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Planar Systems, Inc. (NASDAQ:PLNR)

F4Q11 (Qtr End 09/30/2011) Earnings Call

November 3, 2011 5:00 pm ET

Executives

Gerry Perkel - President and CEO

Scott Hildebrandt - CFO

Analysts

Jim Ricchiuti - Needham & Company

Omid Eftekhari - ROTH Capital Partners

Steve Spence - RBC Wealth Management

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2011 Planar Systems Incorporated earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Gerry Perkel, President and CEO.

Gerry Perkel

Good afternoon and thank you for joining us for Planar's fourth 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 I am pleased with the results we were able to deliver for the quarter and for the full fiscal year. We were able to exceed our expectations for the fourth quarter for both revenue and non-GAAP earnings.

During the quarter we experienced 6% total revenue growth, including 15% growth for digital signage products and 1% or $0.01 of non-GAAP earnings per share. For the full fiscal year, we also delivered both revenue growth and non-GAAP profitability.

Full year revenue growth of 6% represented the highest level of non-acquisition aided growth in eight years for the company. For the year, we were able to grow sales of our digital signage products by 32%. Also, non-GAAP earnings per share of $0.05 for fiscal 2011, represented the highest level of annual non-GAAP profitability since 2006.

Let me talk now a bit more about the results in some of our products lines. As we have discussed in previous calls, digital signage product lines will be key to our growth strategy. As I just mentioned, we did see nice growth in our digital signage product lines for both Q4 and for the full fiscal year.

Sales of our digital signage products totaled $11.4 million for the quarter and $39.5 million for the year, representing 15% and 32% growth respectively. The $39.5 million in digital signage sales represented 21% of our total revenues for the year, up from 17% a year ago.

In particular, our Clarity Matrix LCD video wall solution grew tremendously, as we ship more in the fourth quarter than in all of fiscal 2010 and provides a strong platform for growth going forward for the company. We are seeing a wide variety of applications for this product line from retail to airports, to corporate to sports arenas.

A particular note is that significant recent Matrix installation in the Gucci flagship retail store in Milan, Italy. This installation is indicative of kinds of opportunities we are seeing in retail, as many retailers look for ways to create new exciting environments to attract customers.

In addition to strong sales results, we have expanded our digital signage product portfolio with the introduction of the PS-Series of large format digital signage displays. These products offer us the opportunity to expand our reach into additional portions of the growing digital signage market.

In our non-digital signage product lines, we experienced 4% growth in Q4 and 1% growth for the full fiscal year. Our rear projection cube products grew 31% in the quarter with particular strength in our international markets. Our touch monitor products also had strong growth in the quarter at 36%. And our high-end home products grew 24% in the quarter. This was partially offset by decline in some mature product lines during the quarter.

In addition to the revenue results I have just described, we also continued our effort to expand our resources focused on the digital signage market. We've added sales capacity and marketing resources, as we continue to believe that the digital signage market offers us an excellent growth opportunity. All-in-all we are very pleased with the results of this quarter and the progress we are making towards transforming Planar into a consistent double-digit growth company.

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 our income statement. As you are aware, we've reported GAAP loss per share of $0.07 and non-GAAP income per share of $0.01 earlier today for our fourth quarter of fiscal 2011. For the full fiscal year, GAAP loss per share totaled $0.24. However, non-GAAP income per share was a positive $0.05, as Gerry mentioned earlier.

Non-GAAP results exclude 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. For more detail on these items, a reconciliation is included in the supplementary tables within our press release.

Focusing in on our non-GAAP results, gross margins as a percentage of sales increased to 26.8%. This compared to 26.6% reported in the fourth quarter of fiscal 2010. The increase in gross margin as a percentage of sales from the previous year was primarily due to a more favorable sales mix of higher margin products, including digital signage displays and rear projection cubes, which more than offset a decline in sales of custom AMLCD displays.

Non-GAAP operating expenses for the fourth quarter of fiscal 2011 increased approximately $1.9 million to $13.4 million compared with the same period a year ago. As discussed previously, we have been increasing sales and marketing headcount as well as marketing program spending largely focused on accelerating the growth of our digital signage products.

Our non-GAAP effective tax rate was approximately 10% for the fourth quarter of fiscal 2011. Consistent with the previous quarters, 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.

Switching back to our reported GAAP results, we did record a $1.1 million net restructuring charge in connection with the implementation of a new organizational structure designed to better align our resources with the overall growth strategy focused on selling a higher mix of digital signage products going forward.

Turning to the balance sheet, cash declined approximately $1.2 million to $22.2 million compared with the end of last quarter mostly due to an increase in accounts receivable on higher sequential sales as reductions in inventory were offset by declines in accounts payable.

Looking forward, we are planning for an annual revenue growth in excess of 10% per year over the next three to four years, driven primarily by growth in sales of digital signage products, which we believe will grow 30% per year for the next several years.

Over the longer term, we believe this planned double-digit total revenue growth will yield both gross margin expansion and leverage across the operating expense base on a percentage of sales basis. As a result, we are planning for a longer-term business model of 4% to 6% operating income as a percent of total revenue.

In the near term, we plan to continue to add resources to support our growth strategy. We currently anticipate revenues for the first quarter of fiscal 2012 in the range of $47 million to $49 million, which represents 15% revenue growth when compared to the first quarter of 2011 at the midpoint of the range.

This anticipated sequential revenue decline in the seasonally softer first quarter combined with the expected increase in operating expenses are expected to result in non-GAAP loss between $0.01 and $0.04 per share for the first quarter of fiscal 2012.

Shifting to some additional forward-looking estimates, we believe the average diluted shares outstanding will be approximately 22.2 million for the first quarter of 2012. And we are projecting capital expense of $750,000 and $500,000 of depreciation expense in the first quarter of 2012.

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

Gerry Perkel

Thank you, Scott. As we've discussed, we are pleased with the results from our fourth quarter as well as the progress we're making in implementing our strategy to become a consistent double-digit growth company.

The digital signage market is growing and we feel we are well positioned to continue to grow our revenues from product lines aimed at addressing these growing market opportunities.

We're continuing to seek our ways to aim more resources at these markets. Some of this comes from reallocating resources already in the company, and some comes from adding resources.

One of our key challenges going forward is balancing our desire to pursue these growth opportunities and allocating the resources to pursue them with keeping our traditional product lines strong and contributing. It's a delicate balance, but we believe we can deliver on both.

A second key challenge is to balance the desire for longer-term growth with a desire for improved profitability. We do expect that the kind of growth we can deliver will over time deliver much improved profit performance as well. In the short term, as Scott outlined, we'll be continuing to add some resources to pursue growth with an expectation of improving profit performance as growth materializes and time moves forward.

We're excited here at Planar about the growth potential we see in the digital signage market. We are expanding our product offerings to address that market more fully and expanding our sales and marketing capabilities to better reach more of the market as well.

We expect, as Scott said, to see 30% growth in digital signage product lines as we move forward and believe the market opportunities and our strategies to pursue those market opportunities will deliver that kind of growth, and as a result, enable the company to grow at or above 10% for the next several years.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jim Ricchiuti from Needham & Company.

Jim Ricchiuti - Needham & Company

With the sequential decline in revenues this quarter would you see gross margins are flattish with Q4 or could they comes in a little bit?

Scott Hildebrandt

You're talking about with the sequential decline we're forecasting going into Q1, do we see gross margins staying flat, is that the question?

Jim Ricchiuti - Needham & Company

That's correct.

Scott Hildebrandt

Yes, I think Jim, they're going to be pretty flat, down maybe just a little bit.

Jim Ricchiuti - Needham & Company

As the mix shifts for the digital signage, presumably that's higher margin business. So how should your gross margins play out over the course of the year? Should you see improvement just from mix and also from the just a general scale up in revenues as you go through the year?

Gerry Perkel

I think as we move to the second half of the year, you'll see gross profits begin to improve a little bit. It is very much a function of the mix of the product portfolio. And you're right, many of the digital signage products offer us some upside to gross profit. And so as we continue to drive that we do expect to see some improvement and probably mostly start to see in the second half for the fiscal year.

Jim Ricchiuti - Needham & Company

Gerry, what you have to do, if you grow the digital signage business, if you see 30% growth a year, what you have to do in terms of R&D to support that kind of growth? And also on the sales and marketing side, what kind of resources do you have to put in to get to achieve that kind of growth?

Gerry Perkel

We'll we've been adding a number of sales and marketing resources to be able to help us support that and we'll continue to do that. The good news is though that many of the channel partners that we work with do offer products and do work with customers that would allow them and us to access digital signage opportunities. However, the people that selling the digital signage are broader than our current channel partner.

So the good news is many of the people we work with today already can addressed those kind of products and those kind of applications. But we need to expand our base and have been doing so. So the good news is it's doesn't required entirely incremental stuff. We can build of what we have. But we do need more resources to be able expand our portfolio of resellers and partners, and partnerships in that marketplace to peruse it. So it's not entirely incremental, but it does require some different stuff on the sales and marketing side.

On the product development side, there too we do some reallocation of some of the resources that have been working on other things to help drive this. We also can outsource some of that and some of the partnership we have that help us develop and bring products to market in Asia are squarely in a position to be able to provide it. So once again it's some increment and some reallocation of what we are already doing.

Jim Ricchiuti - Needham & Company

Any color on, I noticed your revenues in Americas looks like it was down in the quarter and yet you showed very nice growth in the other two regions. What was happening in the Americas in the quarter?

Gerry Perkel

Well, for us, when you look at the various geographies, you have to keep in mind that the products mixes are not the same across all the geography. So that's one of the issues there. But I can tell you that we did see tremendous growth in the matrix product line in the Americas and as well as around the world.

The real difference was I think that we saw some really strong rear projection cube growth outside the United States, which booed entire international results more or so, because there are higher percentage of the total of the international results than they are in the Americas. So that was probably the bigger thing that drove that outside the United States

Jim Ricchiuti - Needham & Company

Last question for me, just showing some encouraging improvement in the high-end home products area. Are you sure you turned the corner there on which contributing to that?

Gerry Perkel

Well turning the corner in a market that's liked to the U.S. housing market is a hard sentence to put together. So to be serious, I think the market itself continues to have some pretty significant challenges, as housing starts and particularly the high-end housing starts are certainly not robust by any means.

However, having said that for those that are choosing to implement these kinds of products, our product portfolio is quite strong at the moment. We've been now shipping our flagship 3D product for a couple of quarters. We've brought some new products out. So we're seeing our product portfolio be in pretty good shape and wining a few resellers here and there.

But I guess turning the corner would be a little brighter outlook than I would probably characterize. But I would certainly say we are holding our own and probably in a position to perhaps gain a little bit of share in that space. But the market itself has got some challenges.

Jim Ricchiuti - Needham & Company

So just in terms of the way you're thinking of that growth over the next year, clearly more of it is coming from digital signage and the other businesses, some puts and takes?

Gerry Perkel

I would say that to make it real simple, we're expecting kind of the non-digital signage portfolio to kind of stay relatively flat, up or down a little, and signage to grow pretty aggressively. And that's being enough as signage get to be a bigger and bigger portion of our portfolio to carry the whole company to some pretty substantially growth.

Operator

(Operator Instructions) And the next question comes from the line of Omid Eftekhari from ROTH Capital Partners.

Omid Eftekhari - ROTH Capital Partners

Just had a question on the AMLCD push out, was that push out into Q1?

Gerry Perkel

What we said I think, Omid, is that we had some AMLCD product sales that took place in pervious years in the fourth quarter that were planned earlier in the year to be also in our fourth quarter this year. But got pushed out or delayed by some of our customers. And those were primarily in in-door custom products. So the shipments, the upside for sales didn't go away. They just got delayed a little bit. And we expect some of that to be in now come in Q1 but then in Q2 also.

Omid Eftekhari - ROTH Capital Partners

And then could you elaborate a little bit on the new organizational structure? You guys talked about taking the $1.1 million charge? So do you anticipate any cost savings from that next year?

Scott Hildebrandt

So the changes we've made was to complete a transition that we've begun in some ways a while back, but to move from a business unit structure to a functional structure within the company. Some number of years ago, we put together a business unit structure, which served us well during those times.

But as digital signage has become stronger theme across the company and that product line and application touches many of the business units that were in place. We felt that that it was a much better way to go forward, if we could be functionally organized to be able to make sure that we're doing the best job of allocating resources to the various priorities.

As it relates to, while this create some cost savings going forward. Yes is the answer to the changes we made. However, those will get offset with other resources we're bringing on. So it's not like the cost structure for the whole company is going to go down. The speed at which we grow it will be mitigated by some of the cost savings that we're getting from this.

Omid Eftekhari - ROTH Capital Partners

And then to touch on your guidance a little bit deeper, you guys push it out to 2015. What are your assumptions for the other product segments as far as growth in an intermediate term?

Scott Hildebrandt

Well, I think as I said a little earlier was we kind of look at this year and FY '12 for instance. We see the non-digital signage product lines in total being relatively flat and in a sense not looking a lot different than it looked in this last year. If you look at last year, we saw 1% growth for the non-digital signage products and 32% growth for digital signage. And that yielded at 6% at the company level.

As we move forward in digital signage it becomes a bigger and bigger portion of that. That kind of a relationship will create a higher total growth rate. So I think as we look at the other product lines we're looking for them to be flat to kind of modest kinds of changes as we go forward with the bulk of the growth coming from digital signage products. Within the mix of the non-digital signage some will go up, some will come down, but in total relatively flat.

Hamed Escacari - Roth Capital Partners

So is it safe to assume that signage will account for about half of the business by 2015?

Scott Hildebrandt

That's the goal. Our goal is to drive the company into something along those lines, yes.

Operator

Your next question comes from the line of Steve Spence from RBC Wealth Management.

Steve Spence - RBC Wealth Management

First of all a question on the balance sheet. The inventories are us pretty well year-over-year, understandably what you've got going with product evolution. Generally speaking, I'm challenging your balance sheet, are the inventory levels at such levels today that they would tend to support sales levels along the line for the growth that the guidance that you've given us? If you run a 12% growth rate for next year, it takes us to $209 million in sales. Would you believe that the inventories would support that level of sales? Or is there further balance sheet expansion required there?

Gerry Perkel

I think the inventory levels we have today we think does enable us to support the kind of sales growth you described. I think we actually expect inventory by trend down a little bit in the next quarter maybe two. And then maybe trend back up a little bit as the sales level grows in the second half of the year.

But I think we feel, frankly we're a little inventory heavy at the moment that we should be able to operate the company a little more efficiently from an inventory standpoint. So I think your assertions, what we would be consistent with that we should be able to support the sales growth on the inventory levels we have.

Steve Spence - RBC Wealth Management

Can you also a comment, if we were to build some models that assumed straight across the broad revenue growth of 12%, you're driving it to above 10. And if we assume the operating margins move from sequentially over the next four years from 4% to 5% to 6%. It kept us up to about $8.4 million in operating profit next year and at 6% on $293 million of sales up to about $17.6 million in 2015. I just want to make sure that the way this back-of-the-envelope model is put together, it's consistent with the message that you're trying to provide, or if there's something wrong with those assumptions?

Scott Hildebrandt

Steve, this is Scott. I think the one difference would be the timing of that profitability. So what we're saying is we are going to grow 10%, in your case 12%, per year over the next four, five years. But the 4% to 6% operating margin model that we're talking about really is more in those later years.

So 2012, we hope to be profitable, but it's going to be closer to probably what we have this year maybe 1% or so. So just a little bit slower, because we're adding all of these expenses upfront before we start to add the growth. So does that make sense?

Steve Spence - RBC Wealth Management

Yes, it does and I appreciate that kind of graph, but I was hoping we could avoid in applying the numbers. With respect to income taxes in the later year, given your hopes for revenue and profit growth, what's the size of the NOL today and how far out does it sort of remain durable?

Scott Hildebrandt

We actually are in pretty good shape there. So if we look over the next four or five years, we definitely have some deferred tax benefits that we can use to offset otherwise our tax liability. It's $15 million to $20 million roughly what we've got and those should stretch out for most of that period of time. So we're in pretty good shape as far as that goes and we'll certainly update that as we go forward.

Steve Spence - RBC Wealth Management

Two more quick questions. You talked about the competitive market in digital signage. It's certainly an impressive substantial growth rate in the industry and one would assume will attract increasing competition over time. And to the extent that we think about the kind of growth that you are hoping to maintain in that space, who those competitors might be?

Gerry Perkel

I'd say that in the digital signage world, the words I use frequently is like the wild, wild west right now. It's a market that's forming and expanding rapidly and players are coming in going out and so it's changing quite a bit.

Today, you've got a few fairly large players involved. People like Samsung and NEC, Panasonic play some major roles in there. And then you've lots of little guys too. The software side of the market has got a lot of different players and players come and go on that side every year. And as the new applications come up, you see different software players and new hardware configurations come up.

So I think we're expecting there's going to be lots of people coming at it, and we're not the only one seeing this market obviously. It's a very attractive market. But what we've seen so far is even in and amongst some of the giants like Samsung and NEC with a product like Matrix for instance, we're able to establish a compelling alternative to what they bring out, leveraging some of the technology that we view from other products.

As we look at applications where outdoor signage is going to be an interesting application, we have the leverage to some of our other capabilities. And the net is we believe we can continue to create some differentiated products to be able to cut out a nice portion of this marketplace for us to grow.

And so we're not looking to be 50% market share players. We're looking to grow as fast and maybe faster than what the market is growing. And we continue to opportunities to do that, and it's in all kind of innovative ideas we have and getting those products into the market and getting them adopted.

Steve Spence - RBC Wealth Management

As the world has become sort of enamored with touch screen application and the technical limitations which I'm not familiar with, let's call it ruggedizing, digital signage that has touch screen applications, can you sort of talk a little bit about that in terms of your product offering and to whatever extent it's proprietary and so how you see that niche within digital displays playing out?

Gerry Perkel

So, we see touch and that I even say more broadly interactive displays becoming a bigger and bigger opportunity. Two different kinds of things. I think the first is kind of small format what I would talk touch monitors, which would be typically in the point-of-sale application today or other types of kiosk type applications. And we a nice business there.

And that market is going through a bit of dynamic change as you got all of the touch monitors and stuff, but you've also get things like iPads coming in and which applications work well with a Pad type product versus, say, something that's more of a monitor desktop type device. So we see some changes going on there, but continuing to see more application there.

And I think as you see some of the new software evolve for desktop use as well, you see more touch interfaces put into some of those applications, and that's more interest there.

On the larger format front, larger display front, we are also seeing touch grow at a pretty nice rate whether that's for like a large 40-inch, 50-inch or even 60-inch or 70-inch display, that might be a single display or even in the wall world that we're putting together, we offer a touch version of our video wall today, we work with various people that do interactive interfaces on to these products, and we've got some applications that offer some pretty interesting interactive potential for the future as well.

So we see that as a pretty growing opportunity. I think that there is right now a dozen or two dozen types of ways you can do touch, each that has different characteristics whether you're trying to do single or multi-touch, et cetera, et cetera, and then obviously several different ways to do the interactive kinds of interfaces as well.

I doubt that we'll be in a proprietary position on much of those. Our job will be to do the best job integrating the various technologies, choosing the best technologies and being able to marry those technologies with the best display technology for a given application and being able to put that in a package that people can really utilize. That will be our primarily focus here to do that.

And some of those will be in ruggedized applications, could be outdoor, some of those will be indoor applications. It will run the gamut there. And to us, the more challenging the application, I think the better chance we feel we have to be able to make something that's really differentiated.

Steve Spence - RBC Wealth Management

An example of a product a few months ago, an article about a few QSRs that were going to help service ordering. In fact, a great application for touch screen.

Gerry Perkel

Yes, it's interesting. We have an effort within the company working specifically on displays for the quick-serve restaurant market and have launched a couple of displays and are working on others. And it depends on which company you talk to. Some of the quick-serve folks really like the touch interface. Some think it will slowdown their drive-throughs. All of them don't want to slow down their drive-througs.

And so, you're right, that is an interesting application and an opportunity there, and that's something that some of them are very interested in. Others want to go the other direction, not only do they not want to be touch screen, they want to put a window up on the screen where you can actually see the person inside that's taking your order to make it more personal interface.

So each of them is looking at a different way. So we'll be working with them to determine, okay, who wants an interactive one, who wants something that's touch oriented, which ones want to go more low cost to just make sure that it will work in Las Vegas in the summer and Montana in the winter or whatever. So it's a variety of applications there. And we'll be there to make sure that we could put together the best package form.

Operator

I'll now turn the call over to Mr. Gerry Perkel for closing remarks.

Gerry Perkel

Thank you for joining us. We had a great quarter. We look forward to see some good stuff this coming quarter and coming year, and we'll talk to again in three months. Thanks very much.

Operator

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

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