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Planar Systems Inc. (NASDAQ:PLNR)

F3Q11 Earnings Call

August 11, 2011 5:00 p.m. ET

Executives

Gerry Perkel – President & CEO

Scott Hildebrandt – CFO

Analyst

Jeff Martin – Roth Capital Partners

Jim Ricchiuti – Needham & Company.

John Nelson – State of Wisconsin Investment Board

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Planar Systems Earnings Conference Call. My name is (Kisna), I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

Now I’d like to hand the conference 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 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 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 events or circumstances occurring after today.

With that behind us, let me say that while our overall revenue growth was a bit lower than we expected, I am pleased with the continued progress we have made in growing sales of our Digital Signage products.

Overall, revenue came in at $45.7 million, slightly below the low end of our guidance range and represented 2% growth when compared with the third quarter of 2010. However, sales of Digital Signage products increased 35% compared with the same period a year ago.

Sales of Digital Signage products were fueled by continued strong demand for our Matrix LCD Video Wall products, which more then tripled compared with the third quarter a year ago. Non-GAAP earnings per share also came in slightly below our guidance estimate finishing at a loss of $0.01.

Let me now talk a bit about the various product lines in our business. In our Custom and Embedded product line, the third quarter of fiscal 2011 was not a strong as we had expected, as we experience some softening of demand from some of our ongoing OEM customers as the quarter progressed.

Sales of our Custom and Embedded products for the third quarter were $13.2 million, which represented a decline of 17% compared with the third quarter last year. While we see some of the conditions continuing over the next few quarters, we do currently expect to see growth in our Custom and Embedded product line next fiscal year compared with this year.

We also saw a weaker then expected quarter in our Enterprise IT product line. As the quarter progressed, demand for desktop monitor softened and while we did experienced some modest growth in our touch monitor products, it was enough to make up for the slowdown in desktop monitors. We believe this slowdown occurred broadly across the entire industry in our reseller channels.

Enterprise IT sales were $11.4 million for the third quarter of fiscal 2011, down 17% from the year before quarter. Our outlook for the fourth quarter of fiscal 2011 indicates some significant improvement sequentially in this product area.

The Video Wall product line was a real star of this past quarter from a performance point of view. Sales for video wall products reached $14.9 million, which represents 60% growth over the third quarter of the last fiscal year, a particular strength was our Clarity Matrix LCD Video Wall product line as I mentioned earlier.

We are seeing broad adoption for this innovative product as customers in a wide variety of industries are looking at us for large format indoor video wall applications. We began shipping the 55-inch LCD panel version of this product in the third quarter and orders have been strong. As we look forward, we see video wall product sales as a strong source of growth for the company.

Sales for high-end home products totaled $6.5 million in the third quarter, which represent 21% growth over the third quarter last year. We began shipping our award winning Runco D-73d, 3D LED projector as well the Vistage Series of Runco plasma products. Many of these products were shift as demo units to our dealer partners to help drive end user demand looking forward.

In addition, we plan to launch some additional new products at the upcoming CEDIA trade show in September. End user demand for high-end home offerings are still being somewhat negatively impacted by the weak housing market.

In summary, driving growth in our Digital Signage offering is a key part of our strategy to achieve growth overall for Planar. With the growing momentum in this category, new products we are working on, and additional sales and marketing resources focused on this area, we expect solid growth will continue in fiscal 2012 for these products.

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 reported GAAP loss per share of $0.10 and a non-GAAP loss per share of a $0.01 earlier today, for our third quarter of fiscal 2011.

Non-GAAP results exclude non-cash GAAP items such as intangible, amortization expense, foreign exchange gains and losses resulting from foreign based translation of U.S. denominated assets, share-based compensation expense and some tax items. As a reminder, a reconciliation of these items is included in the supplementary tables within our press release.

Focusing in on our non-GAAP results, gross margins, as a percent of sales, increased to 28.1%. This compared to 27.8% reported in the third quarter fiscal 2010. The increase in gross margin percent was primarily due to a more favorable product mix, with an increase in sales of higher margin products including digital signage displays and rear projection cubes, as well as a decreasing sales of lower margin desktop monitors compared with a third quarter a year ago.

Non-GAAP operating expenses for the third quarter of fiscal 2011 increased approximately $1.1 million to $13.2 million compared with the same period a year ago, primarily driven by increased research and development and sales marketing expenses.

During the third quarter, we continued to add sales and marketing headcount fairly aggressively to expand our go-to-market capabilities concentrated in the digital signage areas. In addition, marketing program expenses increased during the quarter due to trade shows and some targeted spending to advance our selling efforts.

Our non-GAAP effective tax rate was approximately 37.5% for the third quarter of fiscal 2011. Consistent with previous quarters, we expect to have an effective tax rate of 10% in quarters where we have non-GAAP profit before tax, and 37.5% in quarters where we report a loss.

Turning to the balance sheet, cash declined approximately $4.2 million to $23.4 million compared with the end of last quarter, mostly due to an increase in inventory. As Gerry mentioned earlier, we saw weaker than expected demand for desktop monitors in the quarter, which caused some of the increase in inventory.

We currently expect most of this additional desktop monitor inventory to be sold within the next few quarters. Since the beginning of the fiscal year, inventory has increased $12.8 million. Some of that increase was due to desktop monitor situation I just mentioned, however, most is due to increasing inventory levels to help drive sales growth, particularly in digital signage and touch monitors, which have shorter lead-time expectations from customers.

Looking forward, we believe we can achieve revenue growth in excess of 10% in the next fiscal year, driven primarily by growth in sales of digital signage products. As previously discussed, we continue to add resources, mostly in sales and marketing and also expect to utilize additional working capital to pursue this growth opportunities.

Due to the timing of some customer projects, combined with near-term weaker demand for custom AMLCD products, we are expecting only a small increase in sales sequentially in the fourth quarter of fiscal 2011.

In addition, we plan to add resources in the fourth quarter to pursue growth opportunities in fiscal 2012 and beyond, resulting in increased operating expense. As such, we believe total operating expenses will increase to approximately $14 million in our fourth quarter of 2011.

In addition, we expect sales of desktop monitors to increase in the fourth quarter, causing a less favorable product mix and a lower overall gross margin percentage when compared with the third quarter of fiscal 2011.

As a result, we currently anticipate revenue in the range of $46 million to $48 million and non-GAAP loss between $0.06 and $0.08 per share in fourth quarter of 2011.

Shifting to some additional forward looking estimates, we believe average diluted shares outstanding will be approximately $19.8 million for the fourth quarter of 2011. And finally, we are projecting capital expense of $750,000 and $500,000 of depreciation expense in the fourth quarter of 2011.

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

Gerry Perkel

Thank you, Scott. As Scott mentioned, our goal is to deliver double digit growth next fiscal year. We see some exciting opportunities for our current digital signage products as well as new products we plan to launch in the future. We expect that the market for digital signage products will continue to grow at a strong rate and our goal is to expand the product portfolio we have to address this market.

We see numerous customer opportunities, which offer the potential to expand our digital signage business. Some are custom products and many are for standard products. We are in the process of adding sales and marketing resources to increase our market address and to further expand our customer opportunity funnel.

Many of these digital signage opportunity become roll-outs as companies look to deploy these products in many locations over time. Predicting the exact timing on these roll-out schedules can be difficult which can lead to some variability in the timing of revenue. However, our information suggests that the digital signage market growth is strong and we intend to be part of that growth picture.

So now, let me open up it for any questions. Operator, can you comeback on the line?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed.

Jeff Martin – Roth Capital Partners

Thanks. Good afternoon, Gerry and Scott.

Gerry Perkel

Hello Jeff.

Jeff Martin -- Roth Capital Partners

I was wondering if you give us a little bit detail behind the 10% growth guidance for 2012. What kind of visibility do you have into that? Obviously, it's going to be driven mainly by digital signage, but if you can share some insight into whether there is a couple of large customer orders you're working on that you think will come in the year, if it's just broader market growth or – for the segment that will be helpful? Thanks.

Gerry Perkel

Yeah, a lot of the growth will come from the digital signage segment as move forward. We also, as we mentioned in there, expect our custom or custom and embedded business to see some growth as well. The thing that’s driving us to feel we’re confident about that is a couple of things, the momentum we’re getting in the digital signage products and particularly the Matrix product that we have has been continuing to build at a very strong pace and that’s a – is the combination of the kinds of deployments we’ve seen, the kind of customer opportunities we're working on now for the future, and some large opportunities that we believe can move forward towards implementation as move forward.

Secondly, on the Matrix product, as we announced new the 55-inch and began shipping it this last quarter, we have seen new customers come in and even more interested in the product, and more opportunities and orders have been strong as we’ve began shipping that product. So, that’s there.

The next piece, on the digital signage side is that we have new products that we're working on, that will expand product portfolio, and so we think we're going to be able to participate in more segments of the digital signage market as move forward and that will lot be another driver for us. And then, finally, we have been adding to and plan to continue for a bit to add more sales in marketing resource to expand our reach. We still don’t have as much reach as is desirable in the digital signage market as it's growing. And so adding more sales people to attract more channel partners and work on more strategic accounts will bring us more opportunities there.

So, those are the – it’s primarily a good market that’s growing, good momentum in the products we have now. New products we're bringing in will expand our address from a product standpoint and in additional sales and marketing resource to expand our customer address.

Jeff Martin -- Roth Capital Partners

Okay. That’s helpful. And then, Gerry, can you expand on the sales force strategy? What kind of sales people are you hiring and exactly what’s their approach to selling the products in the first six months to a year?

Gerry Perkel

So, we’re adding, the primary additions to sales forces is really in three categories. We’re adding outside sales people to expand our channel address to be able to bring on more AV integrators more AV integrators, more of the people that are doing projects for the strategic end customers. And to have more of them be preferring to use Planar products.

Secondly, we’re adding to our ranks significantly for what we call "strategic account managers," these are people that are working with large end users who are considering large deployments typically of digital signage products, it could be in the retail market of instance and some other segments. And where it takes more than just working with the reseller, they want to work directly with the vendor and to work through the technology choices that they have there, and so we have been building that up.

And then, third, we've been building some inside selling resource as a way of expanding just purely the bandwidth we have, the number of phone calls we can make and the number of customers we can touch to be able to start finding those opportunities. So as it relates to how did they get going in the first few months. With the inside sales people, we are generating leads on a costing basis from our marketing activities. They are taking those leads and doing the initial contact and trying to determine what kind of opportunity is there, to the extent they find reseller leads they forward those onto our external reseller team and we are working on that. And to the extent they look a like large strategic opportunities, we forward those to our strategic account manager.

So, the strategic accounts probably take a little longer to materialize than to say, getting new resellers that might already have projects in motion. But the strategic accounts can bring some very large purchases and large rollouts as they materialize.

Jeff Martin -- Roth Capital Partners

Okay. And then, can you help characterize whether you feel better, the same, or – yeah, a little more uncertain about 2012? I mean, considering what seems to be a short-term phenomenon in custom and LCD and desktop business?

Gerry Perkel

Yeah, I think with the exception of some of the craziness that’s going on with the stock market and some of the macro factors, when we look at our markets, we look at digital signage, it appears to be going great guns and not seemingly impacted by much of this.

I think the question that can just – a little bit of concern that you have to have is, is any of this, going on about the debt crises and all of the stuff in the stock market. Well, that cause any other business executives to pause and spend less. And that’s the question that we have to be asking ourselves.

So, provided that some of these craziness we see in the stock market in the Italian debt crisis and everything else begins to sort it itself out and people continue to look to expand their business based on what's fairly strong corporate earnings in a lot of segments. Then, I think we feel pretty good and if there is a double-dip in a recession, obviously that could make a difference.

One of the places that we are seeing a lot of interest in our products is in the retail segment. Our retailers that are looking to improve the environment in which their customer shop, using a lot of these products for digital signage application screen, different environments within their stores. We have some very exciting ones that we are working on at the moment. If we have a double-dip recession and consumer spending goes down, will some of those people pause? Well, that's a possibility and so that's something we constantly watch. But right now, we are continuing to feel pretty good about the growth opportunities that are in front of us.

Jeff Martin -- Roth Capital Partners

Okay. And then, with regards to the desktop business, is there anything to point here specifically that's causing the industry-wide slowdown?

Gerry Perkel

Well, the data points we hear tossed around is the explosion in the utilization of tablet computers and to extent that the people are using tablets in lieu of alternatives. They might not be buying a desktop monitor to be associated with it that’s not a phenomenon just happen in the last couple of months though and so there is a trend there that does tend to impact some of the purchases. But I think we'll see the sales here in the fourth quarter rebound nicely from the third quarter and we'll look at that as kind of a little distant bump that happens from time to time. And so, I don’t think it’s a huge industry restructuring or anything like that. I don’t think desktop monitor growth has been a big deal for quite some time and while tablets may put a little bit more pressure on it, I still think there is business to be at.

Jeff Martin -- Roth Capital Partners

Okay. So not in too specific or anything like that. I would imagine if it's tablets and that's the primary source you would – you would either sell product at a discount or not expect it to rebound, I don’t have any further thoughts there.

Gerry Perkel

If I thought that all of a sudden, the introduction of tablets was going to mean, I don’t know 30% reduction in number of monitors sold and that would be different situation. I don’t see that. I think it will heed into it some degree. But I also think there is other things are going to be pushing more monitor sales as some of the new operating systems come out. They will require new features and capabilities that some of the monitor don’t have now. So that will offer some opportunities for refresh in certain areas. 3D is another thing that you are seeing as a feature in some of the monitors, which will creep into the desktop over time.

So, there is a few things that will help spur some sales and do some replacement stuff as well. And so, while we don’t see the market as terribly vibrant, we do see that we'll see our sales rebound this particular quarter and stabilize as we move forward.

Jeff Martin -- Roth Capital Partners

Got it. Okay. Thanks good luck guys.

Gerry Perkel

Thank you.

Operator

(Operator Instructions). Next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed.

Jim Ricchiuti – Needham & Company.

Thanks. Good afternoon.

Gerry Perkel

Good afternoon.

Jim Ricchiuti – Needham & Company.

Regarding the weakness that you called out, it looks like – you're just looking at the geographies, it was confined primarily to the Americas? Or did you also see some of that in the EMEA region?

Gerry Perkel

Well, you see that in the release the different percentage growth areas. You have to understand that in our EIT business is a North America business only.

Jim Ricchiuti – Needham & Company.

Right.

Gerry Perkel

Primarily, I mean, maybe small amount, but it's 98% or something like that Americas. And so, as a result, that the fact that that declined weighed on the Americas region differently than it does on EMEA and Asia Pacific. And so that’s one reason that particular region performs a little bit differently. One of the businesses basically only operates in that one region. So, some of the other business areas, if you took that – if you took desktop monitors away or EIT products away, you would see that Americas would have been up as well.

Jim Ricchiuti – Needham & Company.

Got it. Okay. And so, Q4, it sounds like you still see pretty good growth in digital signage, embedded is that going to be – it sounds like that is still going to be somewhat challenging in Q4 and then pickup a little bit next year?

Gerry Perkel

Yeah, I think custom and embedded be a little challenged in Q4 and then start to pickup as some of that new design wins that we are working on start to come into play in FY12. Our digital signage will see some good improvement, continued growth we think in our Matrix products and some others. I don't recall right at the top of my head, but I think our compare is a little – more difficult in Q4. I think Q4 last year we had some very large sales from one of our custom signage customers that isn't going to be repeating nearly the same strength.

So the compare maybe a little bit different, but the trend of revenues continue to be good and strength as we move forward and we see some pretty good growth opportunities in digital signage as we go in FY12.

Jim Ricchiuti – Needham & Company.

Yeah, and then, actually gets into the next question Gerry, is it tougher comparisons in fiscal '12 or do you still feel – where do you think the growth rate for your digital signage products going to be next year?

Gerry Perkel

I don't think we've formulated a particular number, but we are going for double-digit growth across the portfolio. Our digital signage will be higher than that because that is going to be driving the growth. So, certainly higher than the 10% level, but we haven't put forth a specific number on that, but we see some pretty good growth.

Jim Ricchiuti – Needham & Company.

And embedded would be – more like single-digit growth or do you think you could go up that higher?

Gerry Perkel

Yeah, it kind of depends on how rapidly some of the new customers come on and whether we get some rebound in some of the slowness we've seen from some of our current customers. We expect growth, I don't know that we've pegged in necessary to be right at 10% or less than 10%, but we do see some opportunities for growth there.

Jim Ricchiuti – Needham & Company.

Okay. Scott, on just couple of the specific items that you called out in guidance. I think you said $14 million of OpEx, is that GAAP OpEx?

Scott Hildebrandt

No, that would be non-GAAP.

Jim Ricchiuti – Needham & Company.

Okay. Okay, and what is your comment about lower gross margin, wasn't sure if that was sequentially or year-over-year?

Scott Hildebrandt

Yes, it's sequential. We – because of the change in pick it up more desktop monitors in the mix in Q4 as Gerry talked about, coming off of kind of a light quarter in Q3, we're going to get – that is going to actually be negative to overall gross margins because of its low gross margin percent for that piece of the business. So, we do except sequentially gross margins will come down and expenses will go up.

Jim Ricchiuti – Needham & Company.

Got it. And then finally, Gerry, just to go back to the comments you made about interest in the – coming from retail sector. Can you talk specifically about which are the – which particular verticals within retail that you’re seeing the most interest in digital signage, what might provide the upside to that next year?

Gerry Perkel

We’ve seen it from enough number of different retail, a lot of stuff. Probably the – I just kind of think for a moment, probably the biggest segment would be in the apparel side of the retail market where we see a lot of apparel retailers looking to create environments in their stores to be attractive to bring customers in. But we’ve seen it in other areas too. We’ve seen in it some of the electronics folks. We’ve seen it in a number of different areas, as well as some work that we’re beginning to do and some of the (inaudible) restaurant stuff as well.

Jim Ricchiuti – Needham & Company.

Okay. Thanks a lot.

Operator

Your next question comes from the line of John Nelson with State of Wisconsin Investment Board. Please proceed.

John Nelson – State of Wisconsin Investment Board

Hi, my question is related to the revenues coming from – you mentioned the percentages increases, decreases for the various regions, what kind of breakdown on actual revenues from the Americas, EMEA, and Asia Pacific?

Gerry Perkel

Okay, do you that Scott?

Scott Hildebrandt

No, I don’t know, if I have that handy here right now. Certainly, if you could give me a call back after the call, we could chat about, I just don’t have that information here.

John Nelson – State of Wisconsin Investment Board

Okay. And then, can you give us any idea on new products, if there are new products in the (hopper), the digital signage, or high-end consumer or what’s coming down the pike, if you can discuss it at all?

Gerry Perkel

Yeah, I would rather not announce the new products here unless the normal launch process bring them to market. But we are continuing to – we’re going to be expanding the set of offerings we have for digital signage here and fairly soon, and offering some additional new products and then the CEDIA trade show will be announcing some new high-end home products as well. And then, we have some product roadmap activity that would throughout FY'12 be bringing new products as well with a strong focus towards trying to drive more on the digital signage areas as that’s a good growth market for us.

John Nelson – State of Wisconsin Investment Board

Okay. Thanks very much.

Gerry Perkel

You’re welcome

Scott Hildebrandt

Thank you.

Operator

And there are no further questions in queue at this time. I would now like to hand the conference back over to Gerry, for any closing remarks.

Gerry Perkel

Thanks very much for joining us. We appreciate it and we’ll see you again next quarter. Thanks very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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