Planar Systems' (PLNR) CEO Gerry Perkel On Q3 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Planar Systems, (PLNR)

Planar Systems, Inc. (NASDAQ:PLNR)

Q3 2014 Earnings Conference Call

July 31, 2014 17:00 ET

Executives

Gerry Perkel - President, CEO

Ryan Gray - CFO, VP, Finance

Analysts

Jeff Martin - ROTH Capital Partners

Brad Mas - Needham & Company

Operator

Good day, ladies and gentlemen and welcome to the Q3 2014 Planar Systems Earnings Conference Call. My name is Clinton. I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

Gerry Perkel

Good afternoon and thank you for joining us for Planar's third quarter earnings conference call. With me this afternoon is Ryan Gray, Planar's Chief Financial Officer.

Before I begin, I first need to say today's conference call will include forward-looking statements. On this 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 such statements to reflect the events or circumstances occurring after today.

Now, that said. Let's move on to our results for the quarter. We were very pleased with our results in terms of both revenue and bottom line performance. Overall, revenue came in at $43.9 million, which represents 17% growth over Q3 a year ago. Revenue from digital signage products which represents our primary strategic focus area came in very strong at $21.4 million and grew 53% over last year's Q3 as well as 13% sequentially.

We also experienced strong orders during the quarter and we are able to convert those to sales. Our tiled LCD video wall products had another great quarter with revenues of $15.7 million which represents 65% growth over Q3 of FY'13. As you may recall, we began shipping our new G2 architecture for our Matrix products in fiscal Q2 and this quarter we saw strong demand for this new advanced product.

We have also been seeing an increase in demand for our Mosaic product, a solution aimed at enabling more architecturally oriented designs for video walls. In addition to our video wall solutions quarterly revenue from our signage monitor products came in at $5.7 million, which was 27% higher than the year ago quarter.

We continue to see opportunities for growth in our digital signage product revenues and at the InfoComm Trade Show in June; we launched a number of new products in pursuit of the opportunities we see in the market.

Over the past year, we have seen growing demand for 4K solutions and a little over a year ago, we launched our first 4K offering with our UltraRes 84, an 84 inch 4K display with unique capabilities compared with others in the market.

At InfoComm, we introduced our new UltraRes 98, which is a 98 inch 4K monitor for the same market leading integrated hardware and software as we have in our UltraRes 84. We expect the UltraRes 84 or 98 to generate additional growth opportunities for us in FY'15 and we expect to begin deliveries near the end of our current fiscal year.

We also recently launched three other 4K products including a 28 inch, a 58 inch and 65 inch display. This broadening of our 4K line up aligns well with the growing market demand for 4K. Altogether, it was a strong quarter for our digital signage product portfolio. We experienced strong growth, we saw strong sales funnel activity and we launched a number of new products to support future growth.

Next our commercial and industrial products delivered $22.5 million of revenue which represents a 4% decline over a year ago but a 2% increase sequentially. Within this category, we saw strong performance in our custom product line which grew 27% compared to the year ago quarter, and in our Rear Projection Cubes product line realized 29% growth.

There was also 1% growth in our desktop monitor product line over the same periods. However, the growth in these three product lines was offset by 37% decline in touch monitors and a 44% decline in our high-end home product line.

The overall strong performance at the top line helped drive improvement in our business model. As we have been saying for some time growth in digital signage sales will help improve gross profit and it did this quarter as our gross profits were up significantly over a year ago. Linked to that gross profit expansion, we saw our profits increase as well and we delivered $0.05 non-GAAP earnings per share performance compared with a $0.03 EPS loss in the year ago quarter.

In all, it was a strong quarter performance wise for Planar arm, healthy order performance translated into stronger revenue which was spurred on by the 53% growth in digital signage revenue. We also saw our business model continue to strengthen as it produced the results we anticipated on both the top and bottom line and this reflected in a strong growth of our digital signage product sales. We also launched a number of new products to give us more opportunity to drive growth as we move forward.

The strong orders during the quarter, along with the robust sales funnel activity positions us to deliver an even better fiscal Q4.

Now, let me turn it over to Ryan for some more detail on our financial performance and our revised outlook for Q4 and the full year. Ryan?

Ryan Gray

Thanks Gerry. Let me start with our income statement for the quarter. As we reported earlier today in the third quarter of fiscal 2014, we earned GAAP net income of $0.03 per share and on a non-GAAP basis $0.05 per share.

Consistent with prior quarters, our non-GAAP results excluded non-cash GAAP items such as intangibles amortization expense, foreign exchange gains or losses resulting from foreign based translation of U.S. denominated assets, share based compensation expense, some tax items and other non-recurring charges such as restructuring and impairment and gains or losses associated with the sale of assets.

For more detail on these items, reconciliation to GAAP terms is included in the supplementary tables within our press release. Focusing further on our non-GAAP results, in the third quarter of fiscal 2014, our gross profit as a percentage of sales was 24.4% which was up from 21.7% in the third quarter of fiscal 2013.

The improvement in gross profit rate is the result of both the higher concentration of higher margin digital signage product sales relative to lower margin commercial and industrial products as well as higher gross profit rates on sales of digital signage products compared to the year ago quarter.

We continue to believe there is an opportunity to expand our gross profit rate as our mix of business shift towards higher margin digital signage products and as we leverage our overall cost structure with increased revenue.

Non-GAAP operating expenses for the third quarter of 2014 were $9.6 million up from $9.0 million a year ago. The increase was primarily driven by higher sales and marketing spending as well as we continued to expand our overall customer base and develop more sales opportunities.

Our non-GAAP effective tax rate was approximately 10% in the third quarter of fiscal 2014 and largely consists of fixed tax items as most of our income was offset by NOLs. As a reminder, we have approximately $45 million of utilized gross NOLs in the U.S. at the end of the third quarter of fiscal 2014.

Turning to our balance sheet, cash decreased approximately $1.5 million to $11.5 million as compared to the end of the previous fiscal quarter. The primary drivers of working capital remain flat with the previous quarter as reductions in inventory which improved overall inventory turns to 5.1 and a small increase in accounts payable were roughly offset by an increase in accounts receivable.

Cash declined in the quarter primarily as a result of payments made to a third party for certain components related to the EL business for which the buyer of the EL business, Beneq Products Oy, has agreed to repay over time.

Looking forward, we currently expect to see continued strong revenue for digital signage and custom C&I products in the fourth fiscal quarter of 2014. Therefore we anticipate revenue in the range of $48 million to $50 million and non-GAAP income per share of $0.08 to $0.10. In line with this expectation we have raised our estimates for the full fiscal year of 2014, and we currently expect revenue in the range of $173.4 million to $175.4 million and non-GAAP income per share of $0.21 to $0.23.

In terms of some additional forward-looking estimates, we expect average shares outstanding will be approximately $21.7 million for the fourth quarter of 2014. We also expect CapEx in the range of $100,000 to $200,000 and depreciation to be around $500,000.

Now, with that I will turn it back over to you Gerry.

Gerry Perkel

Thank you, Ryan.

Our strategy remains unchanged; we will build shareholder value by continuing our goal to grow as aggressively as possible via sales of digital signage products. We remain focused on creating innovative products and building an increasingly more capable sales and marketing force to take these products to market.

Our strategy is demonstrating clear success with our digital signage product revenue growing 42% last year and 34% year-to-date. Along with this growth, our company has become more profitable and we expect our business model to improve further as we see the profit potential in our digital signage products to be greater than our commercial and industrial product lines.

Our performance in fiscal Q3 has enabled us to increase our expectations for revenue and earnings per share for the year and we see the possibility of more growth and profit improvement in the years to come with our digital signage products.

Now, with that I would like to turn it back over to the operator to being the question-and-answer session. Operator, can you come on?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jeff Martin of ROTH Capital Partners. Please proceed.

Jeff Martin - ROTH Capital Partners

Hi, Gerry. Hi, Ryan. How are you doing?

Gerry Perkel

Good, Jeff. How are you?

Jeff Martin - ROTH Capital Partners

I'm doing well. Thank you. Congratulations on a nice quarter.

Gerry Perkel

Thank you very much.

Ryan Gray

Thank you.

Jeff Martin - ROTH Capital Partners

Gerry, could you give us a sense of what the mix will look like in Q4 just ballpark of digital signage versus custom and industrial?

Gerry Perkel

Yes, versus commercial and industrial, we have seen I think the last couple of quarters, there has been a little less than 50% digital signage. And I think we see the same in this coming quarter as well. I don't know the exact percentage, but I think we have been seeing something like 46% something like that 47% digital signage products and something along those lines is probably similar coming into this quarter as well.

Jeff Martin - ROTH Capital Partners

Okay. So that would imply your commercial and industrial is going to grow year-over-year and so what's driving that?

Gerry Perkel

It's going to grow sequentially, and year-over-year, it will be close – I don't know exactly if it will grow or not. Where we are seeing some improvement is on the custom product side, we'll most likely see some growth there. But, in total, I don't know that I would see a lot of growth in year-on-year, I think we will see more of the growth on the digital signage side.

A year ago that ratio was quite a bit higher on commercial and industrial than it has been over the last couple of quarters. So a year ago was probably more like, I don't know between 30% and 35% digital signage products now to be more like 45%, 46%, 47%.

Jeff Martin - ROTH Capital Partners

Right. I should have looked more closely to $28 million in C&I in the fourth quarter last year that was…

Gerry Perkel

That would be a tough number to get to this quarter.

Jeff Martin - ROTH Capital Partners

Much higher quarter than you have been trending recently, right? Okay.

Gerry Perkel

But I think it is important, we do expect to see some sequential growth in both categories, digital signage products and commercial and industrial, based on some of this strength in custom, we are seeing some – a little bit of strength in the desktop monitor product line as well. So…

Jeff Martin - ROTH Capital Partners

Okay. And then now that digital signage has become 50% on the business and probably becomes more than that in the future, is there a seasonality impact we should start to factor in to the model for digital signage?

Gerry Perkel

Well, this year if you look at our results so far plus the guidance we have provided, it shows kind of a stronger performance in the first and fourth quarters and a little lower performance in the second and third quarters. Historically, we have seen Q2, our fiscal Q2, calendar Q1 be the lighter quarter and I think as we look into this next year, we continue to see that still being the potentially softest quarter and I think we would have again expect next year Q1 and Q4 to be the two strongest quarters.

So I think in general, we are going to see calendars Q3 and Q4 be our strongest in a sense calendar wise the first half of the calendar year being less strong than the second half of the calendar year.

Jeff Martin - ROTH Capital Partners

Okay, great. And then on the third party payment relating to EL, what was the dollar amount on that and over what timeframe do you expect to recapture that?

Ryan Gray

Hey, Jeff. This is Ryan. So the total amount plus the little over $3 million and given the terms of some of that we can't get really into specifics, there is some confidentiality in the agreement. So I can't really get into it all of the timing of it. But, it's paid out over time and its $3.3 million I think is the exact figure of addition.

Jeff Martin - ROTH Capital Partners

Okay. And then what the business doing – putting up nice profitability now, are you planning on increasing any sales and marketing programs investing in headcount, anything on those lines we should factor in?

Gerry Perkel

As we move into our new fiscal year, we will likely continue to grow the selling and – bit of the marketing expense line. We will be bringing on more sales people more territories, we believe particularly in North America there is still a lot of opportunities for us to go access, if we can continue to grow the relationships with our resellers and with the end users that use our products. So will be expanding our selling team some and continuing to invest in demand generation.

In addition, we will continue to broaden the product portfolio, I don't think we will see R&D expenses go up that much maybe just a little bit. But, the bulk of change as we look forward to see in the next year is mostly in the sales and marketing line.

Jeff Martin - ROTH Capital Partners

Okay. And then could you touch on – next question on your resellers and your partner network. Could you give us an update on your ability to grow there, and are you starting to see any specific concentration with certain barge of partners?

Gerry Perkel

For digital signage products I would say that the universe of people that we sell to is quite broad and there is not a lot of concentration there. I don't know the exact number but I can tell you we did – we are doing business this year with hundreds and hundreds of resellers there. And we are adding a fair number of resellers as well; I don't know the exact number for the year. But, I'm going to guess, we probably going to add 150 resellers or something like that this year on top of 150 or 200 that we added last year.

So there is a lot of new folks coming in and however, we also have opportunity to get more business from some of the ones we deal with today and have dealt with for some time. So it's a combination, our selling efforts are combination of trying to getting more penetration into the resellers we are getting a larger share of wallet there. And at the same time continuing to expand to ensure that we are covering the basis of the folks that are selling these kinds of products and so it's a two-pronged approach there and that's been working for us fairly well so far.

So I think there is still a fair amount of opportunity to be had there by continuing to penetrate the reseller base.

Jeff Martin - ROTH Capital Partners

Okay. And then could you give us a sense Gerry on, when resellers are selling your product, how – what's their primary differentiation or using Planar as a customization, is it price, is it other factors?

Gerry Perkel

You mean, why did they chose us or versus how do they sell it?

Jeff Martin - ROTH Capital Partners

Well, how do they stack you up relative to some of the larger Asian offerings out there and what do you think your advantages with them?

Gerry Perkel

Let me talk about Matrix for a moment since it's the largest portion of this in our tiled LCD line. The products are very different than what the large Asian manufacturers supply. Typically the Asian manufacturers are providing a monitor and if you want to build a wall of Amigo, you buy a bunch of them and bunch of mountain, you kind of on your own to kind of put this into the form of a system whereas we designed the product as a system.

So as a result, it's easier to install and thus the reseller can make more money on the installation because it doesn't take them as long or he pass that on as lower cost to the end user paying he chooses to market that. It's the alignment of the products is better, the reliability of the products is better so there is higher customer satisfaction, less service issues et cetera things like that.

And then the customer is buying into those advantages and like I said sometime those are if it's easier to install it's marketed as a lower cost or sometimes it's selected that by the reseller because he knows he can make a little more money. He might mark down the product a little bit more.

So in general, it's a selling process that includes trying to sell more value for a little bit higher price.

Jeff Martin - ROTH Capital Partners

Okay. And then, I recognize you not in a place where you are giving 2015 guidance to this point, but what kind of growth rate do you think is or growth range is reasonable for next year, just for those us who are obligated to model it out?

Gerry Perkel

We are still in the – we are in midst of putting some final touches on our FY'15 operating plan and reviewing those with our Board et cetera. But, I would say that the game plan looks much the same. We are going to be looking to grow the digital signage products pretty aggressively. I don't know what the exact number of B, but I think we are looking to try to get in the north of 20% area as we get a little bigger, growth rate; it's a little harder to maintain. And we will see some decline in certain parts of the commercial and industrial business. Although, some of the parts that have been declining like Runco fairly small at this point such that a little decline is not all that much impact from a dollar standpoint.

So you are right, I'm not going to give you specific guidance numbers until we are in a position in and ready to do so but we wouldn't expect to see a similar kind of picture with digital signage products growing. And as those digital signage products grow and become a bigger percentage of the total, we would expect the business model to improve. So we would expect to see gross margins rise a little bit as we move forward as we have seen this year as we have continued to grow that portion of the business.

Jeff Martin - ROTH Capital Partners

Okay, great. Good luck and keep it up.

Gerry Perkel

Thank you.

Ryan Gray

Thank you, Jeff.

Operator

Thank you. The next question comes from the line of (indiscernible). Please proceed.

Unidentified Analyst

Hi, guys. Would you attribute any of your digital signage growth to gaining market share, is it primarily a reflection of overall growth in the market?

Gerry Perkel

I don't think the market is growing 53% in this last quarter. So I do think we have taken some share. I think we have done a real nice job on the 4K front. And I think we continue to do a real nice job on the video wall front. So I do think we are taking a little bit of share. It's a little hard to get specific exact market estimates that seem to make sense. But, from what our sense would be is, I think we are taking some share.

Unidentified Analyst

And what percentage of your business today is 4K?

Gerry Perkel

That's a good question. I don't have that right off the top of my head. But, I would guess for the fiscal year it's probably going to be in the $8 million to $10 million or something like that, 4K monitors. You have to remember however, whenever we ship a video wall, if it's a 2x2 video wall that video wall is 4K. So when you say 4K, sometimes people do that in the form of video wall versus sometimes they do in the form of single standalone displays.

Unidentified Analyst

Okay. I understand that. And sort of in the commercial and industrial product lines, I saw that Rear Projection sort of came in up 29% I think and I was sort of thinking about space is declining, so I'm wondering if that was something particularly happened in that space in the quarter or what we should be thinking over the years?

Gerry Perkel

Well, I think this is an area where we continue to see some descent demand and I think at the end of the year you look to cross the quarters, you probably wouldn't see the different quarters be that different. I think the growth percentage number is probably more attributable to a pretty soft quarter a year ago then it was to a particular strength this year. So if you look sequentially, it was up a few points, few hundred thousand dollars, but year-on-year was up more just because Q3 a year ago was pretty soft.

So we see that business relatively stable yet, the market indications are declining particularly in the U.S., I would say in Western Europe. But we continue to participate there and it's still a lot of customers that chose that technology as a preferred solution.

Unidentified Analyst

Okay. Great. Thank you.

Gerry Perkel

All right.

Operator

The next question comes from the line of Brad Mas of Needham & Company. Please proceed.

Brad Mas - Needham & Company

Hey, guys. First question, I was wondering if I can get the number again on the tiled LCD video wall.

Ryan Gray

It's $15.7 million.

Brad Mas - Needham & Company

Great. And then just the strength in digital signage just wondering if you guys have any goals or range or where you guys think gross margins can potential get to?

Gerry Perkel

Well, I think we see – currently we are seeing gross margin about 24% and that's the combination of the two buckets and I say it's kind of high 20s on the digital signage and lower 20s on the commercial and industrial. So as we get more and more business on digital signage, I think we can start looking for things to be edging up into potentially in the high 20s. It will take a while for the whole portfolio to be that strongly digital signage products to get there.

It's also important to understand that within commercial and industrial, we got a quite a range of different margin types, obviously, desktop monitors being the lower margin of that and probably custom and maybe cube is being on the higher margin side of that portfolio. So kind of depends on the moving parts there. But, to answer your question, I think higher 20s is probably what we see today in the digital signage, so we still got several points to be able to move over the coming years. And that's at the current revenue level and I would say as we continue to drive more revenue, we are going to get more absorption of our fixed expenses and that offers us some more opportunity as well.

Brad Mas - Needham & Company

Okay. And then wondering if you can talk about the earlier sponsor seeing from the new 4K displays come out in InfoComm Trade Show?

Gerry Perkel

We had tremendous interest in the 98 people wanted faster than we can get it built probably. We are going to like – I think our current goal is to ship a couple of units in September and then get more volume going in October in our first fiscal quarter. So a lot of interest there continued strong interest in the 84 coming out of the trade show as well. And the 58 and 55 are kind of newer models, and people are just starting to evaluate them. And but, in our space 4K is a very interesting opportunity. There is a lot of discussion in the market about what's going on with 4K and television is there, material and content there. In our world that's not really an issue because most of our displays are driven by computers, many of which have the ability to drive 4K and there is plenty of data and content available to drive them. So it's a little different – it's not really necessarily limited by that, there is a plenty of content there.

And so I think as people start to get their hands on and see these things particularly on the larger sizes, they are going to be very interested. Because if you look at a larger sizes like 80 and 90 inches, if you have only full HD, the pixels will get a little big and you start to not get quite the image quality you would like particularly if you are interacting with them close up. And a lot of the demand we are getting for our 4K solutions for 84 and I think over time probably for the 98. People are looking at touch applications and so they are up close viewing the data.

Brad Mas - Needham & Company

Awesome. And then just last one from me, just any kind of stabilization in the legacy display business?

Gerry Perkel

When you legacy display, what are you referring to? Are you talking about desktop monitor or the whole commercial and industrial or we are not quite taken by legacy?

Brad Mas - Needham & Company

Yes, talking more about desktop monitors.

Gerry Perkel

Okay. Desktop monitors seem to be stabilizing a bit. I think we saw pretty big PCs suffered last year. There is a reduction in – we saw a lot of growth for tablets et cetera. And our business is tied more to PC sales, I would say. And so we've seen the PC market be a little more stable this year and as a result, I think we are starting to see the desktop monitor business be a little more stable.

In our custom side of our commercial and industrial, we are seeing a little improvement as some of our current customers are seeing some better volumes than what we have seen in past. So the price that we have seen a little bit of rocky roads been on the touch monitor side, there tablets are seemingly making a little more inroad against touch monitors in places like restaurants, for point-of-sale applications and things like that. And so there I think it's going to continue to be a bit challenging, the desktop monitor seems to be stabilized a bit.

Brad Mas - Needham & Company

Great. Thanks guys.

Operator

Thank you. At the momentum we have no more questions in the queue. (Operator Instructions) We have no questions in the queue. And now, I would like to hand the call back to Gerry for closing remarks.

Gerry Perkel

Well, thank you very much for joining us. We had a great quarter. And we look forward to talking to you in a few months when we delivered an even better quarter in Q4. Thanks very much.

Operator

Thanks for joining today's conference. This concludes the presentation. And you may now disconnect. Good day.

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Planar Systems (NASDAQ:PLNR): FQ3 EPS of $0.05 beats by $0.03. Revenue of $43.85M (+17.0% Y/Y) beats by $1.05M. Shares +9.6% AH.