PAR Technology Corp (PAR) 2003 Q2 法說會逐字稿

Good afternoon, my name is Chastity and I will be your conference facilitator today. At this time I would like to welcome everyone to the PAR Technology Corp second quarter investor relations conference call. All lines have been placed on mute prevent any background noise. After these speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Chris Byrnes, Director of Investor Relations. You may begin the conference.

Thank you, Operator. Good afternoon everyone and welcome to PAR Technology's second quarter earnings conference call. Hopefully by now everyone should have received the copy of our second quarter results. On the call today to discuss those results is John Sammon, PAR Chairman and CEO; Ron Casciano, PAR's Chief Financial Officer; and Greg Cortese, CEO and President of PAR Tech, Inc.

Before John delivers his formal remarks, I would like to read our disclaimer. This call contains forward looking statements concerning the company's strategic plans, market opportunities, cash flows, liquidity, and future growth. These forward-looking statements are neither promises nor guarantees, but are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including without limitation risks in technology, development, and commercialization risks and product development and market acceptance of and demand for the company's products.

I now turn the call over to John Sammon, PAR Chairman and CEO.

Good afternoon. Today I'll be presenting the results for our second quarter. The second quarter revenues from continuing operations were at $32m, a 5.6 percent decrease from the $33.9m reported for the same period in 2002. Income from continuing operations for the period was $351,000 or $0.04 per diluted share, compared to the $702,000 or $0.08 per diluted share reported last year. When discontinued operations are included, EPS for the period was $0.04 per diluted shared compared to $0.02 per diluted share reported last year. The reason for the revenue decline is attributable to lower restaurant sales to McDonald's, and earnings were down due to the lower restaurant revenue and to lower earned margin on our government contracts. Overall, these results are in line with our expectations as we had anticipated both the lower sales to McDonald's as well as the decreased government margins.

Now looking at the quarterly revenue breakdown. [inaudible] revenue for the quarter was $13.1m, down 13.8 percent compared to the second quarter of last year. As just stated, the decline resulted from lower sales to McDonald's, but did not come as a surprise since earlier this year we announced that we anticipated a slowdown in our McDonald's business. The McDonald's slowdown resulted from delayed buying decisions by franchisees while the McDonald's management teams studied various strategic options including the reversal of an earlier announced subsidy to the cost of upgrading franchise stores.

Back in April McDonald's announced it's new strategy which among other things focused on improvements of store operations, but severely limited the upgrade program to only 1,000 stores this year. While the announcement of the strategy has removed some of the market confusion, there are nevertheless some regions, which have not yet resumed their normal buying patterns. We have seen sales improving dramatically over the past several weeks, but they are still running somewhat below plan.

Sales to YUM brands for the quarter were lower than last year when we benefited from a sale to Harmon's Corporation, KFC's largest franchisee. Year to date our YUM business was significantly ahead of plan and we fully expect this trend to continue.

Service revenue for the quarter was $8.6m, down 10.5 percent compared to Q2 of last year. This decline was caused by lower installation revenue associated with fewer installs this year versus last. Contract revenue was up 13.2 percent to $10.3m for the quarter. This increase was in line with our internal plan.

Moving to margins, product margins for the quarter were at 34.7 percent up from 32.2 percent a year ago. And this improvement was primarily the result of greater software content in our product mix. Service margins were up to 16.1 percent versus 15.3 percent a year ago. We're hopeful that this slight improvement will reflect a trend of improving service margins. We have recently made both management and administrative changes in our service organization in order to more closely manage our service business.

Contract margins were lower than average at 4.1 percent compared to exceptionally high 7.4 percent last year. Margins this quarter were impacted by start-up costs of new contracts, and by an investment in our logistics management business as we experienced a funding hiatus.

Now turning to expenses, SG&A expenses for the quarter were $4.7m. R&D expenses were $1.3m, both essentially unchanged from a year ago.

Summarizing, Q2 came in pretty much in accord with our revised expectations set back in Q1 when we planned around the McDonald's slowdown and the logistics management funding hiatus. Year to date, our restaurant business has been impacted by the uncertainties introduced by the management and strategy changes at McDonald's. However, over the past several weeks we have experienced improved sales to McDonald's. And I believe this is the result of some clarification regarding the corporation's position relative to a limited franchise subsidization program and store upgrades, and perhaps, more importantly, to improvements in McDonald's own business as reflected in same store sales measurements. Additionally, we are pleased with our current domestic market share and thus we will look forward to continuing improvements in this important sector of our business.

Beyond McDonald's we have made good progress in signing up several new accounts. In fact today we are announcing a very important strategic win of the KFC domestic corporate account. After a year of intense competition, KFC has selected PAR as their primary domestic supplier of POS systems and service. The significance of this win is based upon the following factors. First, PAR has been selected as KFC's primary supplier, which means that PAR will get 65 to 80 percent of the corporate domestic business. Currently, KFC operates about 1,400 restaurants domestically. Second, KFC Corporate is committed to upgrade about 1,200 of these domestic stores by the end of 2004. Thirdly, KFC franchisees typically purchase their POS systems from corporately approved suppliers. And currently, KFC domestic franchisees operate 3,800 stores; bringing the total POS KFC domestic opportunity to 5,000 stores.

And lastly, although this win is being awarded by domestic KFC, it was negotiated with YUM management for the benefit of all YUM brand concepts. And it is the intent of YUM brands to purchase their future POS systems off this master agreement. Considering a strong position PAR currently holds in the Taco Bell sector, that is that we've sole source for the past 20 years, and that PAR is one of only two approved international suppliers, it is likely that PAR will enjoy a strong business relationship over the next decade with the world's largest restaurant chain, which currently operates about 33,000 stores worldwide.

For these reasons we feel that this win is both significant and strategic. On another bright note, restaurant product margins increased again this quarter to the 34.7 percent, reflecting higher software content in our product mix. While we recognize that two quarters do not constitute a trend, we nevertheless view this is as an important accomplishment. We have over the past several years invested significant money and effort to create stable, feature rich software targeted to our restaurant market. And with persistent dedication to our goal to raise software content, we will seek continuing product margins improvements.

To summarize, our restaurant business outlook, based upon continuing improvements in McDonald's business, initiation of the KFC roll out, and the announcement of additional accounts, we feel that the sales for the second half will show considerable improvement over last year with growth in the second half of about 20 percent.

In Q2 our government business was on plan. Contractual work began to accelerate on several new programs and thus we expect to end the year on plan for our core government business. Nevertheless our overall government business is being negatively impacted by a funding hiatus in our logistics management business. The funding problem is the result of politics and confusion within the new Department of Homeland Security. Our logistics management project involving container security is widely acknowledged as a high priority program, yet due to the complexities in setting up the new Department of Homeland Security and the assignment of jurisdictions, high priority projects such as ours are being delayed. While there is a chance of getting funding later this year, we have assumed that this area will not receive government funding for the remainder of the year, and we have taken the actions to minimize the cost by maintaining a efficient skeletal capability to support commercial testing, and to position the company to restore this potentially valuable business area when funding does become available.

Last quarter we planned our overall government business to account for the logistics management funding hiatus, and now feel that our overall government business, that includes the core business and the logistics management business, will grow in the range of 15 percent in the second half, while achieving a pre-tax profitability of 2 to 3 percent, well below the traditional 5 to 6 percent range, which reflects the absorption of the LMS investment cost. The future for our government business remains quite good considering the pipeline of opportunities, which we are pursuing, as well as our current backlog of $114m.

Taking into consideration all known factors, I would summarize our revenue expectations for the year and separately for the second half as follows. We anticipate the combined annual revenue growth, year over year from all business sectors, will be in the range of 6 to 7 percent. And for the second half combined revenue from all sectors will be in the range of 18 to 20 percent.

This ends my formal remarks and we'll now open the session for questions.

Thank you. At this time I would like to remind everyone in order to ask a question please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

John, Chris, Ron - I'm on.

Thank you, Greg.

At this time there are no questions. You do have a question from the line of Michael Barish with Lazarus Partners.

John, could you go over that second half revenue? I thought I understood you to say the restaurant group would be up about 20 percent. Is the government sector also likely to be up that amount?

We think that the government - you're correct about the restaurant sector in the second half being up about 20 percent. And we think that the government business will be up about 15 percent in the second half.

Okay.

And that means for the entire organization an 18 to 20 percent growth rate in the second half.

Okay. And have you already initiated shipments to KFC?

We have put a small number of systems in as part of the testing which was quite extensive. We had been putting systems into different regions as part of the test in order for them - for KFC and YUM to make their selections of the winner. And Greg, you may be able to add to this but I think we have put in, in the range of 30 to 40 systems over the past year as part of that test.

Yeah, it's in like about 46 systems right now and the others are shipping already. We've already started shipping the roll out.

Okay. I remember when you had a big activity with Boston Markets. You had to sort of front-end some of the maintenance expenditures. Is there anything like that circumstance involved here?

This is Greg. No. It won't require that. We have sufficient resources right now to be able to handle all of - KFC and all of the other customers and still provide them with the service levels that they're used to.

Okay. And then going over to the government side, I think I understood you to say that the margins in the second half would be 2 to 3 percent because you're going to be funding the logistics management effort. What would the margins look like or what would you expect them to look like without that circumstance?

It's tax margin that I'm speaking to. And we would expect them to be in the normal range of 5 to 6 percent for the remainder of the year had it not been - or if it were not for the investment that we will be - we're planning on making in the logistics management business.

Okay. And finally, did I understand you to say that while the business at McDonald's has improved just recently it's still below your planned expectations in the second half?

It's currently running at the beginning of third quarter slightly below our internal plan. But we have not taken our plan down. Our sales force believes that as McDonald's continues to perform and their same-store sales continue to move in the right direction, that orders that we are chasing will come in, and that we will stay on plan. So, Mike, we have made a decision to not alter our plan because we do believe that things are moving in the right direction.

Right. Okay. Thank you very much.

Thank you.

Thank you. Once again, to ask a question please press star, then the number one on your telephone keypad. Again we'll pause for just a moment to compile the Q&A roster.

Your next question comes from Sam Bergman of Bayberry Capital.

Good afternoon.

Hi, Sam.

Hi, how are you? A couple of questions. One, in terms of research and development, can you give me an idea of the general run rate for the quarters for the next six months? You figure it's going to be in $1.3m or is it there going to be some greater research and development in new software that will take that number up?

I believe that it's going to be in the same range of $1.3m.

Yeah, Sam, this is Ron.

Hi, Ron.

It will pick up a little bit. We're working on some new hardware products as well as continuing our software development. So it'll pick up a little bit each - for the next - for the second half compared to the first half. But not a tremendous jump.

Have there been any cutbacks at all in terms of personnel on the government side because of the slowdown in government commitment or not?

That is the - the slowdown has been in the logistics management portion. We reported logistics management under our government business, and the funding hiatus has been there. We have cut some positions in that organization, but we - because of our expanding business in government we were able to place most of the logistics management employees in positions, in government positions. We currently have, I think, around eight - eight or nine people actively working in the logistics management, which reflect the investment that we're making. But the other part of the group largely has been placed within our government business.

All right. Congratulations on that KFC contract. But perhaps you can talk a little bit more about the POS side and what that pipeline looks like for the remainder of the year.

Well, the importance of the KFC contract, as I indicated, is very important to us. As you know, Sam, we have - we are fortunate enough to have the very largest accounts in the QSR market space. And with McDonald's and now this YUM position it really puts us as the primary supplier by a long shot of POS systems and services in the QSR sector. So it's very important to us and I think it bodes well for our future. And it is very, very strategic for us. And thank you for the - your comment.

As far as the business going forward, I think I had summarized it in the overview portion of saying that we're anticipating a 20 percent or greater growth rate in the second half. This growth is being driven by the KFC contract, by improvements in the McDonalds business, and then a number of other accounts that we have - we're currently working on and anticipate signing up over the next several months. So I think - at a high level, Sam, I think we're saying that we feel very good about the foundation of our point of sale business as far as the opportunities that are in front of us. And I also want to point out that strategically we feel that the margin improvement is a very important accomplishment. While we're not saying that we're going to be improving at the same rate every single quarter, we are - we have been investing and we anticipate with success that we will see continual improvements in that product margin. And so I think these are the important factors as we see them relative to our restaurant business.

And the only question on the POS guide - I guess you had mentioned that you didn't ratchet down at all the outlook for the McDonald's business because your sales force has been told certain things. Could you say that McDonald's is working under the assumption that if same store sales increase like they have the last couple months that the orders will pick up? Is that the rationale they're using with your sales force?

I think there's two factors. I think that is certainly one of the factors as McDonald's business improves and then they are more likely to make a capital investment. But I think also this - there was - we can't overstate the confusion that was caused by the shifting of management and the shifting of strategy. That really put a major slowdown in purchasing because the franchisees were basically told that they were going to get subsidies for investments in their store including the point of sale system. And so therefore, we anticipated an increase in our point of sale orders. Then when new management came in they put the program on hold and said they wanted to re-study it again. And then on the basis of that, that just stopped in its track the process of taking our orders. The franchisees wanted to wait and see if they were going to get subsidies or not.

And then there was this announcement that there would be some limited number of subsidies, 1,000 stores this year, which was substantially less than what we had anticipated and what the franchisees were told. And how - who would be qualified for those subsidies became a question and still is a question, and how those subsidies are going to be handed out in some of the regions within the country. McDonald's divides the U.S. into a number of regions. Some of the regions have made a very clear definition and statement relative to who gets the subsidies and who will not. And yet other regions have not had that same clarity. So we're in the state where the clarification of subsidies is an ongoing process. And as that is removed, that uncertainty is removed, we would expect orders to start flowing in from those regions just like they are flowing in from regions where that clarification has been given. So part of the reason has to do with what you suggest and that is just the general improvement of same-store sales at McDonald's. And the other has to do with this clarification of the confusion that was caused by a change in strategy and a change in management.

And the only last question I have and I'll let somebody else get on the line - the SG&A for the six months - it was a couple hundred thousand dollars. And I know you had a tough first six months and expecting the better half of '03. Is there any way you can hold the SG&A comparably flat with the second half, to '02 so you can pick up some margins that way or not?

Sam, this is Ron. There will probably be, you know, some small increases in SG&A in the second half compared to the first half. There usually is and there's a lot of little factors that go into that. But there's not going to be any substantial growth in that area. There's no large investment that we're making either in - or that we have to make either in personnel or anything else that would affect the SG&A line. So we're going to hold the line and hold or reduce the percent of SG&A in relation to sales as the second half unfolds.

Thank you.

This is Greg.

Oh, hi.

We certainly working very, very hard to ensure the fact that SG&A does not grow certainly on the restaurant side of our business. And I don't see it actually growing at all during the second half.

Thank you, again.

Thank you. At this time there are no further questions.

Well, thank you for joining in on our call. We'll be pleased to answer any other questions that you may have in the future. Thank you.

Thank you for joining today's conference call. You may now disconnect.