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Planar Systems, Inc. (NASDAQ:PLNR)

F3Q10 (Qtr End 06/25/10) Earnings Call

July 29, 2010 5:00 p.m. ET

Executives

Gerry Perkel - President & CEO

Scott Hildebrandt - CFO

Operator

Good day ladies and gentlemen and welcome to the Q3, 2010 Planar Systems Earnings Conference Call. My name is Christopher, and I will be your operator for today. At this time all lines are in a listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions).

I'd now like to turn the conference over to Mr. Gerry Perkel, President and CEO. Please proceed, sir.

Gerry Perkel

Good afternoon and thank you for joining you 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 other 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 such statements to reflect events or circumstances occurring after today.

With that behind us let me say that we are very pleased with the third quarter performance we were able to exceed our expectations of both at the top line, and we are profitable for the quarter in a non-GAAP basis. Based on that improved performance, we were also able to end the quarter with a stronger cash position than we had anticipated.

Total company sales for the third quarter were $444.7 million, which represents 13% sequential growth and 1% year-on-year growth. Sales growth was due to nice sequential and year-on-year in our customer and embedded product lines as well s our IT product lines. In addition, based on more volume than expected in a relatively product mix, gross margins came in stronger than expected at just under 28% of sales for the quarter. We also were able to manage our expenses to be down slightly on a sequential basis while we're continuing to selectively and carefully make expenditures to capitalize and opportunities for growth, we've taken other actions to reduce expenses to help fund those growth areas.

Now let me briefly talk about our various product lines. During the quarter, we experienced nice improvement in our customer embedded product lines. Sales were strong in the quarter as the third quarter represents a better seasonal sales period for us. And as additional installations of a couple of ongoing retail custom signage products continue.

We continue to see opportunity for additional sales related to these specific designs, design wins and also to capture other design wins resulting in future sales for our custom and embedded products. In our IT product lines, sales were also strong in the quarter both for touch products as well as our desktop monitors. We've been adding resources as we can afford to improve both our touch product line and go-to-market capabilities with the goal to grow our touch revenues moving forward.

Our high end product, our high end home product lines continue to struggle somewhat as the housing market has not begun to recover, and spending in this category is relatively soft. We're experiencing success with the LED projectors for which installations are growing. Unfortunately, the flat portion of our high end product line has declined as additional competitive offerings have made this category challenging.

We have new products under development and they are improving both our projector revenues and our flat panel revenues. Our video wall product lines were mixed. While we did see sequential growth from our seasonally soft fiscal Q2 in this lines, our sales levels were down from a year ago, where projection cube revenues were down from a year ago as the market has been impacted in part by the substitution of thin bezel LCD solutions.

In addition, the market is going to a fairly rapid transition from lamp-based cube products to cubes with LED-based light sources. Some of our competitors release their LED version sooner than we did which has impacted our revenue somewhat as well.

As we move through the fourth quarter, we will have all of our new LED version shipping which should offer us opportunity to recapture share and grow this product line our new metric super narrow basal LCD video wall product that we began shipping in the first quarter of this year continues to creates new opportunities for video wall installations in new markets such as indoor digital signage.

Incremental revenue from this new product offering has offset to some degree the decline in your projection of cube sales. In summary, we are pleased with the sales growth return to non-GAAP profitability. In fact we were able to perform better than our expectations for the quarter.

With that let me turn the all over to Scott Hildebrandt to discuss our financial performance in more detail. Scott?

Scott Hildebrandt

Thanks Gerry. Let me start with the income statement, as you are aware we reported GAAP income per share of $0.01 and non-GAAP income per share of $0.03 earlier today for our third quarter of fiscal 2010.

Non-GAAP results exclude non-cash GAAP items such as intangible amortization expense, foreign exchange gain and losses resulting from foreign based translation of U.S. denominated assets. Share based compensation expense and some tax items.

A reconciliation of these items is included in the supplementary tables within our press release. Regarding our non-GAAP results gross margins increased by 4 percentage points sequentially but were down slightly compared to the third quarter of 2009.

The decrease in gross margin percent year-over-year was primarily due to an unfavorable product mix resulting from lower sales of higher margin rear-projection cubes. Non-GAAP operating expenses increased 1% in the third quarter of 2010 compared with the same quarter a year ago. As mentioned previously we have been pursuing a number of new initiatives driving expenditures and product development as well as sales and marketing in an attempt to drive future revenue growth.

Our non-GAAP effective tax rate was approximately 10% for the third quarter as we discussed previously for fiscal 2010 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 the balance sheet, cash was relatively flat sequentially at 32.3 million and we continue to have no borrowings outstanding on our existing line of credit.

Looking forward, while some of our end markets continue to be negatively impacted by the macro economy and industry wide product and technology transitions. We believe the relatively strong demand for customer signage and embedded displays will continue into the fourth fiscal quarter.

As a result we currently anticipate revenue in the range of 45 to $48 million in the fourth quarter of fiscal 2010 and non-GAAP income between $0.02 and $0.04 per share. Net cash should be in the range of 30 to $33 million at the end of the fiscal year.

Our fiscal year 2011 we expect to see growth in revenue and improved non-GAAP EPS compared to fiscal 2010 with a seasonal pattern of stronger financial performance in the second half of the fiscal year when compared to the first half.

Shifting to some additional forward looking information, average diluted shares outstanding should be approximately 19.6 million for the fourth quarter of 2010.

Also we are projecting capital expense of $600,000 and our $700,000 of deprecation expense in the fourth quarter. With that I will turn it back over to you Gerry.

Gerry Perkel

Thank you Scott, in summary we see both opportunity and some areas of concern for the company as we look forward. First, we see some of our end markets improving. We also see dynamics in certain markets and technology changes which create opportunity for us.

Markets such as custom digital signage continue to show nice growth potential. The market for custom touch displays continues to grow as well. Evolving technology trends such as 3D and LED light sources are also creating opportunity with 3D showing potential in the home market for not only new growth but also a possible replacement cycle.

In pursuit of these opportunities we have a number of new products scheduled to begin shipping this quarter and in our first quarter of 2011. Clearly these new products offer the opportunity for us to grow our revenues and we are focused on leveraging these launches.

We also continue to have opportunities to grow our revenues by further developing some of the design wins which we have captured in the past year as well as by capturing new design wins in the future. On the caution side of the coin we still see some customers being slow to commit to new projects and new installations.

We see cautious behavior in a variety of areas in our customer base as they look to digest the various economic factors facing them. This cautiousness could impact the pace of growth and create a challenging environment for our business.

Our response to the situation is to continue to make selective investments to pursue growth opportunities as aggressively as we can afford. We are looking for ways to increase our efforts in areas we believe we can grow but to do so in a way that fits inside the maintenance of our conservative balance sheet.

Simply put, our goal is to pursue growth as aggressively as we can without materially dissipating cash. This is a difficult balance to achieve given the challenges to predictability that currently exist in our markets. It is difficult to know how quickly new customers will ramp or how quickly customers will adopt new products.

Year-to-date, for fiscal 2010, our cash balance is up and based on our guidance Scott provided earlier, we should end the year somewhere around flat in cash for the year while having funded a number of actions to pursue growth. Given the uncertainty in the market we believe it is prudent to proceed in this way until we start seeing improved financial performance or unless we extraordinarily compelling opportunities.

So our plans are to continue to watch expenses, look for ways to grow, see if we can reduce expenses anywhere in the company to help pay for the growth initiatives and watch our customers and markets closely. Ultimately we believe our efforts can deliver some growth which is needed to drive improved profitability.

Let me summarize before opening the call to questions. First, we are pleased with our financial performance improvement in the second quarter to the third quarter and that we were able to achieve both sequential and year-over-year revenue growth.

We also see opportunities to continue that kind of performance into the fourth quarter. We have several new products shipping by the end of the calendar year that may offer opportunities to grow our revenues in fiscal 2011 over 2010.

How fast they will enable us to grow is difficult to predict given the volatility we see in our markets and customers at this point. We are working hard to balance our ability to grow with our affordability as we believe this is a prudent approach given the current circumstances.

Now let me open the call up to questions. Operator, can you come back on the line please?

Question-and-Answer Session

Operator

(Operator Instructions). At this time Mr. Perkel we have no questions in queue, sir.

Gerry Perkel

Let me just close the call by saying thank you for joining us. We're very happy with the progress we've made and we'll talk to you again next quarter. Thanks very much.

Operator

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

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