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Planar Systems, Inc. (NASDAQ:PLNR)

F1Q10 Earnings Call

February 2, 2010 5:00 pm ET

Executives

Gerry Perkel - President & Chief Executive Officer

Scott Hildebrandt - Chief Financial Officer

Analysts

Jim Ricchiuti - Needham & Co.

Operator

Good day, ladies and gentlemen, and welcome to the Q1, 2010 Planar Systems earnings conference call. My name is Diana, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Gerry Perkel, President and Chief Executive Officer; please proceed.

Gerry Perkel

Good afternoon and thank you for joining us for Planar’s first 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 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 progress we made this quarter in a number of areas. We were able to exceed our revenue guidance as well as continue to improve our cash position. We also made progress in several key areas to better position for future growth, including expanding our market address capabilities and digital signage for both custom and large format displays.

Before I review the performance of the various markets we serve in our business, let me start by point out of change in the way we are managing our business. At the beginning of the quarter, we implemented a new organizational structure, which moved away from our historical business segment structure, resulting in a linear more functional organization focused on driving overall results for the company.

As a result, we will report our overall financial results as a single segment this quarter and moving forward. However, in an effort to provide continuity for investors, we will summarize revenue performance by our various end markets, which matches the previous business segment structure.

Sales of our custom and embedded products, formally the industrial segment decreased 5.2% to $13.1 million in the first quarter of 2010, compared to the same period of 2009. The decrease was primarily due to a large order for 3-D displays in the first quarter of 2009, which did not repeat in fiscal 2010 and was partially offset by growth in the sales of custom digital signage products, primarily for use in retail applications.

This product category tense to experience seasonal patterns related to the lack of retail signage instillations in the seasonally strong retail selling period of the fourth calendar quarter. We are continuing to see good opportunities for growth and custom displays for digital signage applications and expect to have the improved results in this application area as we move through the fiscal year.

Sales of Video Wall products formally the Control Room and Signage segment decreased 4.4% to $11.1 million in the first of quarter of 2010, compared to the same quarter a year ago. The decline was due to a decrease in sales of digital signage software as a result of the sale of the CoolSign digital signage software business in the first quarter of 2009.

While sales of video wall hardware products were somewhat similar year-on-year. We did see some change in the mix of products, rear projection cube for somewhat lower while that decline was offset by growth and sales of our new Clarity Matrix LCD video wall product, which began shipping during the quarter. Our new Clarity Matrix LCD video wall products enable us to address market opportunity beyond the traditional Command and Control market, including large venue and retail digital signage applications.

In addition we announced earlier today, a number of new video wall rear projection cube products that utilize LED elimination, which will begin shipping in the third fiscal quarter of 2010. LED based cube offer customers a number of advantages including exceptional video performance and maintenance free elimination with up to eight times the life of traditional lamps and are being demonstrated at the ISE show in Amsterdam this week.

Sales to the Information Technology market, formally the Commercial segment decreased 12.5% to $11.7 million in the first quarter of fiscal 2010, compared to the same period of 2009. The decrease was primarily driven by less revenue from lower margin desktop monitors stemming from the change in strategy for this market to focus more on higher margins product offerings, including tough monitors and business projectors.

Sales of High-end Home products, formally the Home Theater segment decreased 31% to $7.1 million in the first quarter of 2010, compared to the same quarter a year ago. The decrease was primarily due to softer demand for high performance home theatre products as a result of the weakness in the housing and new construction market, especially in the United States.

During the first quarter, we begin shipping our latest home theatre offering, the Runco QuantumColor Q-750, a lamp-less LED based projector with breakthrough visual performance. The response to this new product has been very encouraging so far and based on the strength of the initial shipments, we saw sequential growth in home theater projectors compared to the fourth quarter of 2009.

With that, I’ll now turn the call over to Scott, who will review our financial performance and forward-looking estimates in a bit more detail. Scott.

Scott Hildebrandt

Thank you, Gerry. Let me start with the income statement. As you are aware, we reported a non-GAAP loss per share of $0.05 earlier today for the first quarter of 2010. Non-GAAP gross margins were approximately 23% of sales in the first quarter, down from approximately 25% a year ago and were unfavorably impacted by the sale of CoolSign digital signage software business, which occurred in the first quarter of 2009 and also by a lower absorption of fixed manufacturing costs in a less favorable product mix.

These decreases will partially offset by improvements in gross margin as a result of cost reductions in actions and that reducing the overall cost to production. We expect gross margins to return to a more normal level of 26% to 29% in the third and fourth quarters this year.

As Gerry described, we reorganized during the past quarter to simply our structure resulting in one reporting segment. For accounting purposes, the change in segment structure triggered a review of our goodwill. With the goodwill no longer solely attributed to our legacy industrial business or highest profit generating unit, the goodwill was deemed impaired and consequently we recorded a $3.4 million non-cash charge in the first quarter of 2010 to write-off the remaining goodwill on the balance sheet.

Non-GAAP operating expenses, excluding the charger for goodwill, intangible amortization, and share based compensation as well as the gain on the sale of assets recorded in the first quarter of 2009, declined $2.4 million to a $11.5 million for the quarter compared to the first quarter year ago.

Total operating expenses were down 17% 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 the CoolSign business. Sequentially, expenses were roughly flat with the fourth quarter of 2009.

Lastly on the P&L, the non-GAAP effective tax rate was approximately 37.5% for the first quarter of 2010. As we discussed previously, for fiscal 2010 we expect to have an effective rate of 10% in quarters, where we have a non-GAAP profit before tax and 37.5% effective rate in quarters, where we record a loss.

Turning to the balance sheet, cash increased $3.5 million sequentially to $34.2 million at the end of the first quarter, compared to the cash balance at the end of the fourth quarter of 2009 and we continued to have no borrowings outstanding on our existing line of credit. Cash increase during the quarter, primarily due to improve turn on accounts receivable. In summary, net cash was improved $50.5 million, since March of 2008.

Looking forward, while we believe the general slowdown in the global economy is still impacting our end markets and comparisons with previous years. We are beginning to see areas of improvement. In addition, we continue to believe we are well position to capitalize on industry projections for growth in the overall digital signage market through our ability to deliver custom signage displays as well as our ability to offer large format digital signage solutions with new LCD based video wall solution.

As a result, looking forward, we currently anticipates revenue of approximately $40 million to $42 million in the second quarter of fiscal 2010, EBITDA of a slight loss to breakeven, and a non-GAAP loss between $0.05 and $0.10 per share. In addition, we currently believe that our cash on hand will remain above $33 million at the end of the second quarter of 2010.

While this financial performance is projected to be relatively flat in the second fiscal quarter compared to the first quarter, we believe that the second half of fiscal 2010 will show improvement in revenues and gross margins resulting in non-GAAP profitability in the third and the fourth quarters and an increase in cash by the end of the fiscal year. We believe that this improved financial performance will be primarily driven by a number of design wins and ramping sales associated with our custom and embedded display product offerings.

Shifting to some additional forward-looking information, fully diluted shares outstanding should be approximately $19.0 million for the second quarter of 2010. We are also projecting capital expense of $800,000 in the second quarter as some important upgrades in our Finnish EL manufacturing facility, we have discuss previously have been pushed out to the second quarter. Finally, depreciation should be approximately $700,000 in the second quarter of 2010.

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

Gerry Perkel

Thanks, Scott. When we launch this fiscal year, we did so with expectations then we’re beginning to see some year-on-year improvement in our results. In particular, we look to see year-on-year sales growth and to grow cash by year end as well. Those goals continue to be something we are both focused on and expect to achieve the economic environment we see in our market is mixed.

We see opportunities expanding in some areas and we see other customers preceding cautiously or even still holding offline purchases. All-in-all, we see slight improvement punctuated by caution. How soon we start to see revenue growth and how much growth we can achieve depends both on the economic environment and how much innovation we can bring to the market.

Our goal as continue to create innovative product that can both participate in growing markets and capitalize an opportunities that are surfacing due to changes in display technology. The results we are seeing from our new LCD video wall product are an example of such an opportunity as is the success we are seeing with our QuantumColor LED Home Theatre projector. We are also continue to work to add more new design wins for our custom and embedded products and we are having success in that area as well.

As Scott mentioned earlier, we expect that through the combination of those efforts we should expect to see improved revenues in the second half of our fiscal year and with that improved revenue level, we expect to deliver non-GAAP profitability in the third and fourth quarter as well.

Beyond this year finding additional ways to generate growth is a key to sustaining that profitability on a quarter in, quarter out basis. We are currently making determinations regarding the best course of action to deliver that incremental growth that we need.

With that, I will now open up our conference call to questions. 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 guys could talk a little bit about the design wins that you alluded to and your expectations of that contributing to some revenue pickup in the second half of the year. Can you talk a little bit more specifically about what areas of the business you are same at design wins?

Gerry Perkel

There’s a couple different areas Jim, some of these were design wins we talked about in previous calls that we had captured during this last summer and some newer ones. We are getting a number of digital signage area and outdoor LCD digital signage opportunities. Also seeing some opportunities to participate in certain Kiosk Applications and then just a wide variety of other areas, specialty equipment its requiring it some communication equipment at some variety of different applications, but probably the biggest opportunities coming in the digital signage and Kiosk space.

Jim Ricchiuti - Needham & Co.

Gerry, the margin profile in general terms in this business, I mean you talked about margin improvement in the second half of the year and I assume some of that’s volume driven, but how are the margins in this newer area.

Gerry Perkel

The custom and embedded space is traditionally been among the higher margin of our product lines, and I don’t think we’re seeing that to be much different in the particular applications of the custom and embedded solution. So there I think that being a positive impact to our overall gross profits for the company.

Jim Ricchiuti - Needham & Co.

With the new organization structure, is there anything that we should expect in terms of your operating expense levels going forward? Do you see any much of a change there in terms of potentially some reductions in operating expense? Although, then what we might see in sales and marketing with the sequential decline in revenue?

Scott Hildebrandt

No, I think that those changes are pretty much have been made over the last several quarters leading up to the changes that we’ve made this last quarter. So I don’t think we’re going to see much further reduction there and then as we begin to experience growth, we would expect to see some expenses go along with that, but we’re trying hold off until we start to see some of the growth there to happen.

Jim Ricchiuti - Needham & Co.

Gerry, what about the plans for the cash? I mean, you guys have done a nice job with balance sheet, and certainly the cash position has improved over the past year. What can you say about the plans in that area?

Gerry Perkel

I don’t think we have any specific plans at the moment. I would say that, there’s a couple of considerations that go into the debate and the discussions that happened at the Board level related to the cash. First off, let’s remember, we just come up with several quarters and we’re all trying do everything we could to generate more cash to provide stabilization.

So having a strong cash balance is a fair recent phenomena for us, but having said that, we’re looking at a number of different growth strategies, and as we look at some of the revenue growth, we may need some cash for working capital purposes in the form of inventories and funds receivables as we start to see some other growth, there could be some opportunities there.

We do want to cautious. Like I said, we’re seeing some improvement in some areas, and some cautiousness, and some others. We still have some people talking about our second dip, we’ve got kind of a jobless recovery, exactly how that’s going unfold, unclear and so, if the economy were to take any kind of a second dip, we certainly want to make sure, we have the cash reserves to be able to weather whatever kinds of changes we would need to make.

Then third, just related to some other growth ideas and growth new product developments and things like that. Where there’ll be some cash required for any of those. Right the second, we don’t have big plans for those, but we’re studying all of those and looking at that and having discussions to work with the Board on just to determine the best out forward.

Jim Ricchiuti - Needham & Co.

Your revenue guidance for the current quarter, just wanted to understand a little better what’s going into some of that in terms of the assumptions. Would you expect some seasonality in the video wall business, or do you see the new products perhaps offsetting some of that?

Gerry Perkel

Historically, the second fiscal quarter has been a weaker quarter for the video wall business. It’s also been a weaker quarter in the High-end Home business and depending upon what’s going on in the marketplace it as often times had impact on the IT business. So, we’re looking at all of that and we did $43 million, we’ve outlook $40 million to $42 million.

So fairly similar kinds of environment as we saw in the first quarter, whereas we expect to start seeing revenues pickup more as we get into the second half of the year, as we get out for a seasonal sections of the year and get some of these new design wins to start contributing in a bigger way.

Jim Ricchiuti - Needham & Co.

In the second half of the year, the design wins, is that the big driver to the improvement you’re anticipating in revenues…?

Gerry Perkel

Yes, I think so. We also look to see, we can deal with some of these new products that we’ve got and we’ve got some other new products on the development board right now, but I think the primary driver is some of the design wins starting to come in and play a little bigger role in our revenue mix.

Jim Ricchiuti - Needham & Co.

Gerry, maybe you could also talk a little bit about the digital signage area. I don’t know if there’s way that you had some high profile wins in that area that maybe you could elaborate on. In rough terms, how many customers are we talking about here and are there some newer applications that give you the confidence that you’re going to continue to see some pretty good growth in this area?

Gerry Perkel

I think, pretty much every market forecast, you look at regarding digital signage is forecasting large growth. However, in some ways, every year for the last several it’s going to be the year of digital signage. So when you really look into, who is deploying and who’s implementing, you see that it kind of goes and fits and starts and you see a big deployments, in other places you see people holding off.

What we’re seeing is that in our custom world, whereas we look it, it’s in a sense one customer, because we’re working with one customer to create a custom solution. They’re maybe selling it to many different customers. A much of that is in the retail area, but we see opportunities kind of across the Board and we think that we’ll likely see that both from a custom standpoint and the deployment of people using are new LCD Video Wall. That product is pretty much brand new, we began shipping it at the end of November, so customers are just starting to see that and deploy that in certain applications.

It is bringing new applications, new customers to the market where perhaps rear-projection cubes wouldn’t meet their needs or directly deed and meet their needs for various reasons either cost, or space, or whatever. Now this new technology does open up some new applications. We see that in a variety different areas from sports applications, sports arenas and things like that to airport applications, to retail applications, we just installed a system in a museum just this very recently.

So we’re seeing a lot of new different types of applications come from that. It’s a little tough to sort of exactly, but I thing we think this last quarter we price our Digital Signage business up somewhere around 15% from the year before and we just see that as growth way that we can continue to raise as we go forward.

Jim Ricchiuti - Needham & Co.

How are you going to the market in this area? Are you, I know you talked about some of the partners you’re working within the traditional retail area, but what about some of these other markets?

Gerry Perkel

We work there’s kind of a variety of different areas, some of it’s in the retail areas sometimes it’s through partners, sometimes it’s directly with some of the large stores and some of the large retailers themselves depending upon how involve they’re getting in providing these kinds of products.

We work with a lot of our professional commercial AB integrators that provide these kinds of solutions for different companies that are looking for them. We have some vertical market folks where workers and people particularly in the sports arena area. We also do work with some of the big guys that manage some of the advertising networks like a clear channel and those kinds of folks.

So, it’s through multiple different areas some custom things, some general channels stuffs and particular large end users and then through some of the advertising folks that kind of bring all the advertising dollars to the market.

Jim Ricchiuti - Needham & Co.

As you pursue this market more aggressively, do you see result having to add resources on the sales and marketing area to go after some of these verticals?

Gerry Perkel

I do think there’s some additional work that we needed to cost plane are to be someone that people would looked at look two more in this kind of market, we might not be as well known there’s so little bit of money there and not a lot. I think as we work on our selling resources, yes we probably will add some overtime, we’ve added a little bit so far to help push this a little bit and we may take on more.

The question that we’ve got to work on is do we choose to take on more resource to focus more on some of the international markets. There are a lot of opportunities there, we don’t do as much of our business over there as some of the opportunities suggest. So that’s another area we’re looking at as expanding some of our international distribution.

Operator

There are no more questions at this time.

Gerry Perkel

Let me just summarize by saying, thank you for joining us and we’ll talk to you again in a few months. Thanks very much.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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Source: Planar Systems Inc. F1Q10 (Qtr End 12/25/09) Earnings Call Transcript
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