Planar Systems' CEO Discusses F3Q12 Results - Earnings Call Transcript

Aug.13.12 | About: Planar Systems, (PLNR)

Planar Systems, Inc. (NASDAQ:PLNR)

F3Q12 Earnings Conference Call

August 14, 2012 5:00 PM ET

Executives

Gerry Perkel - President and CEO

Scott Hildebrandt - VP and CFO

Analysts

Jim Ricchiuti - Needham & Company

Jeff Martin - ROTH Capital Partners

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Planar Systems Earnings Conference Call. My name is Reggie and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Gerry Perkel, President and CEO. Please proceed, Sir.

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 expect, anticipate, intends, plan, 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 earning’s 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. 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 talk a bit about our financial results released earlier today. We are pleased that we saw a strong rebound in third fiscal quarter versus our performance in the second fiscal quarter of this year. We had expected to see a rebound in revenues over the second quarter, and at $44.7 million, we exceeded our third quarter sales expectations as total sales grew 19% sequentially.

Let me talk a bit about our various product lines. In the third quarter we experienced our highest quarterly sales of digital signage products to date. Digital signage product sales were $11.8 million, which represents 26% of total revenue for the quarter, 58% sequential growth and 9% year-on-year growth. Within our signage product portfolio we saw strong performance from our Matrix Tiled LCD offering which experienced year-on-year growth of 66%.

When looking at our year-on-year digital signage results, it is important to note the shift in the makeup of our digital signage product revenues. Our digital signage product revenues are made up of what we refer to as standard products and custom products. Custom products are just that. Customized versions of products designed for a specific customer, who typically will have large rollouts. Our standard products, while typically embodying a variety of innovative features are designed to be purchased and utilized by a variety of customers.

In the past 18 months or so, our strategy has shifted more towards building innovative differentiated standard products such as our Matrix product family where we can leverage our investments and drive volume cross larger customer sets. As a result our revenues become more and more standard product oriented in digital signage. When you look at the third quarter for instance, our 9% overall digital signage product signage product revenue year-on-year growth was made up over $4 million or 56% growth in our standard digital signage products, offset by a little over $3 million in decline, in custom digital signage products.

While we made from time-to-time have custom digital signage opportunities and revenue contributions, going forward we expect the majority of our digital signage product revenue to come from standard products and our overall digital signage product growth rate to increase as we no longer have the drag of the reduced custom signage product revenue to contend with.

And the third important part of driving that standard digital signage product growth going forward is the expansion of our product portfolio with innovative leading-edge products that appeal to a variety of customers. In third quarter we made some significant progress towards expanding our portfolio. We shift our first Planar Mosaic system, which is a new offering leveraging our Matrix platform and extended it to applications where Matrix could not reach easily such as broad uses of flat panels in architectural designs.

In addition, we added a new family of very unique large signage flat-panel monitors in the UltraLux series. This family includes a one of a kind sleek industrial design, a number of great features for digital signage installers and comes in 60, 70 and 80 inch diagonal sizes. We see these products being deployed into digital signage applications that demand large size displays and where having the sleek design as a valued part of the digital signage deployment. We already have a number of orders for this new offering and we will begin shipping this product in the fourth fiscal quarter.

We also launched our first transparent LCD product with the introduction of our LookThru 32 inch transparent LCD display case. This product will help customers display their merchandise inside of a display case and to deliver marketing messages on the transparent LCD that fronts the case, and offers retailing customers a new way to display and market their products. All in all with the strong quarter for our digital signage products not only in revenue performance but in the new offerings we made progress on which position us for continued growth in the future.

Sales of our commercial and industrial product lines were $32.9 million for the quarter, which represented approximately 9% growth sequentially and a year-on-year decline of 5%. When looking across our custom and industrial portfolio, we saw a mix set of results with year-on-year growth in our custom products, desktop monitors, touch monitors and Rear Projection cubes being offset by declines in our EL and high-end home product lines. Of note, we had a record quarter of sales for our touch monitors. We see continued opportunities for growth in this product area in the future.

Finally, I also want to mention that we were able to make some real progress on reducing our inventory levels in the third quarter which helped us end the quarter with an increased cash balance compared to the second quarter. In addition, the expense reduction actions previously communicated helped us to get us closer to breakeven in the third quarter.

So all in all this quarter represents a step in the right direction. We exceeded our revenue expectations, had record digital signage product revenues, lost a number of new digital signage products, lowered our expense base and reduced inventory. I’ll be back later to talk about our views going forward, but let me turn it over to Scott to talk about our financial performance in a bit more detail. Scott?

Scott Hildebrandt 

Thanks, Gerry. Let me start with our income statement. As you are aware we reported a GAAP loss per share of $0.08 and a non-GAAP loss per share of $0.04 earlier today for our third 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 translations of U.S. denominated assets, share based compensation expense, some tax items and other non-reoccurring charges such as restructuring and impairment. For more details 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 22.0%. This compared to 28.1% reported in the third 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 expenses in certain production areas with relatively higher fixed cost basis such as our EL production facility in Finland, and also an unfavorable product mix with the greater proportion of our sales drive from relatively lower margin products such as desktop monitors.

Non GAAP operating expenses for the third quarter of fiscal 2012 declined $2.1 million or 16% to $11.1 million compared with the same period a year ago. As we discussed on last quarters call and Gerry just mentioned we implemented cost reduction measures earlier in the third quarter which drove most of the reduction and expenses compared with last year.

Our non GAAP effective tax rate was approximately 37.5% for the third 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 increased to approximately $1.1 million to $16.2 million compared with the end of last quarter, again driven primarily by the $7 million reduction in inventory, partially offset by a reduction in accounts payable and increase in accounts receivable associated with the sequential revenue growth.

Looking forward, we continue to see opportunities to grow sales of digital signage products by accessing new customers and expanding relationships with existing customers, as well as by adding new products to the digital signage portfolio including Planar Mosaic, Planar LookThru and Planar UltraLux.

For the fourth quarter of fiscal 2012 we expect continued revenue growth in sales of digital signage products and a reduction in sales of our commercial and industrial products on a year-over-year basis. As a result of the fourth quarter of 2012, the company currently anticipates similar revenue, gross profit margins and levels of operating expenses and profits compared with the third quarter of 2012.

Shifting to some additional forward looking estimates, we believe average shares outstanding will be approximately 20.5 million shares for the fourth quarter of 2012. In addition, as discussed during the last few call, capital expenses will trend a bit higher over the next two quarters as we implement a new core business system to both improve efficiency as we grow and replace some of our ageing legacy systems. As such, we are projecting capital expense of $1.2 million and $500,000 of depreciation expense in the fourth quarter of 2012.

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

Gerry Perkel

Thanks, Scott. In summary we saw a nice rebound in the third quarter and we are experiencing some nice growth in our opportunity funnels as well. We have a number of new products we are now selling and it will be key for us to understand the sales cycles for each of these new products to be able to predict when we will experience growth contributions from them. We have a number of large opportunities being identified but the timing is a little tough to predict.

Our goals are unchanged as we look to continue to leverage growth in digital signage product revenue as a primary driver of growth for the company. For fiscal year 2013 we expect the growth rate of digital signage product sales to higher than that of fiscal 2012. As that revenue level grows we look to continue our improving our P&L performance as well.

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

Question-And-Answer Session

Operator

Ladies and gentlemen, (operator instructions). Your first question comes from the line of Jim Ricchiuti. Please proceed.

Jim Ricchiuti - Needham & Company

Thank you. Good afternoon. Can you say what the percentage mix is standard versus custom in digital signage?

Gerry Perkel

Yes. At this point, Jim, it’s almost all standard product. Very small contribution from custom. I don’t have the exact number, but well over 90% standard product at this point.

Jim Ricchiuti – Needham & Company

Okay. And with that you I would think would be seeing higher gross margins. I assume that’s better margin business and how much of a drag are you seeing along those lines from the EL and Home Theatre business?

Gerry Perkel

Well, on the first question I don’t think it’s necessarily the case that the standard products are higher margin than the custom products. It all depends on the particular product portfolio that’s involved. And so some of our custom products have had high margins and some haven’t had. So it’s not necessarily higher one way or the other. And then I’m sorry, the next question about EL and Runco?

Jim Ricchiuti – Needham & Company

Well, before we get to that, Gerry, so is the newer products that you’re introducing presumably those have higher margins?

Gerry Perkel

Well, I think in general almost all of the products have higher margins in the early part of their life if their differential is larger. As time goes on and maybe other people come up with other products that may bring some of those same features. At times we’ll see it go away. So yeah, I think the newer products tend to be a little bit better and keep driving the potential for increased margins.

Jim Ricchiuti – Needham & Company

And then on the EL and the Home Theatre business, can you say what kind of a drag that is? Are you losing money in Home Theatre and on the EL side are you near bottomed do you think?

Gerry Perkel

So on each of those, we don’t really go through and do a full product line P&L on any of these things. So we don’t go allocate the administrative expenses or trade show expenses and things to a particular product line. So I can’t tell you exactly through an entire P&L analysis so where they stand. But what I can tell you is that in the Runco side I think the business has been relatively stable now for a few quarters. The margins are relatively stable and we continue to just see tough market conditions as we don’t see a real rebound in that high end home theatre market as of yet. On the EL front, it’s a matter of new design wins offsetting those customers whose product lives that include EL in an OEM basis have expired. And so in every quarter or every couple of quarters we’ll have some new design wins coming on and we have some people falling off and I’d say over this last year probably had more people falling off than some of the new design wins. But we have some pretty exciting new things that we’re working on there. So it’s a matter of can we get enough new design wins to offset that and over this past year I’d say we haven’t no matter how quickly we can do that in the future.

Jim Ricchiuti - Needham & Company

Okay. So what’s the outlook on EL? Do you see some of these newer design wins kicking in in the early part of fiscal ’13 or the second half?

Gerry Perkel

I would say it’s hard to say exactly when these folks go into production. I’d say it might be more in latter part of 2013.

Jim Ricchiuti - Needham & Company

Got it. Thank you.

Operator

(Operator instructions). Your next question comes from the line of Jeff Martin. Please proceed.

Jeff Martin - ROTH Capital Partners

Thanks. Good afternoon guys. Was curious if you could give us a sense of the strategy for some of the newer products, the Mosaic, the LookThru and the UltraLux in terms of what are the key markets you’re targeting for those? And then secondly, what your sales strategy is, whether direct or indirect.

Gerry Perkel

So for Mosaic, this product line was driven from some people that we saw starting to try to use Matrix in some different kinds of applications. In particular Matrix is a fabulous product if what you want to do is build a rectangular video wall. If you like the shape of that to be anything other than kind of a big rectangle or to use any other kinds of designs with video in it, it doesn’t work quite as well and that’s why we brought the Mosaic product out. Seeing that people who are looking to try to use video products to create a certain physical space and physical image, it might be in a lobby of a business. One of the applications that we’re doing right now is in retail store. Another one is in a chapel in a hospital. There’s a number of different applications where people are looking to use video to kind of create an architectural piece of their design and rather than other building materials starting to think of flat panel video the screens as part of the building material that they could use.

For the UltraLux products, these are going to be products where people really are trying to create a very high quality brand image. And so we’re seeing some of the initial orders for high end retail outlets, places where they’re trying to really build a brand image, some of the luxury goods, brands we’re seeing in some of the public venue marketing spaces like airports, things like that. So retail, public spaces, high performance areas where they want to make a really high quality image and separately have the need and the space to make it very large. So these are 60, 70 and 80 inch displays. So they need the space to be able to support that. But we’re seeing a lot of interest and we see that in the large flat panel space that the larger screen sizes is where the biggest growth is going to be taking place over the next couple of years. And so for those products we continue to leverage our primarily indirect model.

Our products are almost all sold through some sort of reseller or integrator. But we do have some vertical market selling in marketing resources particularly aimed at the retail space where we’re not only working with the resellers but also some of the end users. And then also talking to the various influencers in both of these spaces, whether those are commercial architects or retail space layout folks, a variety of different folks like that. We’re looking for new products like this, including our new LookThru technology as a way of marketing in a different way to people that come into their stores.

Jeff Martin - ROTH Capital Partners

Okay. The reason I asked the direct or indirect question was about six or nine months ago you were looking at building out a direct sales force for digital signage. Have you reversed course on that strategy?

Gerry Perkel

Well, I don’t think we’ve ever been talking about building out a direct sales force for digital signage. We’ve talked about building up our sales and marketing resources for digital signage, but it’s been mostly deployed and always plan to be in recruiting more folks that sell digital signage solutions. So we’ve expanded our customer base quite a bit. The Matrix product line has led us to a number of new customers as has our other flat panel products for signage and we look to continue that. The only direct stuff we’ve done to some of the business development work we’ve done in the retail side and a few others. But most of the work that we’re doing continues to be through partners that we can leverage a much broader access to the market that way.

Jeff Martin - ROTH Capital Partners

Okay. And then any strategic evaluation plans for EL? Is that something you’ve already done, planning to perhaps do at this point?

Gerry Perkel

Constantly. We’re always looking at that and all the pieces of the company to make sure we’re doing the right things and we’ll continue to do that and if there are opportunities to find a better way to operate we’ll certainly take advantage of those. But we’re constantly looking at the portfolio as we’re trying to transform the company more and more towards digital signage. We want to make sure that the resources that we have are valuable and the product lines are supportive of that and so to the extent that we can look at different alternatives we are.

Jeff Martin - ROTH Capital Partners

Okay. And then what was the exposure to Europe in the quarter from a revenue base?

Gerry Perkel

I don’t know if we have that right off the top of…

Scott Hildebrandt

I think it was pretty similar, Jeff, to past quarters. Europe 30% ish.

Gerry Perkel

International 30%.

Scott Hildebrandt

International 30%.

Gerry Perkel

Of which Europe is…

Scott Hildebrandt

Probably by far. 25% maybe, somewhere in there.

Gerry Perkel

20% to 25%.

Jeff Martin - ROTH Capital Partners

Okay. And then what’s your expectation for inventories? Do you think that has continued to come down and then generate cash flow?

Gerry Perkel

I do think there’s some opportunities to continue. We’re not going to see the kind of magnitude of change that we saw in this past quarter. But I do believe there is some opportunities to drive a little bit lower on the inventory front. We continue to see some opportunity to bring cash into the balance sheet that way.

Jeff Martin - ROTH Capital Partners

Okay. And then do you care to take a stab at what your ongoing cash flow break even revenue base would be at this point?

Gerry Perkel

Well, it depends a lot on how the mix of the products come out. If the mix is as it was this last quarter you can just see how much gross profit would need to be there to cover it. So it’s several million dollars. But as some of these new products come on and bring some higher gross profit hopefully it’s a little lower than that. So it depends a lot on the mix.

Jeff Martin - ROTH Capital Partners

Okay. And then last question I had was, you referred to growth rate higher in fiscal ’13 and fiscal ’12 for digital signage. What about for commercial and industrial?

Gerry Perkel

I think that we’re going to continue to see some reductions in our commercial and industrial. I think overall we would expect 2013 to be a revenue growth year for the year. But a combination of more aggressive growth in digital signage than the decline rate in commercial and industrial.

Jeff Martin - ROTH Capital Partners

Okay. And then can you refresh our memory what the year-to-date growth in digital signage has been if you have that handy?

Gerry Perkel

I don’t know if we have a year-to-date growth rate. I think it was similar this quarter to last and it was much higher in the first quarter. So we get all done with the, if I recall probably something like 10% or 15% for the year what we’re thinking about.

Jeff Martin - ROTH Capital Partners

Okay, great. Thanks for taking the questions guys.

Operator

You have no further questions at this time. I would now like to turn the call back over to Mr. Gerry Perkel for closing statements.

Gerry Perkel

Thank you all for joining us for the call and we will see you next quarter. Thanks very much.

Operator

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

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