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Planar Systems, Inc. (NASDAQ:PLNR)

F2Q2012 Earnings Conference Call

May 02, 2012, 17:00 p.m. ET

Executives

Gerry Perkel - President and CEO

Scott Hildebrandt - VP and CFO

Analysts

Steve Spence - RBC Wealth Management

Derek Brumfield - The Kelt Group

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2012 Planar Systems Earnings Conference Call. My name is Trisha, and I will be operator for today. At this time all participants are in 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’d now like to turn the conference over to your host for today Mr. Gerry Perkel, President and CEO. Please proceed.

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 issue 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 expect, anticipate, intends, plans, belief, seize, 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 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. 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.

That behind us, let me move on and talk a little bit about our results. We are obviously disappointed in the revenue levels and resulting loss the company generated last quarter. We have been expecting to see orders at a slightly lower level than we had seen in the previous two quarters, but our order rate came in much softer in our second quarter than in the previous two quarters and below our expectations.

We have typically seen some seasonality to our revenues with the second quarter typically being our softest quarter, and while we expected some softness the order rate simply came in much lower than we expected.

There were several drivers to the lower order rate. First, we saw average order size in some product areas to be smaller than we have previously experienced as a number of larger transactions slipped outside the quarter. We also experienced some softer demand from some of our OEM customers as they saw softness or changes in their businesses. We also built a bit of backlog this quarter as some of the new orders we did received were scheduled out beyond the end of our quarter based on the customer’s requirements.

Finally, we saw some loss of productivity as we made some changes in our sales organization as part of our continued work to transform our company to be better positioned to access the digital signage and growth opportunity.

Now let me talk a bit about our various product lines. In a digital signage area, we saw growth in our standard digital signage product offset by a decline in our custom digital signage products. Overall, sales of digital signage products were $7.5 million which is down 3.9 million from the second quarter of last year with custom digital signage products being down approximately $4.8 million as two of our larger signage customer did not reorder this year after having purchased large amounts last year during the second quarter.

Our standard digital signage product sales were up 14% compared to the second quarter of last year as our Matrix product line continue to grow delivering 33% year-over-year growth in the second quarter.

As we move forward with our digital signage growth effort, we expect the primary growth driver to come from our standard digital signage products. We launched several new products this past quarter to help propel that growth. Most noteworthy is our new Planar Mosaic product line. This multi display system builds off our Matrix technology base, extended significantly and will allow us to enable customers to build tiled LCD wall of a variety of shapes and sizes and design, and to address new applications of tiled LCD walls. This also includes a new square video tile which will enable new types of designs as well.

In addition, we launched new additions to the Matrix family of product to enable more applications to be accessed with our product line. We also have several other new products under development that address the digital signage market which we expect to launch and begin shipping later this fiscal year.

In our commercial and industrial product lines, we saw sales of $30 million which was down 18% from the second quarter a year ago. We saw good growth in our desktop monitor and touch monitor product lines which has offset by a declines in our rear projection cubes, EL, and high end home lines.

As we look forward in our commercial and industrial product lines, we do see some potential for sequential improvement in the third quarter as we see some improvement in rear projection cubes and continue to strengthen desktop and touch monitors. In addition, we expect to see improvement in our custom commercial and industrial product lines as we see a strengthening with some of our production customers.

As I said at the outset we are disappointed with the results and are committed to improving them. We did elect in the quarter to reduce expenses in an effort to lower our breakeven point. While we have reduced expenses across the company, we are not in any way giving up on our pursuit of growing our digital signage revenue base as we continue to see a variety of opportunities in the digital signage marketplace. We believe it is a strong market and we will continue to pursue it.

With that let me turn it over to Scott to talk about our financials in a bit more detail. Scott?

Scott Hildebrandt

Thanks Gerry. Let me start with our income statement. As you are aware we reported GAAP loss per share of $0.33 and a non-GAAP loss per share of $0.17 earlier today for our second quarter of fiscal 2012.

Non-GAAP results exclude non-cash GAAP items such as intangible amortization expense, foreign exchange gains or losses resulting from foreign based translation of U.S. nominated assets, share based compensation expense, some tax items and other non-recurring charges such as restructuring and impairment. But more detail on these items the reconciliation is included in the supplementary tables within our press release.

Focusing in on our non-GAAP results, gross profit as a percent of sales decreased to 19.3%, this compared to 29.2% reported in the second quarter of fiscal 2011. The decrease in gross profit margin as a percent of sales from the previous year was primarily due to the under absorption of expense in certain production areas as a result of lower than anticipated sales as well as an unfavorable product mix with lower sales of relatively higher margin products such as rear projection cubes. Non-GAAP operating expenses for the second quarter of fiscal 2012 were approximately flat at $12.8 million compared with the same period a year ago.

Increases in research and development and sales and marketing expenses focused a digital signage product areas were offset by a reduction in general and administrative spending. We also recorded a $500,000 net restructuring GAAP charge in connection with the implementation of cost reduction actions designed to lower our breakeven point.

Our non-GAAP effective tax rate was approximately 37.5% for the second 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 loss.

Turning to our balance sheet, cash declined approximately $5.2 million to $15.1 million compared with the end of the last quarter, driven primarily by the loss recorded in the second quarter has declined in receivables and payables roughly offset.

Looking forward, we expect sales to be higher in the second half of fiscal 2012 compared with the first half. Based on this expected increase in revenues combined with the lower expenses as a result of our recent cost reduction actions, we believe we will report a slight profit on a non-GAAP basis in the fourth quarter of fiscal 2012.

For the third quarter of fiscal 2012, we expect a sequential increase in revenue, improvement in consolidated gross profit margin as a percent of sales, and approximately $700,000 less in operating expenses. As a result we currently anticipate revenue in the range of 39 to $42 million and a non-GAAP loss between $0.07 and $0.10 per share for the third quarter of fiscal 2012.

Shifting to some additional forward-looking estimates, we believe average shares outstanding will be approximately 20.3 million for the third quarter of 2012. In addition, as discussed during or last conference call, capital expenses will trend higher over the next three to four quarters as we implement a new core business system to both improve efficiency as we grow and replace them of our ageing legacy systems. As such we are projecting capital expense of $1.2 million and $500,000 of depreciation expense in the third quarter of 2012.

With that I will turn it back over to you Gerry.

Gerry Perkel

Thank you, Scott. As we look forward we are working towards driving the company towards profitability and continuing to grow our digital signage revenues. As Scott said, we expect to search engines sequential improvement in our business in the second half and our goal is to become profitable in the fourth quarter.

As we look beyond this year, we expect to continue to search engines our digital signage revenue growth become a larger portion of our overall revenue base. We have seen significant growth in our Matrix product line and expect our tile LCD system revenues to continue to rise. We also have a number of other digital signage products under development that e expect to launch in the second half of this fiscal which should provide us a broader product line base from which to grow next fiscal year.

With that let me open it up for questions, and operator can you come back on the line please.

Question-and-Answer Session

Operator

(Operator Instructions) You have a question from the line of Jeff Martin from Roth Capital Partners. Please proceed.

Unidentified Analyst

This is (inaudible) calling in for Jeff. Just a few questions, first on the cost reduction plan. Can you walk us through the strategy behind this, I mean that being is a focus here on reducing headcount or is there more going on?

Scott Hildebrandt

Well, we took some actions in both headcount as well as some program dollar areas. The reduction we did was approximately 50 people across the company, and what we try to do is to make sure that we kept our focus and resources on the growth opportunity, but allowed us to lower the breakeven point and to get the cost structure down little bit lower as we see that revenues are not coming in as strongly as we had expected.

Unidentified Analyst

Okay. And then on your visibility, what are you seeing heading back into the back half of the year, what’s giving you confidence in being GAAP profitable by [two quarter]?

Gerry Perkel

Well it's really all about getting the revenue line back up to higher point and as it relates to moving into this quarter, we started the quarter with a little more backlog as some of the orders we did get last quarter were for shipments in this quarter and so we entered this quarter with more backlog than we had last quarter. And we have seen the early part of the quarter order rate to be little stronger than what we have seen in the past and so, we are starting to see the orders come in to support an expectation of some higher order rate. And then on top of that as I mentioned we do have a couple of new products that will begin shipping here in the second half and so opportunities for that which are in general additive to the opportunities that we are working on now should enable us to grow the revenue sufficiently to get up above the breakeven point.

Unidentified Analyst

Okay, and then what are your expectations for gross margin percentage in the back half of the year?

Scott Hildebrandt

We talked about the EPS in the third quarter and then profitability in Q4. So, obviously the gross margin percentage is going up a bit. I think for your models we were looking at like between 23, 24% somewhere in that neighborhood.

Unidentified Analyst

Okay. And then on the last question, the large orders that were pushed out are those set to return in Q3?

Gerry Perkel

We have captured couple of them already, and we have more than we are working on, it's just for whatever reason we had seen kind of pace of closing of deals in the second half of last calendar year, that when January rolled around. It just slowed and people took more time and things got delayed and couple of them were big projects that are linked to construction projects that had some delays. So, we are continuing to work those. We did not see a lot of losses in the quarter, and the big opportunity, most of them were delayed and so while I’d like to say yes everything is right back on track, I’m a little hesitant just because the last three months has thought us that the things are little bit slower than they were maybe six months ago. So, we have seen a couple of them come in already, we are working them and we are hearing good news about them, but we are being a little cautious about going out (inaudible) before we get them.

Operator

(Operator Instructions) And you have a question from the line of Steve Spence from RBC Wealth Management. Please proceed.

Steve Spence - RBC Wealth Management

Can you give us a little bit of kind of looking backwards sometimes (inaudible) but the decision made about a year ago to take the portion of the balance sheet, and to strategically spend and if I recall the scenario correctly to help to build the end markets and your ability to meet them. What’s the best way to characterize the shortfall in terms of a return on the investment, is it a competitive problem, is a pricing problem in end markets. The answer is probably some of each but if you give a light there be helpful?

Scott Hildebrandt

Well I’d say couple of things, one is that a lot of what we are trying to build is in fact showing improvement which is a little hard to see through some of the challenging news that we have here but the what I will call the standard digital signage product sales while they were only up 15% this quarter they were up great deal in this last quarter. And I think by the time we get to the end of the year. I don’t know exactly what that number will be, but it's going to be up at least 40% or something along those lines maybe 50%. And that’s exactly what we were trying to do.

The difficult challenge is some of the places that we worked looking to grow but we were counting on holding steady or maybe having some modest growth from the markets they are in have not done as well. So, in our EL product and in some of the custom digital signage which e didn’t expect to grow and in some of the other product lines that high end home etcetera, where we were looking to kind of stay flat, we have seen declines there. We weren’t upping the investment in those areas but we were expecting those businesses to continue to provide the kind of value they were. So, we have made some good progress.

Now I’d say that just in the last few months, we have seen a little bit of a slowdown to what was a rather torrid growth pace in some of the digital signage areas. And we have seen a few analyst reports saying that yes Q1 calendar was a little slower and step down from what people have been seeing at the torrid pace there. So, there is a little bit of market timing and pause issues you will but our indications and the step we see going forward is there continues to be a robust set of opportunities and customers beginning to look at deploying more in a digital signage area.

So, I think it's a combination of some good progress maybe not quite as much as we had hope to in some of the areas we were investing in coupled with some declines that we had not been anticipating in the areas that we were not really investing in. So, make sure if that answers your questions as precisely as you like, but that’s a picture I’d draw.

Steve Spence - RBC Wealth Management

You talk about the price points in the marketplace and any structural cost pressure that are the industry is experiencing that it can or cannot pass through in terms of your selling prices. What is going on in that regard, that’s another gross margin issue that’s not related to volume.

Scott Hildebrandt

Yes, it's a little different story in each of the different product lines, but I’d say that in most of the either product lines that’s been around a while or fairly generic product lines, I’d say there is probably overcapacity in the marketplace, some pricing is challenging. I don’t think that’s particularly worse today than it was three months or six months ago, but it is challenging. So, for desktop monitors for instance there is plenty of supply and there is always the challenges is that over supply in this quarter or whatever and what’s going on with the pricing etcetera there.

I think in rear projection cubes it really matured technology, there is once again I think over supply as I think market is not growing and the players that are read it have more capacity than is available to be consumed and so we do see some pricing pressure there.

In the places where things are a little more innovative or newer some of the tiled LCD walls we see pressure that it multiple competitors in the market but we have some uniqueness, so not as quite much pressure on some of those areas. So, I’d say that the bulk of our gross profit issues are either related to volume or mix our products have different gross profit levels obviously. And so the mix is unfavorable it's a little lower, but they are not related to all of a sudden we are having a price to products markedly lower than we have been.

Operator

We do have one enter the queue and that is Derek Brumfield from The Kelt Group. Please proceed.

Derek Brumfield - The Kelt Group

Couple of quick things it seems like that when I read the results and kind of see what you guys are highlighting as what’s going on. It seems to me that it's pretty clear that the one growth area of the digital signage I think we are all aware that. Is everything else around digital signage, kind of just trying to maintain and create revenue and some decent margin, but do you guys see any kind of growth other places as I said to the signage that you are relatively excited about. And second part of my question and then I will slip in, is as far as the home theatre goes, any traction there and I know it seems like there is not, but I was just wondering where the home theatre business is right now an what where we see that going forward?

Gerry Perkel

Okay. So, clearly digital signage does offer a lot of growth opportunities in several of the other product line we are in more of maintain our position. Although we have in this year seen some pretty nice growth in the desktop monitor and touch monitor side of our business. And we see a few opportunities there as touch interactivity becomes a bigger part of the user interface and the potential that has new operating systems from Microsoft come out that there may be more opportunities there. So, there is some potential for opportunity there but most of our views on growth or in digital signage and kind of keep most of the rest of the portfolio either in the flattish or modest growth has been our goal.

As it relates to the home theatre business continues to be a very challenging market space, and we see revenues lower than what we saw a year ago, they seem to have kind of flattened over the recent pass just what we are seeing now. And we see customer still buying products but nowhere near at the rate that they were a year ago. And I think we have seen in general a bit of a step down in price on average whereas a year or two or three ago people might have been spending a little bit more per projector or per home theatre construction project that’s spending a little bit less going for maybe some lower cost products to outfit their solutions. So, we don’t see that improving a whole lot n so we are doing what we can to make sure that we are as much in control of what we need to do from expense standpoint given that revenue level.

Derek Brumfield - The Kelt Group

I guess when you guys first kind of had bought the (inaudible) brand and then we are trying to integrate it into company. I remember one of these conference call the comment was made it's not going to become, we don’t want to let it become a (inaudible) on our earnings. I think it was for a while, are you thinking that with home theatre did that ever become that and has it or are your expenses in line that we can kind of at least maintain?

Gerry Perkel

We don’t really go through and build a four P&L for each product or each product line in the company, but what I can tell you and looking at that is, on a given quarter we had a few problem, we have been trimming the expenses there to make sure they are outlined with the revenue, it does consume some fixed expenses in the company that wouldn’t necessarily go away if the product line wasn’t there, but we are looking at everything we can to make sure that it doesn’t become something that’s too much of a drag for us on a going forward basis.

Operator

And we have no more questions in queue.

Gerry Perkel

Okay. Thank you very much for joining us on the call and we will talk to you again next quarter. Thanks very much. Bye.

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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