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Executives

Gerry Perkel – President and CEO

Scott Hildebrandt – Chief Financial Officer

Analysts

Jeff Martin – Roth Capital Partners

Jim Ricchiuti – Needham & Co.

Planar Systems, Inc. (PLNR) F1Q12 Earnings Call February 7, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the First Quarter 2012 Planar Systems Earnings Conference Call. My name is Jeff, and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Gerry Perkel, President and CEO. Please proceed, 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 -- press releases 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 other -- 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’m pleased with the 14% revenue growth we delivered in the first quarter and the progress we are making in growing our digital signage revenue base. Specifically on the digital signage products front, I’m very pleased that we were able to deliver 85% growth in revenues for these products compared with the first quarter of last year, as digital signage product revenues totaled $10.9 million.

As you know, for sometime, we’ve been focusing on driving digital signage growth and have set a target to achieve 30% or greater digital signage product revenue growth for this fiscal year. Quarterly growth rates will swing from quarter-to-quarter and obviously 85% was a very strong result.

The key driver of our growth was again, impressive results for our Clarity Matrix product line, where we saw growth of approximately 140%. We continue to experienced strong growth in the adoption of super narrow bezel technology and continue to find many customers across multiple markets they are seeing the value of our unique architecture.

In addition, we are seeing more and more of our digital signage product sales come from our standard products versus custom designs as we expand our standard product offerings. We began shipping additional models in our new PS line of large format standalone signage displays this quarter and expect to expand our standalone product offerings as we move forward.

We also continue to seek out opportunities for our outdoor LCD products for signage applications and now have products installed in some trials for outdoor deployments. While the adoption in outdoor LCD signage has been slower than we had hoped. We still see a good longer term opportunity as more customers such as quick-serve restaurants look to convert portions of their outdoor static signage to digital. All in all we are pleased with the progress we are making in our [quest] to aggressively grow our digital signage products.

As we move forward, you will hear us describe the rest of our product lines broadly as our commercial and industrial products. This product grouping represents approximately three quarters of our revenue today, has made up of several product lines, some of which are more mature and some of which offer growth opportunities.

In the first quarter, our commercial and industrial product lines in total delivered 3% and total $36.8 million, most of the product lines within this category group, for instance, compared to the first quarter a year ago our rear-projection cube revenues grew approximately 17%, our desktop monitor revenues grew approximately 16%, our touch monitor revenues grew approximately 10% and our custom developed industrial products grew approximately 28%, and our Runco high-end home theater products grew about 2%.

Unfortunately, those positive results were offset by a 25% decline in our EL product sales along with the reductions in some small product lines that we are in the process of discontinuing.

Our goal with this commercial and industrial product line is to capitalize on growth opportunities we see and to limit our investment level there, so we can fund the growth of the digital signage opportunities we see.

As we look forward, we do see growth opportunities for several of these product lines, but in total we expect to see single-digit growth in this area for FY ’12 as the more mature areas may tend to offset growth in other areas.

We’ve captured a number of new design wins recently for our custom AMLCD business for ruggedized military applications. We expect this to begin production in the second half of FY ’12 and in FY ’13, and these new customers as they move into production do offer opportunities for growth.

We also have several prospects for fairly large new EL design wins that could also offer opportunities to improve our results from that product line, but it is too early to determine whether they will ultimately become production customers.

In summary, the first quarter was a very good quarter in terms of revenue growth, as we delivered 14% revenue growth in total and 85% digital signage revenue growth.

I’ll be back in a few minutes to talk more about the future of the company looking forward. In the mean times Scott will take over and talk a bit more about our financial performance in detail. Scott?

Scott Hildebrandt

Thanks, Gerry. Let me start with our income statement. As you are aware, we've reported a GAAP loss per share of $0.16 and a non-GAAP loss per share of $0.09 earlier today for our first quarter of fiscal 2012.

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 profit as a percentage of sales decreased to 22.1%. This compared to 28% reported in the first quarter of 2011. The decrease in gross profit as a percent of sales was primarily due to some under absorption of expenses in a few of our production areas and a specific reduction in the carrying value of inventory for certain end-of-life products.

During the quarter, we saw demand decline on a few legacy product areas and as a result decided to end-of-life these products to focus more resources on our new and growing set of industrial and digital signage displays. The resulting write-off of inventory value impacted gross profit margin by approximately 3 percentage points.

Non-GAAP operating expenses for the first quarter of fiscal 2012 increased approximately $1.4 million to $13.5 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. Over the past year, we’ve added approximately 50 new positions to our global workforce.

Our non-GAAP effective tax rate was approximately 37.5% for the first quarter of fiscal 2012. Consistent with 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.

Turning to our balance sheet, cash declined approximately $2 million to $20.3 million compared with the end of last quarter, driven primarily by the loss recorded in the first quarter.

Looking forward, we are planning for annual revenue to increase approximately 10% in fiscal 2012 compared to fiscal 2011, primarily driven by increases in digital signage product sales and expected new design wins for custom industrial displays.

As we have indicated in the past, the rate of year-over-year revenue growth will fluctuate from quarter-to-quarter depending on the number of factors, including the timing, nature and size of design wins and related schedule deliveries. For example, the second quarter of 2011 had a very strong customer signage revenue from two significant customers which are not expected to repeat in the second quarter of this year.

For fiscal 2012, we anticipate second half revenues will increase over 10% compared to the first half of fiscal 2012, and the fourth quarter to be profitable on a non-GAAP basis. For the second quarter of 2012, we expect sequential improvement in overall gross profit margin as a percent of sales, offset by some increase in operating expenses to support ongoing execution of our strategy to drive sales growth.

As a result, we currently anticipate revenue in the range of $45 million to $48 million and a non-GAAP loss between $0.06 and $0.08 per share for the second quarter of 2012.

Shifting to some additional forward-looking estimates, we believe the average shares outstanding will be approximately 20.2 million for the second quarter of 2012. Additionally, capital expenses will trend higher over the next four quarters as we implement a new core business system, including both hardware and software across the company.

These new capital investments are intended to both improve efficiency as we grow and replace some of our aging legacy systems. As such, we are projecting capital expense of $1.2 million and $500,000 of depreciation expense in the second quarter of 2012.

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

Gerry Perkel

Thank you, Scott. Our strategy continues to be -- to transform Planar into a company that can deliver double-digit growth on an ongoing basis by aggressively growing our participation in higher growth markets such as the digital signage marketplace. To do this we are investing in sales and marketing resources to address this growing opportunity. In addition, we are investing in more product development activities focused on the digital signage market.

As an example, earlier today we announced the newest product family that is the part of our digital signage product expansion effort, a system product we call Planar Mosaic. As we have seen with our Clarity Matrix system revenue grow strongly over the past two years we’ve notice some of the installation fall into what we would call architectural or design applications.

Applications where the content and the displays are meant to create an environment and an ambiance consistent with the customers brand and goals. We’ve seen this in retail establishments, corporate lobbies, as well as hospitality market.

Our new Planar Mosaic system leverages what we have learned and created with the Clarity Matrix system, but takes it to a new level, enabling architects and designers to more fully utilize digital display technology.

This new system enable the placement and usage of variety of display sizes and shapes, and virtually any kind of design whether contagious or not, with content easily mapped to this creative display design, something which is new and unique in the marketplace.

As part of this announcement, we’ve also announced the availability of a square video tile to augment our other display products for this system. The new square display tile named Planar Salvador will offer designers and architects, and even more creative power of choices for designing, the kinds of display layouts that will meet their goals.

We plan to show off this new system at the Digital Signage Expo next month in Las Vegas and plan to begin making shipments of this new system in the third quarter of our fiscal year. While we have modest expectations for the impact of this new system on our revenues for this fiscal year, it offers us a great platform for digital signage growth in FY ’13 and beyond.

As we move forward we expect to bring additional new and innovative digital signage products to market to help support our goal of growing our digital signage revenue aggressively. Over the next several years we expect our digital signage revenue will become almost half our overall revenues.

As we grow our digital signage revenues and our revenues in total, we expect to begin driving profitability on a more consistent basis. As Scott mentioned earlier, we expect to see profitability in the fourth quarter of this year.

As we look forward beyond this fiscal year, we continue to target 10% total revenue growth per year over the next three to four years, with a goal of reaching 46% operating income before tax level by FY '15. Growth is key to achieving that goal and we're off to a good start in the first quarter.

As Scott said, the second quarter looks less attractive from a year-on-year growth perspective than the first quarter. Our compare is much tougher in the second quarter as last year we had some very strong custom signage shipments to two large customers, which will not repeat this year.

However, at mid-year, we still expect to be around our 30% growth goal for digital signage product revenues. As we look at the second half, we continue to expect digital signage to grow. We expect to continue to grow our Clarity Matrix revenue as we bring the market new displays to enhance the applicability of our system to new applications.

We also expect additional growth contributions from our PS-Series and the new Planar Mosaic system. We also have other digital signage products on the roadmap that we anticipate will begin shipping before the end of the fiscal year.

On the commercial and industrial front, we continue to expect our desktop monitor revenues and touch monitor revenues to grow. As I mentioned earlier, we have captured a number of new design wins for custom ruggedized AMLCD products that we expect to begin production in the second half of this fiscal year.

In total, we see some strong sequential growth in the second half of the fiscal year and to deliver on our approximately 10% revenue growth for the year. While we haven't by any means finished our efforts to transform Planar into a consistent double-digit growth company. We are making some good progress and look to make some additional progress as we proceed through the fiscal year.

With that, let me open it up for questions. Operator, can you come back on the line?

Question-and-Answer Session

Operator

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

Jeff Martin – Roth Capital Partners

Thanks. Good afternoon, guys.

Gerry Perkel

Hey, Jeff.

Scott Hildebrandt

Hey, Jeff.

Jeff Martin – Roth Capital Partners

Could you talk a little bit about the geographic performance, Americas, EMEA and APAC, Europe 18% and two other three and what were some of the product drivers there, and maybe anything else you want to share about the growth in those regions?

Gerry Perkel

Yeah. I think, obviously, we're seeing a little different economic situation in Europe than we are in the other regions and so that's, we're finding that to be a little more challenging geographic market right now.

Let's say in the Americas, which is the bulk of our business and which experienced a pretty good growth. Matrix is very strong there, as well as some of our other signage solutions. But we also saw some pretty good growth in the desktop monitors and the touch monitors there as well. So, pretty good growth in everything, probably, but EL where we saw some decline pretty much across the Board I think.

Jeff Martin – Roth Capital Partners

Okay.

Gerry Perkel

And in Asia, I think, the growth is probably being driven mostly by rear-projection cube and Matrix products, mostly going into control room applications for the rear-projection cubes as there continues to be investments in infrastructure in Asia.

Jeff Martin – Roth Capital Partners

Okay. And then, can you quantify the currency impact on revenue in the quarter?

Scott Hildebrandt

Yeah. Jeff, it's pretty much of a balance, our foreign-denominated expenses are kind of equal to our sales overseas. So we really are kind of naturally hedged and there really isn't an impact on our P&L, hasn't been for a while. We do have a translation adjustment down in non-operating expense, but that's just the translation of our foreign-based U.S. assets back to dollars and it has some non-GAAP item.

Jeff Martin – Roth Capital Partners

Okay. But I assume there was an impact on revenue expenses, because I was just curious, what the revenue, I assume you've got a benefit out of the currency impact on revenue, strong dollar?

Gerry Perkel

Yeah. I don't have that. We don't have that right here at our finger tips. We can get that for you if you need that.

Jeff Martin – Roth Capital Partners

Okay. And then, could you shed some light on the inventory write-down, was that on EL?

Gerry Perkel

No. Actually it was on some other product lines that really aren't related to EL. Most of the EL stuff we continue to build those products. Our challenges in EL are really just a volume one and absorption in the factory there.

These are some other products, business projectors and some 3D monitor products, and a few other things that, as we have been changing organization and transforming to focus more on digital signage, we're just finding those products not being the areas we want to focus and becoming obsolete needing to write down the value of that.

Jeff Martin – Roth Capital Partners

Okay. And then, are we done with the product obsolescence for this point or do you see -- foresee any more coming this year?

Gerry Perkel

Well, we took whatever we saw at this point, as that we’re -- certainly hope that there's none more. We don't have a plan that there's going to be more, when you have as broad product portfolio as we have, you do run some risks that you can find some of that now and again. But I think the problem there really should be behind us I think.

Jeff Martin – Roth Capital Partners

Okay. And then, could you touch on the second half, what specifically might give you visibility into -- backed into a number, it looks like you need to grow about 15% year-over-year in the second half over the second half of '11 to get to around a 10% total revenue growth for the year.

Gerry Perkel

Yeah. I think some of it is just the trends and some of the things we see so far. Growth in touch monitors, growth in Matrix and the digital signage product that we already got, and desktop monitors. But a chunk of it comes from some of the industrial custom work that we're doing. We've won several big design wins that we're going to be going into production here fairly soon that we'll pause that portion of the business to grow nicely at the end of second half.

And then some of the new digital signage offerings that we have, bringing some additional value in the form of the Mosaic product, I talked about, as well as the PS-Series, which we really just started shipping in the last few weeks, maybe last six weeks, getting all of the models there.

So, you add up all those things, there is a number of different things driving it, but we think some of its trends or products we have now, and then some of it's new customers that we're bringing on and some of it's, some new products.

Jeff Martin – Roth Capital Partners

Okay. And then jumping back to gross margins, you said you had some utilization under runs in the quarter. Do you see margins getting back to a more normalized, upper 20s level in Q2 and building from there or what level do you think those will recover to in Q2, and I would imagine with the revenue growth in the second half, it'll be back to normalized levels?

Scott Hildebrandt

Yeah. So the write-off of inventory, obviously we don't expect to repeat and the under-absorption of our expenses, we think will be improved as we go through the year as well. But we probably won't get back up to 28%, 29% this year, because of the overall mix of products that we're selling, Jeff, probably be more like 25%, 26% through the balance of this year.

Jeff Martin – Roth Capital Partners

Okay. Thanks guys.

Gerry Perkel

Yeah.

Operator

Our next question comes from the line of Jim Ricchiuti with Needham & Co. Please proceed.

Jim Ricchiuti – Needham & Co.

Hi. Good afternoon. Can you talk a little about the range of gross margins in the digital signage products portfolio, what kind of range are we looking at in terms of as we -- as business grows as a percentage of revenues?

Gerry Perkel

Well, I guess, what I would say is, at this point, we see the gross profit profile of the digital signage revenue is, I guess, especially I would say is, as accretive to our gross profit, a little higher than our average gross profits across the company. The Matrix product is a dominant piece of our digital signage portfolio today and it has higher gross profits.

Some of the products we're bringing out will -- water than down a little bit, the PS-Series, et cetera. But overall, I think, we think that we can drive the digital signage gross profits to be at or above what our average gross profits have been. So we expect it to be somewhat accretive as it grows to a larger percentage of the business over time.

Jim Ricchiuti – Needham & Co.

Okay. And the guidance that you've given for the March quarter, what I'm wondering is, with the design win activity that you've had -- has any of the business that you anticipated coming in the March quarter, slipped a little further out or are, basically it's, the design win activity that you've seen is a tracking base from -- in terms of when you would expect some of that business to ramp up?

Gerry Perkel

So I think in the design win business which really we're likes to some of our custom products, it's coming about as we expected it. We expected much of it to come after the March quarter so in the second half and it, it's always little difficult to predict how fast those ramp up, but we are trying to do the best job we can there, I think that will start ramping in the second half.

I think as we saw the quarter start here over the first part of January or is it little softer than maybe what we saw in the fourth quarter, but that tends to be our seasonal pattern that January tends to be a little bit softer than what we've seen in other months. And so we expect to start seeing a pick-up here as we move into February and March.

Jim Ricchiuti – Needham & Co.

Okay. And how much is EL now, I mean, it's been declining for some time now. How significant a part of the revenue is EL and you talked about potentially some wins in this area. How do we handicap whether those come in or not and if they did, when would you anticipate those being converted into revenues?

Gerry Perkel

The EL is about $25 million to $30 million round numbers of the total revenue and for the company at this point. The EL’s design cycles are take quite a while, we've been working on these for a while, I wouldn't anticipate any FY '12 impact, but if these deals do come to fruition, and some of them are substantial, it would probably be an FY '13 impact, but we're not forecasting that at this point, because there's a lot of work that has to be done to get those into production. But if they do move forward at the pace that we think is possible it would be an FY '13 impact.

Jim Ricchiuti – Needham & Co.

Okay. And then, with respect just in general for the digital signage business. How are you looking at some of the more problematic, geographic regions, for instance, Europe, I mean are you -- it sounds like you've already seen some slowing in Europe. I'm just curious as you look at the second half of the year, what are your expectations in that region?

Gerry Perkel

Well, I think we're going to expect the European region to continue to have some challenges and what we've seen there is both the kind of the double whammy of the economic challenges maybe slowing demand, coupled with so many companies competing for that slower demand, the pricing has been pretty aggressive in pretty challenging pricing environments in some of the business transactions we've been involved in.

So, we're kind of expecting that the underlying macroeconomic factors in Europe are not going to be improving much and building our forecast of that, maybe we'll get some better results from that, but I think that's the way that we're really focusing right now, is expecting it not to get better really in this fiscal year.

Jim Ricchiuti – Needham & Co.

Okay. Thank you.

Operator

Ladies and gentlemen, that will conclude the question-and-answer portion for our event. I'd now like to turn the presentation back over to Mr. Gerry Perkel for closing remarks.

Gerry Perkel

Well, thank you for joining us and we'll talk to you again in three months. Thanks. Bye.

Operator

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

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