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Planar Systems Inc. (NASDAQ:PLNR)

F2Q10 (Qtr End 03/26/10) Earnings Call

April 27, 2010 05:00 am ET


Gerry Perkel - President and CEO

Scott Hildebrandt - VP and CFO


Jim Ricchiuti - Needham & Company


Good day ladies and gentlemen and welcome to the Q2, 2010 Planar Systems earnings conference call. My name is Kaina and I will be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct the 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, you may proceed.

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 release we issue today contain forward-looking statements. On this conference, we will comment on our strategic business and financial outlook to make every 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 start of by saying that while it was good to see year-on-year revenue growth in the second quarter we’d actually expected the growth to be more robust. While we continue to see some signs that market conditions are improving, predicting the pace of that improvement is a challenge. However, we continue to work on developing new initiatives to grow our revenues as market conditions improve.

While, we experienced 9% sales growth in total, the results across our various product lines were somewhat mixed. We continue to see growth from our new matrix LCD video wall systems across a number of applications. This product which began shipping in the first quarter has enabled us to access and expand its set of video wall customers.

We also experienced improved demand for our custom digital signage products as well as touch capable displays. These areas of growth are partially offset by slower demand for projection cube as we believe cube sales are being negatively impacted by product technology transitions and overall market softness in the US and Europe where our operations are focused.

Additionally, while response to our new LED home theater projectors has been good. Overall, demand for high-end home solutions has continued to week and we believe is still being impacted by the macro economic slow down especially as it relates to housing construction.

As a result, we believe sales of high end home products will be slower to recover in some of our other end markets.

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

Thanks Gerry, let me start with the income statement. As you are aware, we reported a non-GAAP loss per share of $0.09 earlier today for the second quarter of 2010. Non-GAAP gross margins were 23.7% in the second quarter of 2010, down from the 25.4% in the second quarter of 2009. The decrease in gross margin per sale was primarily due to an unfavorable product mix, resulting from lower sales of higher margin, command and control room rear-projection cubes as well as lower estimates of existing inventory value as these products transition from lamp-based platforms to LED-based platforms.

Non-GAAP operating expenses increased 8% in the second quarter of 2010, compared with the same quarter a year ago. We have been investing in a number of new initiatives and product development as well as sales and marketing in an attempt to drive future revenue growth.

In addition, we expect total operating expenses to increase approximately $500,000 in the third quarter, compared to the second quarter, again to support specific initiatives targeting future revenue growth opportunities.

Our non-GAAP effective tax rate was approximately 37.5% in the second quarter of fiscal 2010. As we have discussed previously for fiscal 2010, we expect to have an effective rate of 10% and quarters where we have non-GAAP profit before tax and 37.5% in quarters where we have reported a loss.

Turning to our balance sheet, cash decreased $1.9 million sequentially to $32.4 million at the end of the second quarter; compared to the cash balance at the end of the first quarter and we continue to have no borrowings outstanding on our existing line of credit. Cash decrease during the quarter due to the operating loss incurred and the timing of working capital items.

Looking forward, as we have mentioned earlier we believe some of our end markets and demand for our product offerings are still being impacted negatively by a variety of factors. In addition to product transition issues associated with our rear projection cubes.

However, some products end markets, specifically digital signage, custom/embedded, and touch displays, are expected to grow in the second half compared to the previous year. We believe that these areas will grow based on improved market conditions and as a result of completed and forecasted expenditures which will put in place to position us to capitalize on opportunities in these markets.

As a result, we currently anticipate revenue in the range of $41 million to $43 million in the third quarter of fiscal 2010 and a Non-GAAP loss between $0.05 and $0.08 per share, with similar levels of revenue and loss expected for the fourth fiscal quarter. Also our net cash should be in the range of $26 million to $28 million at the end of the fiscal year.

Shifting to some additional forward looking information basic average shares outstanding should be approximately 19.1 million for the third quarter of 2010. Also we are projecting capital expense of $600,000 and $700,000 of depreciation in the third quarter.

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

Gerry Perkel

Thanks Scott. As we have mentioned during this call we do see signs of improved market conditions in some of our markets. While in other markets we serve, we expect the recovery in our sales levels to be a bit slower. As a result we are seeing positive results in some of our product lines, while in other product lines we are not currently meeting our expectations.

We have action plans in place to drive improvements in the underperforming product lines, for instance in our rear projection cube product line we have launched three new LED based models. These new offering which will begin shipping in our second half will improve our competitive position and we believe we’ll position us for revenue improvement in cubes in the future.

However, in this market the lead time installations is longer than in many of our markets, and as such the revenue improvements will likely be more visible as we move into next fiscal year.

In our custom and embedded product lines, we have seen nice growth, but have been expecting even better results as our design win portfolio continues to grow. Unfortunately several of those design wins have taken longer to materialize than we expected. We continue to win new customers and have added resources to an [able] list to evolve these design wins into production.

Predicting how fast these new wins will ramp is often challenging, as we need to evaluate not only our timeframe for product development but the acceptance ramp of our customers.

We except the resources applied to the [separate] to continue to add to our design win list and to see those wins move into production status. As I mentioned, we have seen nice growth in the custom/embedded product line, but there is opportunity for more revenue growth and margin expansion.

In addition to developing new cube models and adding resources to accelerate the growth in our customer and embedded product lines, we have identified a number of new initiatives which we believe can help us increase revenues overtime. Some of these are related to new innovative products we can develop and other initiatives are centered on increased expenditures in sales and marketing.

To drive up revenues other products we currently offer. Our challenge is to balance our need to increase revenues and our desire to do that is rapidly as possible. With the affordability of the initiatives given our current performance.

In summary, it was nice to see year-on-year growth return to the company this past quarter. However, we expect more. We are seeing good performance in some product lines and see opportunity to improve the line that have fallen short of our expectations. We have taken actions to improve those lines and expect them to improve overtime.

As Scott mentioned we do expect to see sequential growth, as we move into the third quarter. We have new products under development that we believe can be part of the growth story going forward. We also have developed a number of additional initiatives which we believe can drive revenue as well.

Finding the right mix of [persuasive] growth and improving the base business and evaluating the timing of opportunities balanced with our performance is our primary focus.

With that, I will now open up the conference call to questions. Operator, if you can come back on the line please.

Question-and-Answer Session


[Operator Instructions]. Our first question comes from the line of Jim Ricchiuti of Needham & Company. You may proceed.

Jim Ricchiuti - Needham & Company

Can you provide some break out of the revenues by for instance video and your IT revenues and home products?

Scott Hildebrandt

Sort of the 39.7 that we reported little bit above 14 million was in C&E. 10.5 in IT, 5.6 in high end home and 8.4 in video wall and there is a lit bit more there that we have from corporate revenue sources, but its less than a million Jim to add up to the 39.7.

Jim Ricchiuti - Needham & Company

Got it. Okay and Scott. So it sounds like you are saying your OpEx, non-GAAP OpEx is going to be up about $0.5 million in Q3.

Scott Hildebrandt

Right it was up about 700k in Q2 over Q1 and that will go up an additional 500k roughly when we look at Q3 and 4 versus Q2.

Jim Ricchiuti - Needham & Company

And is that going to be more in sales and marketing or is R&D. You expect R&D also to move up.

Scott Hildebrandt

It’s kind of equally between the two of them certainly no G&A increase, but yeah...

Jim Ricchiuti - Needham & Company

Now looking at the guidance you have given on earnings basis, it sounds like you are assuming your gross margins are going to move up in the second half of the year and is that mix related are you anticipating new products contributing in a bigger way which will only have some higher margins?

Gerry Perkel

Yeah Jim I do think we’ll see mix be a little bit improved and then also just as we see a little sequential growth, we’ll see better absorption from our operations group so. But a combination of mix and a little bit better absorption.

Jim Ricchiuti - Needham & Company

Which areas were you talked a little bit about the areas that’s were weak is there anything competitively or was it just you feel this more the economy and some folks not pulling the trigger on perhaps some of the designs wins that you had gathered earlier?

Gerry Perkel

Well in the C&E business no the design wins are moving forward its just how rapidly do we get them into production and how rapidly do our customers ramp the sale of the products that we are working with them since most of those are in an OEM environment and some of those have ramped a little more slowly or may be taken a little bit longer to get off the ground, but nobody is really backing away its just the speed at which we can get those going.

I think the bigger challenge for us is in the cube market place where we have seen our cube volume not be rear projection cubes volume not be as strong as we expected them to be and there are some technology transitions going on both within our product line and competitors’ product lines in the market place.

But we have seen some of those customers just slow down their projects and programs but by contrast we are seeing you know good opportunities fill our funnel. So a little bit of a mixed bag we see some positive things, but at the same time we are not seeing the sell through half and quite as quickly as we would expect.

Jim Ricchiuti - Needham & Company

You are making some investments in sales and marketing and R&D can you elaborate on where you are putting some of these resources in terms of the markets you are going after?

Gerry Perkel

Well I think that the sales and marketing is mostly around investing in places where we can think we can continue to sell more of the products we are already making, trying to drive more cube sales, trying to drive more digital signage sale etcetera. As we talked about R&D, it’s continuing to expand the line of high-end home projection, expanding the custom and embedded solution so there is pieces now that are kind of across the board basically looking at those opportunities that look like we can drive revenue and we’ll carry a gross profit with them in the strongest way as we move forward.


[Operator Instructions]. Our next question comes from the line of John (inaudible). You may proceed.

Unidentified Analyst

Yeah, just to piggyback on the last question, as far as the design wins, can you guys break that down? You just spoke kind of generically about that as far as what segments those are coming in?

Gerry Perkel

When we speak of design wins that’s really mostly related to our custom and embedded business where we create OEM relationships and get a design win, get our product designed in and then have them sell our products over a period of time. We don’t really refer the design wins so much in the other segments of our business. That’s mostly related to the custom and embedded

Unidentified Analyst

As far as revenue projections it looked a little bit like last quarter we talked about being breakeven to maybe slightly profitable towards the second half of this year. Is that just market conditions that changed that outlook a little bit?

Gerry Perkel

Yeah I think we are less bullish on the revenue side after what we have seen here in this most previous quarter and that being linked to some of the market conditions and how rapidly we can ramp revenues and so with little less bullish revenue for the second half that obviously flows through an impact of the P&L, so that’s what’s causing us to back off the P&L forecast for the second half.


With no further questions in the queue, I would now like to turn the conference back over to Mr. Gerry Perkel for final remarks.

Gerry Perkel

Thank you very much for joining us. We look forward to talking to you again in a few months. Thanks very much bye.


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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