in the industrial business.

James Ricchiuti - Needham & Company

Last question is just regarding the additional cost reduction efforts. Can you elaborate on that and give us a sense as to where some of that hits and when?

Gerry Perkel

We still see the economy as rather volatile and so that makes some of the order rates a bit unpredictable. So, we'd like to lower the breakeven point, take some additional cost out of the company. We are looking across every different function, making sure that our capacity and our operations group is properly matched to our demand, that we don’t have over capacity yet that we are poised to be able to respond as revenue does come up.

So, we are just looking across the board and in general we look to try to keep take a little bit more cost out. So that we can drive the breakeven point down even a little lower. So, that if volatility continues to hit us, we can certainly weather that storm.

James Ricchiuti - Needham & Company

Where would you like to see that cash breakeven go to?

Gerry Perkel

I don’t know that I have a number for you, Jim, but certainly something lower than what it is today. And so, we are still finalizing exactly, where we can get that in and it's a balance between that and you know how much investment do we do in certain growth initiatives that we are working on.


(Operator Instructions). At this time, there are no further questions. I would now like to turn the call back over to Gerry Perkel for any closing remarks.

Gerry Perkel

Well, thank you. As I said, we are pleased with the results that we made. It was a nice milestone quarter for us and getting into profitability and some very nice sequential growth and we look forward to continue to build on the success we had this past quarter and we’ll talk to you next quarter. Thanks very much.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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