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Planar Systems, Inc. (NASDAQ:PLNR)

F1Q2011 Earnings Call Transcript

February 3, 2011 5:00 pm ET

Executives

Gerry Perkel - President and CEO

Scott Hildebrandt – CFO

Analysts

John Nelson - State of Wisconsin Investment Board

Keith Kelt - Kelt Group

Operator

Good day ladies and gentlemen and welcome to the first quarter 2011 Planar Systems earnings conference call. My name is Jonathan and I will be your operator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session after the beginning of remarks (Operator instructions). As a reminder this conference call is being recorded for replay purposes.

I'd now like to hand the call of to Mr. Gerry Perkel, President and CEO. Please precede, sir.

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 contain forward-looking statements. On this conference call, we will comment on our strategic business and financial outlook, 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 we are pleased with our financial results this quarter. Revenue came in near the high-end of our guidance range and non-GAAP earnings per share exceeded our expectations for the quarter. Total sales for the first quarter for fiscal 2011 decreased 3% compared with the same period a year ago. We experienced lower sales of high-end home products, as well as declines in sales and some end-of-life business projectors in network desktop monitors.

Offsetting those declines were some nice growth in higher margin touch monitor product lines which are used in point of sale and retail applications. We also experienced excellent growth in some of our digital signage products, especially LCD video walls which I will touch on a bit later. In our custom and embedded product line we experienced the seasonal soft quarter and a small decline from last year following the normal seasonal buying pattern of some of our key custom signage customers, and the timing of purchases related to their various rollouts.

We did continue to capture new design wins in the first quarter and believe we will exceed double digit sequential growth in the second quarter in this product area. In our IT product lines, the first quarter was approximately flat with last year. We have been increasing our focus on the higher margin touch monitor portion of this line of products and as I mentioned earlier we did see some nice group from touch monitors. We are continuing to see opportunities to grow our touch product sales as we look forward.

Our high-end home product lines decline from last year. In the first quarter a years ago we began shipping our new LED projectors including some demo shipments, which did not repeat this year causing some of the decline year-on-year. We have announced a few new products recently which we believe will help our shipments in this product area in the second half of the fiscal year.

Our video wall product lines experienced over $1 million in growth over the first quarter a year ago. Our matrix LCD video wall products showed strong growth both sequentially and year-over-year. In addition we have new versions of this LCD-based video wall beginning to ship in the near future, some of which were announced earlier this week and expect continued opportunities for nice growth in this product area in the future.

If you look at our business from our overall digital offering perspective, we saw good growth in our digital signage products in the first quarter. In total digital signage sales grew 13% over the first quarter year ago and accounted for 14% of our sales. We currently offer; both standard and custom products that are used in a variety of digital signage applications and has been and will continue to be an area of increased focus for us.

We are seeing a broad and growing set of customers, applications and environments for these products. Our indoor digital signage sales today include substantial installations in sports arenas, universities, museums, airports and a wide variety of retail sales locations. Our front look significant opportunities for both standard and custom digital signage products is growing and we expect to land new customers in the next several months.

In addition to the digital signage markets mentioned above, we have also launched products aimed at addressing opportunities for outdoor custom digital signage. We have a number of trials to these products underway currently including some product shipments. We're particularly focused on the quick serve restaurant or QSR market as we think we have some differentiated solutions that can help enable the adoption of digital signage in the transition from static signs to digital menu boards in the QSR outdoor drive-thru lanes.

We believe this can be a good opportunity for us as our historical expertises have been rugged, reliable, temperature torrent, and sunlight readable outdoor display is one of our core competencies. While the adoption rate is still somewhat unpredictable, we believe the opportunity to be a large one as over 75,000 QSR or drive-thru’s are in place in the US alone, we plan to pursue the QSR space aggressively.

In summary while we are pleased with the quarter we are more excited about what lies ahead for Planar. With that, let me turn the call over to Scott to discuss our financial performance in a bit more detail.

Scott Hildebrandt

Thanks Gerry, let me start with the income statement, as you are aware we have reported a gap loss per share of $0.07 and a non-GAAP loss per share of $0.01 earlier today for our first quarter of fiscal 2011. Non-GAAP results exclude non-cash GAAP items such as intangibles, amortization expense, foreign-exchange gains and losses resulting from foreign-based translation of US nominated 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 margin as a percent of sales increased to 28% compared to 23.2% in the first quarter of 2010. The increase in gross margin percent was primarily due to a more favorable product mix resulting from increased sales of higher margin digital signage displays and touch monitors, while sales of lower margin home and commercial displays decreased. In addition, lower overall spending related to labor and overhead in manufacturing operations contributed to the improvement in the gross margin rate.

Non-GAAP operating expenses for the first quarter of 2011 increased approximately $600,000 compared with the same period a year ago. Increases in expenses associated with research and development and sales and marketing were incurred to pursue various growth initiatives and were partially offset by lower spending in general and administrative areas as a direct result of our efforts to trim administrative overheads.

Our non-GAAP effective tax rate was approximately 37.5% for the first quarter of fiscal 2011. Consistent with previous quarters, we expect to have an effective tax rate of around 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 ended up approximately $200,000 to $31.9 million compared to the end of the last fiscal year. And we continue to have no borrowings outstanding on our existing line of credit. We had strong receivables performance in the first quarter with day sales outstanding of 43 days. This favorable cash impact was partially offset by an increase in inventory and advance of some new product launches which we expect to take place in the second quarter.

Regarding our business outlook, we currently anticipate revenue in the range of $43 million-$45 million in the second quarter of fiscal 2011, and which would represent an 11% year-over-year growth in the midpoint of the range and non-GAAP income between break-even and $0.02 per share. For fiscal 2011, we expect to see some continued seasonality to revenue with slightly more of the total annual revenue coming in the second half of the fiscal year. In addition for the full fiscal 2011, we currently expect to be profitable on a non-GAAP basis as well as generate positive EBITDA in each quarter during the fiscal year.

Shifting to some additional forward-looking information, we expect both R&D and G&A spending on a non-GAAP basis to remain similar - at similar levels to the first quarter for the remaining three quarters of fiscal 2011. Sales and marketing expense should increase a few hundred thousand dollars each quarter through the balance of the year. Also average diluted shares outstanding should be approximately $19.7 million for the second quarter of 2011 and finally we are projecting capital expense of $600,000 and $600,000 of depreciation expense in the second quarter of 2011. With that I will now turn it back to you Gerry.

Gerry Perkel

Thank you Scott, our goal looking forward is to drive revenue growth and with that revenue growth to derive improved gross profits and increased shareholder value. Key to our strategy is to focus more on our market that represent the best growth opportunities. As mentioned previously, we believe we can continue to deliver revenue increases in the digital signage market place.

We see opportunities for both standard products and custom products, as this market is experiencing growth on a number of fronts. To find the leverage our success of our matrix LCD video wall product line by adding new product increasing sales and marketing resources to focus on this and other digital signage product opportunities as they move forward. In summary, we are pleased with the first-quarter results and feel that we are well positioned to drive continued improvement into the second quarter of this year. Now let me open the call out to questions, Jonathan can you come back on the line please.

Question-and-Answer Session

Operator

(Operator instructions) your first question comes from the line of Mr. John Nelson with the State of Wisconsin Investment Board, please proceed sir.

John Nelson - State of Wisconsin Investment Board

Hi, good job on the quarter and I think the emphasis on the digital signage and the growth markets with the continued R&D spending makes a lot of sense. The question I want to ask to you though is what about the home display home theatre market. Do you have confidence that long-term, that the growth market or is there a reason to consider at some point in time exiting this market because it seems to have a lot of or it has had some significant ups and downs and I question myself is to whether it is - this is the long-term market that the company wants or needs to be in?

Scott Hildebrandt

Yes I think, thank you for the comment and the question - in the home market I think our view is that the overall macroeconomics that are holding back the housing market plays a significant role in what kind of growth we will see in the home market and so I believe there is probably going to be a slow recovery there and so until we start the see some growth in the housing market with new housing starts etc. that’s probably going to limit some of the opportunity.

However within the market even without the growth in housing there is some new things happening that do offer some potential for growth and probably the biggest being 3-D and we have announced our initial products for 3-D projection and that does hold some potential to grow as people who already have home theatres installed look to potentially add 3-D to their capability.

So I would say right now we are not expecting a lot of growth in that market, we have seen it stabilized it’s not - it declined during the massive economic that turbulence but it seems to have stabilized and we see some opportunities for some growth - some modest growth in that market as we move forward, but we will be governing our investment in that space in-line with the growth opportunity in other words will be limiting that in and tell if it is time that we do see growth and looking to try to make sure that what we are doing in that market is creating some value for us while we focus our incremental investments on higher growth opportunities.

John Nelson - State of Wisconsin Investment Board

Okay thank you. My other question is related to competition. Have you seen any in your areas of business – any of your areas of your business, anybody any significant new players come in or any significant players get knocked out by the last downturn?

Scott Hildebrandt

We have and I don’t think there has been, any particular competitors that we have seen get knocked out by the downturn obviously it took a toll on everybody in different ways depending upon their particular market focus etc. As far as new competitors, I can’t say that any of them really particularly jump out. In the digital signage world, what we do see is that it is a fairly new and evolving market so we see changes going on all of the time and so we are constantly keeping our eye out trying to sort out who might be coming there. But nobody in particular that’s a brand-new or is really fallen off the map. I think the competitive situation is fairly similar to what we seen over the last several years.

John Nelson - State of Wisconsin Investment Board

Okay thank you.

Operator

(Operator instructions) your next question comes from the line of John Hurris with Kelt Group, please proceed.

Keith Kelt - Kelt Group

Gerry this is Keith Kelt principal with the Kelt group. How are you guys?

Gerry Perkel

Great, how are you?

Keith Kelt - Kelt Group

Good, it has been couple of years since I have talked to you. Since I have remembered reading in a couple of your annuals - a couple of years back in which I was doing some research in hologram and I was just wondering in the retail market with the 3-D serial that you have as far as going into the retail market and using the signage or using the wall in every time if you’ll get the hologram can you imagine what will coming in and looking at the first shoes on a hologram and saying now can you show me that in different color? And how do you coming out on that portion of R&D?

Gerry Perkel

So I’m not sure where the hologram comes from as we have not really done any holographic stuff and so but we do a lot of work on 3-D. Kenny and it relates the retail applications in signage applications the primary issue is that frankly most of the good 3-D today requires glasses to view it and the 3-D that doesn’t require glasses is still in kind of a I would say development stages and doesn’t tend to generate high enough quality 3-D for most people’s taste.

Although this advance is being made every day. The step that we are working on today in ship today does require glasses although we have been doing a little of having some discussions in doing some analysis of some of the new 3-D technology that is coming out that - that may offer the potential for non-glasses of view of which when that does happen and offers the image quality people and then we do see some pre-interesting retail applications whether it will be sign on shoes and that sort of thing I don’t know but I do think we will see a lot of 3-D applications in retail where people try to grab the attention of sharper’s obviously. But it needs to be there so that they don’t have to arm their shoppers with glasses I think.

Keith Kelt - Kelt Group

Okay so there is nothing in the hologram R&D area (inaudible) right now?

Gerry Perkel

We’re not doing it in the hologram but there is a number of other technologies that do not require glasses that do offer 3-D, like I said is the – as that technology evolves I think we will start to see it deployed in the coming years.

Keith Kelt - Kelt Group

Okay. Thanks very much. That is my question.

Operator

(Operator instructions). With no further questions in queue, I would like to hand the call back over to Mr. Gerry Perkel for closing remarks.

Gerry Perkel

Well thank you very much for joining us on the call and we look forward to talking to you in a few months.

Scott Hildebrandt

Thanks very much. Bye.

Operator

Ladies and gentlemen thank you for your participation in today’s call. The presentation has ended, you may now disconnect. Have a good day.

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