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Planar Systems, Inc. (NASDAQ:PLNR)

F1Q 2014 Earnings Conference Call

February 05, 2014 05:00 PM ET

Executives

Gerald K. Perkel – President and Chief Executive Officer

Ryan Gray – Vice President and Chief Financial Officer

Analysts

Jeff M. Martin – ROTH Capital Partners LLC

Brad Mas – Needham & Co.

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2014 Planar Systems Earnings Conference Call. My name is Esthappan and I’ll be your operator for today. At this time, all participants are in 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, Gerry Perkel, President and CEO.

Gerald K. Perkel

Good afternoon and thank you for joining us for Planar’s first quarter earnings conference call. With me this afternoon is Ryan Gray, 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 refer you to the earnings 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 the events or circumstances occurring after today.

With that behind us, let me move on to talking about our results. We’re pleased with the results in Q1 for digital signage product sales and in earnings, we are also pleased to see the positive impact of having digital signage product revenue be a growing percentage of our total revenue. Our overall revenue declined 3% when eliminating EL revenues from a year ago.

The strength of our digital signage product line both in terms of revenue and the margin contribution was encouraging and contributed to the upward revision to our non-GAAP earnings per share guidance for the full fiscal year.

We delivered record digital signage product revenues in Q1. Digital signage product sales totaled $19 million in Q1, which represented 12% growth over a very strong Q1 a year ago and represent 7% growth sequentially over Q4 of fiscal 2013.

We had particularly strong growth year-on-year in our signage monitor product lines where we saw 56% growth. Of note, we've strengthen our UltraRes 84-inch 4K signage monitor, which was launched last fiscal year. We also launched new versions of our PX signage monitor products and introduced a new line, our simplicity series aimed at offering more economical signage monitors.

We also continue to see strength in our tiled LCD signage products and had record revenues in that category as well. All-in-all, it was a very strong quarter for our digital signage product families both in terms of sales and new product launches.

Additionally in January, we announced a new generation of our flagship Matrix Video Wall System incorporating our new G2 Architecture; this new version will create significant new value for our customers and will include the newest generation of LCD panels, which will enable even narrower bezels, a feature which we believe will expand interest in this offering.

We did see some softness in our commercial and industrial product lines in the quarter. In total, our C&I revenues were $21.5 million, which represents 14% decline from a year ago when you exclude revenue from our EL product line.

As you may recall, we saw sold our EL product line in November of 2012 and has small revenue level from that product line in our fiscal 2013 Q1 results. On a year-on-year basis, we saw revenue growth in our custom product line and we expect growth from that product line for the year as well.

We did experienced declines in our desktop monitor and touch monitor product lines as we believe tablets and All-in-One PC platforms impacted the demand for these products.

We also saw decline in our rear projection cube and a high-end home theater product lines continuing a trend we saw last fiscal year. Our revenue was lower in total when compared to Q4 and Q1 of FY 2013. We were able to generate similar non-GAAP earnings per share; this is partially linked to continually managing our expenses tightly, but also linked to the improvement in both the material margins in our digital signage product lines as well as the increase in the portion of our total revenues delivered by our digital signage product lines.

In total, in this quarter, digital signage product revenues accounted for nearly 47% of total revenue. It is notable that our gross profits rose sequentially in spite of lower absorption linked to lower overall revenue.

As we've stated previously, it is our goal to continue to drive our mix of the digital signage product sales higher overtime and with that growth to see improvement in our business model linked to the improved margin contribution from our digital signage revenue when compared to our overall revenues.

This quarter was an example of how that can impact our ability to generate profits. So we are pleased with the first quarter, in terms of our digital signage product revenues and profitability.

Now let me turn it over to Ryan to discuss our results in a bit more detail. Ryan?

Ryan Gray

Thanks, Gerry. Let me start with our income statement. As you are aware, we reported GAAP income per share of $0.03 and non-GAAP income per share of $0.05 earlier today for our first quarter of fiscal 2014.

Consistent with prior quarters, non-GAAP results exclude non-cash GAAP items such as intangibles, amortization expense, foreign exchange, gains and losses resulting from foreign-based translation of U.S. denominated assets, share based compensation expense, income tax items and other non-recurring charges such as restructuring and impairment and gains and losses associated with the sale of assets. For a more detail on these items, a reconciliation is included in the supplementary tables within our press release.

Focusing in on our non-GAAP results, gross profit as a percentage of sales for the first quarter of fiscal 2014 was 24.1%, down from 25.0% in the first quarter of fiscal 2013. As you will recall, the first quarter of fiscal 2013 included a partial quarter of results for the EL product line, which had higher than usual gross profits for the stub period.

Sequentially, the first quarter of fiscal 2014 gross profit rate increased 1.7 percentage points from 22.4% reported in the fourth quarter of fiscal 2013. The increase in gross profit margin as a percentage of sales from the last quarter was primarily due to a favorable change in the product mix and increased sales of higher margin Digital Signage process and decreased sales of lower margin desktop monitors and in spite of lower absorption of fixed manufacturing costs related to the 11% decline in sequential revenue.

Non-GAAP operating expenses for the first quarter of fiscal 2014 declined $1.3 million or 13% to $8.8 million compared to the same period a year ago. We expect this decline as a result of previously implemented cost reduction measures and the divestiture of the EL product line.

Our non-GAAP effective tax rate was approximately 10% for the first quarter of fiscal 2014, consistent with previous quarters we expect to have an effective tax rate of 10% in quarters where we have a non-GAAP profit before tax, and 37.5% in quarters where we report a loss.

Turning to our balance sheet, cash increased approximately $1.2 million to $13.2 million, compared with the end of the fourth fiscal quarter of last year, primarily driven by the quarterly non-GAAP profit, as other working capital items roughly offset. As we look forward into the rest of fiscal 2014, we continue to believe we can achieve 20% to 30% year-on-year revenue growth for sales of Digital Signage products for the full fiscal year and as a result grow overall revenue and improved profitability compared with fiscal 2013.

For the full fiscal year we expect revenue in the range of $165 million to $175 million and non-GAAP income per share of $0.11 to $0.16. In the short-term, we expect to see flat despite higher sale sequentially and also expect to follow our normal pattern of higher expenses in the second fiscal quarter related to the timing of product releases in trade shows. As a result we currently anticipate revenue in the range of $40 million to $42 million and non-GAAP income per share of zero to 2% in the second fiscal quarter of 2014.

Shifting to some additional forward-looking estimates, we believe average shares outstanding will be approximately $21.5 million for the second quarter of 2014. In addition we expect CapEx to be $100,000 to $200,000 and depreciation to be approximately $500,000.

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

Gerald K. Perkel

Thank you, Ryan. We continue to be focused on executing our strategy to aggressively grow our Digital Signage product revenues and in turn to grow the overall company revenues and over time improve our business model. We are continuing to concentrate resources on the key areas to drive that growth.

We continue to focus on developing new Digital Signage products. Our new G2 Architecture, a new version of our flagship Matrix product line is an example of that product development. We also have added new Digital Signage products under development as well and anticipate additional new product introductions to help us drive growth in our sales of Digital Signage products.

We are also continuing to focus on sales and marketing efforts on building more Planar brand awareness in the market and to broaden the number of resellers to sell our Digital Signage products. In FY13 we added over 100 new resellers which helped to contribute to our growth in sales of Digital Signage products.

We have improved the financial performance of the company. We still have plenty of challenges ahead as we look to continue to manage our product portfolio and monitor our expense levels. We want to improve profitability and yet we need to continue to pursue new products and new customers to help drive growth.

While there are challenges, we are enthusiastic about the opportunity ahead for Planar, our progress on growing our Digital Signage product revenues is clear and is having a positive impact on our overall performance. We look forward to continuing to improve the performance as we move forward.

Operator can you come back on the line and begin the question-and-answer period, please.

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) It looks like our first question comes from Jeff Martin with ROTH Capital Partners.

Jeff M. Martin – ROTH Capital Partners LLC

Thanks. Hi, Gerry. Hi, Ryan.

Gerald K. Perkel

Hi, Jeff.

Ryan Gray

Hi, Jeff.

Jeff M. Martin – ROTH Capital Partners LLC

Gerry, can you give a sense on what kind of environment is staying in Digital Signage if there are any industry estimates for gross rate and what some of the underlying key markets are for you for this year?

Gerald K. Perkel

Yes, we’d see lot’s of different market forecasts and they’re kind of all over the map. But in general I think we tend to think that on an annual basis we’re seeing probably 20% to 30% as not an unreasonable growth rate in the Digital Signage product space. And as far as the application areas and the industries that we’re serving, it really is all over the map. We’re seeing good opportunities in retail, we can see other opportunities in public spaces like airports.

We’re seeing corporate purchases, government museums, sports arenas, we see stuff at higher red. It really is a pretty broad mix and it doesn’t seem to be any particular faster rollout or slowdown in one industry or another and so I think we see some pretty strong potential kind of across the board in the various industries and applications.

Jeff M. Martin – ROTH Capital Partners LLC

And is your distribution – your sales channel still mainly through value-added resellers. Or is there any change to the strategy there. Are you adding new partners then maybe some details there would help?

Gerald K. Perkel

In North America, which is the bulk of the business, the business goes almost entirely through resellers. On a rare occasion we do some business direct if a customer really requires it. But it’s really almost all through resellers and there is a variety of types we have kind of the traditional commercial AV integrator reseller partner, which we have expanded quite a number of over the last couple of years. Either folks to put together a solution and go install that an end use, that could be anything from digital signage to a conference room to a control room to a museum system et cetera, et cetera.

Then our desktop monitors and touch monitors have historically been sold through, what I call the PC distribution channel. People like CDW and Ingram and Tech Data, Amazon’s and PC Connection et cetera. And we continue to sell those products through those particular resellers, but those resellers also most of them have digital signage initiatives one form or another, because digital signage is at a fairly half market right now.

So we also doing business there and looking to drive our sales team that addresses that channel to pursue those opportunities as well, and we are seeing a growing portion of our business in digital signage coming from those channel partners as well.

And then finally, our Runco product line have been sold primarily through what I would call residential AV system integrator. People that typically did installation of systems in homes, home automation and home theaters and the like. And what we continue to sell our Runco products there, we found that channel has started to look at some new markets, because the home market frankly hasn’t been all that vibrant for them.

And so they start to look at commercial applications as some of their opportunities and so we are selling interesting amount of our digital signage products through them as well and I would sometime this fiscal year, we’ll probably begin to see the amount of products that channel is selling being more of our Planar products than our Runco products.

And so we’ve been able to take advantage of that channel partner set and their relationships with us, and their desire to move into commercial spaces and leverage our relationships there. So it’s all through resellers of different types and different capabilities and they come in all kinds of shapes and sizes. Digital signage has really broaden the number of people that are involved in this versus a control rooms which took a fairly large organization and capability set.

For digital signage people can get into that business a little easier. So we’ve to broaden our reseller base.

Jeff M. Martin – ROTH Capital Partners LLC

Okay, and then. Frank, can you expand on some of the – contribution factors to the higher gross margin in the quarter, and what’s your outlook is for the remainder of the year in terms of gross margin?

Ryan Gray

Yes, sure. Gerry mentioned we are getting a little bit higher profit contribution from the digital signage products that’s coming one in the form of scales we continue to grow that product set. We’ve been able to get a little bit better pricing in some of the materials as we get some volume there.

And two, as we have some good differentiation in that product line in the form of our UltraRes and UltraLux. Those tend to higher little bit more or offer a little bit higher opportunity for some profit there relative to some of the more economical pieces of that line like the simplicity series of the PSone.

So we’ve seen some good expansion there, and we’ve seen somewhat of a mix change and more of our sales coming from the digital signage and how to think we ended up with over 24% total gross profit in Q1. I think we’d expect something around that level for the full fiscal year probably around 23.5% to 24.5% depending up on exactly how the mixed looks.

Jeff M. Martin – ROTH Capital Partners LLC

Okay, that’s helpful. Thanks for taking my questions, guys.

Ryan Gray

Very thanks Jeff.

Operator

It looks like there are no more questions in queue. (Operator Instructions) Our next question comes from Brad Mas with Needham & Co.

Brad Mas – Needham & Co.

Hey, guys this is Brad filling in for Jim.

Gerald K. Perkel

Hey, Brad.

Brad Mas – Needham & Co.

Just a quick question, I was wondering if you could give any visibility into just high level into the commercial and industrial going forward within the various product lines?

Gerald K. Perkel

Well, on the custom part of our business we are expecting to see growth this year as we talked about in previous calls, we had a very large design win that went into production in the latter part of last fiscal year, and that business continues to be reasonably vibrant than we expect to have a full year of it versus only a partial year this last year, and continuing to serve a number of other of our OEM customers and so that business seems to be fairly stable in a little bit of an up trend in this particular fiscal year.

In the desktop monitor business that business tends to bounce around a little bit depending up on the particular skews that have been launched and particular trends obviously the macro trend there is that’s underlying that business is the sales of PC that’s obviously not a strong situation right now as PCs declined last year.

And with the advent of tablets and All-in-Ones, et cetera standard, either desktop PCs or laptop PCs are not doing nearly as well in combination versus the past time. So I think there is some macro pressure there, but we see that business kind of in the stable to slightly down kind of area.

On the touch monitor area, that’s a little bit more of a challenging market right now as tablets have a more direct impact on that as do some of the All-in-One. And, so we’re at this point seeing that touch monitors are likely to be down for the year somewhat, but once again kind of depends on quarter-to-quarter and if there’s large opportunities that we end up capturing.

On the cubes area, I think we’ll see again some decline this year as the macro levels there are working against the technology replacement that’s coming in the form of tiled LCD walls and other types of technologies, making it tougher and tougher for cubes and we’re seeing more and more customers choose other video wall solutions over cubes in many application areas.

And then, in the home theater and wall area we’re continuing to see some decline there. We’re putting less emphasis on that market space than others. But as I mentioned earlier, we’re seeing the customers that we service there begin to grow nicely on our commercial product line. So I think we’re looking for C&I to probably contract a little bit, our product lines with growth and custom offset with some flat to declining revenues in the other categories.

Brad Mas – Needham & Co.

Awesome. Thank you very much.

Gerald K. Perkel

Sure.

Operator

Our next question comes from [indiscernible] Group.

Unidentified Analyst

Hey, Gerry, Ryan. How are you guys doing?

Gerald K. Perkel

Good. How are you, Derrick?

Unidentified Analyst

Good. Thanks. Congratulations on a good quarter. Looks like things are moving quite well. My question is more in terms of – clearly there is a part of your business that is very commoditized as far as pricing goes and then we’ve got this growing margin area, which is the digital signage and that’s what everybody’s, and I know you guys are excited about. I’m just curious. It seems to me from the outside looking in that you’ve got part in niche going there and so with things like the Mosaic and the Matrix to where you guys really comment and customize, what does the competitive landscape in that area look like right now as far as doing what you do?

Gerald K. Perkel

Well, in the Matrix product line where people are doing video walls of the rectangular types, shapes, et cetera we do have a number of competitors, the largest of which are large Asian suppliers such as NEC and Samsung and a little bit LG. And basically the difference there is we’re offering a system solution with some really differentiated features versus a component solution that they offer where basically you’re on a 3x3 wall. Here’s nine monitors, here’s nine months go at it and figure out how to put it all together as a video wall whereas ours comes complete with the mount and a system that mounts this is in a much closer profile to the wall, takes improved reliability by taking electronics and things off the wall, et cetera, et cetera.

So what we find there is that we’re offering a product set that has got more value for a little bit higher price and when we can get in and tell that story we find that we have a pretty good success rate in capturing opportunities. Our challenges were up against, compete with some pretty big brand presence and so we’re constantly fighting to get more ad back and get it back early enough in the sales cycle to be able to get our story told and for people to understand the value of what we provide.

So there we have a product that is, at the end of the day does some similar things, but with some better features and we charge higher price for it. We talked about something most vague. That’s another step removed from that and really nobody really has a solution quite like what we have to offer. And so, we’ve done the work to allow people to assemble a well or video that is not contiguous and not rectangular and can be kind of any arbitrary shape or pattern that people would like to have and a very simply put content on that wall without having to spend thousands and thousands of dollars creating content that’s aimed at a wall that is not connected or is not rectangular in its configuration.

And so, you could go, configure a wall, like that with other people’s products, but you have to spend lots of money on a continuous basis creating content, figuring how to calculate, what parts of the image you go on, which display and our product does that automatically for people. So that’s a very differentiated solution, but that’s kind of a product set that’s really in its infancy as architects and designers are just now understanding that video can be something other than a black rectangle in their designs. And so, as you get more and more exposure to that people begin to appreciate what they can do it, do within and we’re seeing more and more people interested in deploying solutions like that.

Unidentified Analyst

That really helps. Thanks a lot.

Gerald K. Perkel

You’re welcome.

Operator

It looks like there are no further questions.

Gerald K. Perkel

Okay. Well, thank you very much for joining us. We appreciate it and we’ll talk to you again in a few months.

Operator

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

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