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Planar Systems, Inc. (NASDAQ:PLNR)

F4Q09 Earnings Call

November 17, 2009 5:00 pm ET

Executives

Gerry Perkel - President and CEO

Scott Hildebrandt - CFO

Analysts

Jim Ricchiuti - Needham & Co.

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Planar Systems earnings conference call. My name is Louisa, and I'll be your operator for today. (Operator Instructions)

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

Gerry Perkel

Good afternoon and thank you for joining us for Planar's fourth 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 contains 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 refer you to the press release we issued earlier today and 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 fourth quarter. We were able to deliver non-GAAP productivity as well as continue to strengthen our balance sheet. In addition, we increased cash to over $30 million at quarter end.

Fiscal 2009 was a challenging year as we dealt with one of the most difficult economic climates in modern history. During this time we undertook a number of actions to improve the balance sheet and stabilize the financial performance of the company. I'm pleased with our results as we have both weathered the storm and created a stronger company in the process.

Let me now review a few topics related to the various market segments in our business.

Our Industrial business had a strong quarter as we saw both sequential growth and we were able to land several new design wins during the quarter. We experienced strong demand from the retail sector as part of our continuing rollout of a large custom signage network. Our Q4 sales total of $16.5 million in our Industrial segment represents 22% growth over Q3.

As I mentioned earlier, our Industrial sales team also landed several new design wins during the quarter, including a custom display for an in-home patient monitoring device, a custom rugged display for safety vehicles, a custom LED backlit touch display for a medical device, and multiple custom products associated with a new retail digital signage opportunity.

In the Commercial segment we were coming off a nice quarter in Q3 and were able to continue that performance as favorable market conditions continued through much of Q4. As a result, sales grew 1% to $12.3 million while gross profits continued to be somewhat higher than typical in this segment.

Sales for the Control Room and Signage business decreased 7% to $11.2 million compared to the third quarter of 2009 due to the timing of a few large rear projection video wall installations which took place during the third fiscal quarter.

We also began in earnest our sales and marketing efforts of our recently-announced Matrix LCD Video Wall product. As we moved through the quarter, we saw our opportunity funnel grow very nicely for this product. As we begin shipments in Q1, we are seeing that funnel grow even more. The unique design approach we have taken on this product has created opportunities for us to address large dynamic indoor signage applications in many areas, including airports, sports arenas and retail, to mention a few.

Sales in our Home Theater business declined 18% to $5.2 million compared to the third quarter of 2009 as demand for high end home theater equipment continued to be negatively impacted by the overall economic climate and its resulting effect on the housing market.

On the new product front, we announced a number of new products at the CEDIA trade show in September, including our latest breakthrough development in home theater projection technology, the Runco Quantum Color Q-750, a lampless LED-based platform offering superior color contrast, instant on and low power consumption. We are very excited about this new product, and the initial reception has been outstanding.

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

Scott Hildebrandt

Thank you, Gerry. Let me start with the income statement.

We reported non-GAAP income per share of $0.04 for our fourth quarter of 2009, with sequential sales growth of 3%.

Non-GAAP gross margins ended up at approximately 27% of sales in the fourth quarter and were favorably impacted by the following - first, the strategic changes made in our Commercial business to increase our focus on more profitable niche product lines; second, continued favorable market conditions in our commercial business; third, 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 Industrial, Control Room and Signage business and Commercial unit sales versus lower margin Home Theater unit sales.

Non-GAAP operating expenses declined $4.2 million to $11.4 million for the quarter compared to the fourth quarter a year ago. Total operating expenses were down 27% compared to a year ago, with reductions in all expense categories, driven by cost reduction actions put in place over the last several quarters and the divestiture of our CoolSign software business in the first quarter of 2009. Sequentially, expenses declined slightly in our fourth quarter due to higher trade show expenses in the third quarter of 2009.

Lastly on the P&L, the non-GAAP effective tax rate was approximately 10% for the fourth quarter of fiscal 2009, reflecting the anticipated usage of NOLs which would offset income in the U.S. as well as the forecasted mix of U.S. and foreign profitability. For fiscal 2010 we expect we will have an effective tax rate of 10% in quarters where we have a non-GAAP profit before tax and 37% in periods where we do not.

Turning to the balance sheet, cash increased $5.2 million to $30.7 million at the end of the fourth quarter compared to the cash balance at the end of the third quarter of 2009, and we continue to have no borrowing outstanding on our existing line of credit. Cash increased during the quarter primarily due to the positive EBITDA generated during the quarter as well as favorable changes to working capital as both inventory and accounts receivable declined sequentially. In summary, net cash has improved $47 million since the end of the second quarter of 2008.

Looking forward, while we believe our markets are still being negatively impacted by the global economic situation, we are beginning to see a number of opportunities that we believe will result in increased revenues in fiscal 2010, particularly in the overall digital signage and custom embedded display markets. We believe we are positioned to capitalize on industry projected growth in the overall digital signage market through our ability to customize smaller and/or ruggedized outdoor displays, as well as our ability to offer large format digital signage solutions with our new LCD-based video wall product offering.

As a result, looking forward we believe that our current operating plans will result in increased sales in fiscal 2010 compared to fiscal 2009, with a similar pattern to fiscal 2009 in terms of expectation for higher revenues and profits in the second half of fiscal 2010 than in the first half.

Given this seasonality, we currently anticipate revenue of approximately $40 million in the first quarter of fiscal 2010, EBITDA of a slight loss to breakeven, and a non-GAAP loss between $0.05 and $0.10 per share. We currently believe that our cash on hand will remain above $30 million at the end of the first quarter of 2010 as well as at the end of fiscal 2010.

Shifting to some additional forward-looking information, fully diluted shares outstanding should be approximately 19 million shares for the first quarter of 2010. Also, we are projecting capital expense of $700,000 in the first quarter as some important upgrades in our Finnish EL manufacturing facility are necessary. Finally, depreciation should be approximately $1 million in the first quarter of 2010.

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

Gerry Perkel

Thank you, Scott.

As I mentioned earlier, FY '09 was a challenging year on many fronts. As the economy weakened, we saw not only declining demand but tremendous volatility in our sales cycle. Nonetheless, we persevered and drove change across the company that enabled us to not only survive these tough times but to exit the year in a stronger position than we entered it. We were able to more than double our cash levels throughout the year, and the second half of the year brought us back to non-GAAP profitability as revenue improved based on seasonal strength.

As we drove change across the company, we did so with two goals in mind. First, we wanted to reduce costs to meet the realities of lower revenues; but at the same time, we wanted to ensure that as the economy does improve that we would be in a position to grow the company.

We've reduced costs across the organization, including reducing the number of executives, and reorganized the company with a more streamlined organization structure. While we've continued to expect our revenues to follow the seasonal pattern we experienced this past year of stronger revenues in the second half of our fiscal year, we do expect that with the slowly improving economy we will experience improved revenue in FY '10 in total.

As we turn our focus more towards growing the company, we see a number of opportunities. While economic challenges may be dampening the pace of growth, we still see display technology evolving and enabling new applications.

The most compelling growth opportunity we see currently is in digital signage displays. The deployment of dynamic digital displays and signage applications across a wide variety of industries is growing nicely, and we have the potential to address that market both from a standard product approach, such as our new Matrix LCD Video Wall product, and from a custom product development approach. As such, we are looking to increase our focus on this market as we move forward and to leverage this opportunity to drive growth for the company.

In addition to digital signage, we also see the embedded market as a growth opportunity for us. We've seen our marketing efforts in this area create numerous design wins and a good funnel for future sales.

While these two opportunities will garner much of our focus on growth, the challenging technology in the display world is creating new opportunities in various areas in our portfolio, and we're continuing to seek out those growth opportunities as well.

Just how fast the economy will improve is a debate that has many opinions. We are seeing some positive signs in certain areas and challenging signals in other areas. All in all, we are planning on a slow recovery from an overall economic standpoint. While the messages are a bit mixed, we do see some encouraging signs in certain markets, and, as such, we want to ensure that we are both focused on those markets and poised to pursue and capitalize on the growth opportunities that we uncover.

The challenge going forward is to find the right balance between pursuing growth and affordability of the resources and projects to pursue that growth. As I said, we are building our plans with a slow recovery scenario in mind. We hope to see some growth in FY '10 with more growth in FY '11 as our plans and new products have time to succeed.

With that, I'll now open the conference call up to questions, so, Operator, if you can come back on?

Question-and-Answer Session

Operator

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

Jim Ricchiuti - Needham & Co.

I wonder if you could talk a little bit about the opportunities you're seeing in the digital signage market. First, can you tell us if the ongoing rollout that you've got under way right now is still moving forward, and where do you stand with that over the next couple of quarters?

Gerry Perkel

Yes, the one large rollout we're doing does have continued future rollout expected. Being that it's a retail environment, as we've seen with a number of potential retail customers, they don't like to have anything going on in their stores in the fourth quarter as the Christmas season comes and the fast selling season comes, so they tend to look to see their deployments happen more in the spring and summer rather than in the fall and winter. So we expect, as we did this year, to start to see that pick up as we pass the calendar year boundary, and exactly how quickly it'll pick up is still being debated. But, yes, we do see more rollout potential with that one.

As it relates to opportunities in general, we've seen a couple of things. On the standard product front, which would be particularly related to our Matrix LCD Video Wall product, we're seeing interest in a wide variety of applications, from large airport displays and deployments there, retail, corporate, education, sports arenas, a number of different applications for this new LCD video wall technology. And we've seen, like I said, a lot of interest from a wide variety of applications as people are seeing this as a good alternative and much less expensive than deploying, say, an LED wall if they're looking for any kind of high resolution displays.

The other side that we're seeing a lot of interest is people who want to deploy digital signage but for which a standard product may not exist; they need something specific, either in the way it's designed from a physical standpoint or maybe the environment in which it's going to be deployed so, for instance, outdoor digital signage.

We have some very strong interest in people that want to deploy outdoor digital signage solutions. And obviously there's a lot of challenges to making sure you can take LCDs and keep them cool and have them be sunlight viewable and all of the issues that go along with that, but we're well on our way to working on some of those applications, leveraging some of the custom development we've done in other areas in our embedded business. So we're seeing both opportunities on the custom side as well as on the standard products side.

Jim Ricchiuti - Needham & Co.

And Gerry, you mentioned in your comments about design win activity that you have a new retail design win. Is this also something that was done in partnership with your existing partner, Thomson's PRN?

Gerry Perkel

No, this is actually a new opportunity, Jim, separate from that. And we do continue to work with PRN on other opportunities, but this particular one is separate from that and in another completely different area.

Jim Ricchiuti - Needham & Co.

Is there anything you can say in terms of how it ramps over the course of the next couple of quarters and maybe what the magnitude is?

Gerry Perkel

Well, one of the things I've learned about these large digital signage rollouts is the timeframes are unpredictable. As people begin to roll them out, there's some starts and stops. So I don't want to get too excited about it other than to say that it's a significant one, and we think it could have some significant impact. But how quickly it will come is a question, and we tend to try to be a little bit conservative on that just because we've seen over time these large rollouts oftentimes have some fits and starts as they get going.

Jim Ricchiuti - Needham & Co.

Sure. Now, the Industrial business overall did about $16.5 million of revenue in the quarter. Can you say how much you're doing roughly of that in digital signage in total?

Gerry Perkel

Not yet. We're looking as we move forward to break more of that out and give some more indications of what the digital signage percentage of the business is, but we're not in a position to do that quite yet.

Jim Ricchiuti - Needham & Co.

Okay. And then just to shift gears for a second, given the mix in revenues in the quarter and the sequential decline in the Home Theater business, was the loss that you saw in this quarter larger than what you saw in the previous quarter?

Scott Hildebrandt

Yes. You know, Jim, when we look at the loss on a non-GAAP basis, we actually had a gain, right, so we had a $0.04 gain last quarter, a $0.04 gain on this quarter. On a GAAP basis, I'd have to look, but -

Jim Ricchiuti - Needham & Co.

Actually on operating income or operating earnings of the segments?

Scott Hildebrandt

Are you talking about -

Jim Ricchiuti - Needham & Co.

Yes, I'm sorry.

Scott Hildebrandt

The Home Theater unit in particular?

Jim Ricchiuti - Needham & Co.

Right. What I'm trying to get to - I know it's going to be out in the K - but was the loss that you saw in the Home Theater segment larger than the loss you saw in Q3?

Scott Hildebrandt

No, it was less and quite an improvement, yes. Sorry about that.

Jim Ricchiuti - Needham & Co.

That's okay. And just with respect to the Control Room business, it's a lumpy business, but what's your sense on how that business looks in the next one to two quarters?

Gerry Perkel

We continue to see some good opportunities. We do see a few challenges there from a product standpoint. We're going through some new product development we need to get out, so we'd like to get some of that product out to be a little bit stronger from a competitive standpoint. But we're continuing to see good opportunities, and it's just a matter of where do the lumps fall, as you said, do they fall really in this quarter or next? And so we continue to work through those.

And some of those are getting bounced around with some of the economy, depending on how exchange rates fluctuate and things like that. It's created some challenges in the International segment.

Operator

(Operator Instructions) Your next question comes from Jim Ricchiuti - Needham & Co.

Jim Ricchiuti - Needham & Co.

How should we think about operating expense this quarter, guys? Your sales and marketing expense came down sequentially. Some of that may be due to the trade show that you talked about. But as we look at the December quarter, how should we think about that?

Scott Hildebrandt

Well, expenses pretty much in total will be flat as we go into the first quarter and the full year, maybe down a little bit in R&D when you compare the full year to the full year. And if you're just looking at the December end quarter, pretty flat.

Jim Ricchiuti - Needham & Co.

Scott, your G&A expense also took a pretty good decline. Was anything unusual going on in that sequential decline that we saw in G&A?

Scott Hildebrandt

There was one that's probably a couple hundred thousand dollars, so what you should think about there is somewhere a little bit north of $4 million, I think, on a non-GAAP basis. So kind of flat to just slightly above where it was in the fourth quarter for the first quarter.

Operator

(Operator Instructions) And at this time we have no more questions. Actually, we just got a follow up question from Jim Ricchiuti - Needham & Co.

Jim Ricchiuti - Needham & Co.

The designs wins that you alluded to, Gerry, it's tough to predict when those come on, but putting aside this potentially significant retail design win, what about some of the other ones? How's your visibility on when that moves forward, and how significant do you think these are in terms of review potential?

Gerry Perkel

Well, they're all a little different as far as timing. It depends on how much customization's being done. And so I would say that for most of these it's probably a minimum of three months and probably a maximum of six to nine months maybe before they start kicking in.

In total they're worth several million dollars. Exactly how quickly they kick in and how much they'll be worth in FY '10 is the question that we're working through right now, and as each week goes past we have more insight into that and the progress that we're making.

So they're significant in the form that, you know, it's once again another chunk of several million dollars added to the potential as we move forward in the embedded business.

Jim Ricchiuti - Needham & Co.

How are the margins on some of these new pieces of business you're winning?

Gerry Perkel

Continuing to be good and strong, as we've seen in the Industrial business, so we're not seeing any particular erosion of margins, etc.

Frankly, the margins tend to be linked to the difficulty of doing the work in a sense, so the more challenging the display type is, the more likelihood that our value added is more valuable to the process; the more that the customization's simpler, then it's a little tougher to get quite the premium. So in some ways for us the harder the problem, the more we get excited about it.

Operator

And at this time we have no more questions in the queue. I'd like to turn the call back over to Gerry Perkel for any closing remarks. Sir?

Gerry Perkel

Well, thank you for joining us for the call, and we'll look forward to talking to you again at the end of the first quarter. Thanks very much.

Operator

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

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Source: Planar Systems, Inc. F4Q09 (Qtr End 9/25/09) Earnings Call Transcript
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