PAR Technology Corp (PAR) 2003 Q3 法說會逐字稿

Good day Ladies and Gentlemen and welcome to the Q3 2003 PAR Technology earnings conference call. My name is Mike, and I'll be your conference coordinator. At this time all participants are in a listen-only mode. We will be facilitating our question and answer session towards the end of this conference. If at anytime during the call you require assistance please press star followed by zero and our coordinator will be happy to assist you. I would now like to turn the presentation over to your host of today's call, Mr. Chris Barns Director of Investor Relations. Please go ahead.

Thanks Mike. Good afternoon and welcome everyone to the PAR Technology third quarter earnings conference call. By now all you of should have received copies of the third quarter results. Here to discuss those results is John Sammon [inaudible] Chairman and CEO, Ron Casciano the company's Chief Financial Officer, and Greg Cortese CEO and President of PAR Tech, Inc.

Before John begins with the prepared remarks I want to caution participants that forward-looking statements on this card, including forward-looking statements regarding our expected performance for the remainder of this fiscal are made pursuant to the Safe Harbor provisions of the private securities litigation of 1995 -- I'd now like to turn the call over to John Sammons, PAR's Chairman and CEO.

Good afternoon. Today I'm going to be presenting the results for our third quarter. Third quarter revenues from continuing operations were 36 million, a 13.3% increase from the 31.8 reported for the same period in 2002. This represents the highest quarterly revenue in the past four years. Income from continuing operations increased 18.2% for the period to 858,000 or 10 cents per diluted share compared to 726,000 or 9 cents per diluted share reported last year. When discontinued operations are included, EPS per the period was 9 cents per diluted share compared to a loss of 3 cents per diluted share last year. When discontinued operations are included, EPS for the period was 9 cents per diluted share compared to a loss of 3 cents per diluted share reported last year.

For the nine months ending September 30th revenues from continuing operations were 98.6 million compared to 99.4 million reported 1 year ago. Year-to-date income from continuing operations were 1.5 million or 17 cents per diluted share compared to 2.3 million or 28 cents per diluted share reported last year. When discontinued operations are included earnings per share for the nine-month year- to-date period was 15 cents per diluted share compared to 5 cents per diluted share reported last year.

Generally we are pleased with our performance this quarter having wondered if difficult clients are selling software, hardware and services to the hospitality sector over the past year. We have seen increasing interest and activity in the sector of our business which is reflected in product sales being up 18% for the quarter. Additionally we experienced a 10% increase in our government contracts business in spite of some program delays and a funding hiatus in our logistic management program.

In looking at quarterly revenue break down-- Product revenue was 15.5 million up 18.1% compared to the second quarter of 20002. This increase generally reflects an improving hospitality market with strong sales to McDonald's, Young Brands and Chic Fila.

Service revenue for the quarter was 10.1 million up 9.6% compared to Q-2 of last year. This increase reflects increased installation revenue associated with increased sales this year versus last, but lags product revenue growth due to warranted that where we cover the equipment service other warrantys.

Contract revenue was up 10.2% to $10.4 million for the quarter. This increase was slightly lower than expected due to program slippages and slower than anticipated start up on new acquired contracts. We do anticipate higher growth if these programs mature and recover from a funding hiatus in our logistic management program.

Turning to margins--product margins for the quarter were 34.2% unchanged from a year ago. Service margins were 17.1% versus 20.9% a year ago. Contract margins were lower than average at 4.6% compared to an exceptionally high 8.5% of last year. Typically contract margins run between 5 and 6% but last year we experienced an exceptionally closure on a large contract. Margins this year have been running slightly than lower average due to start up costs of some new long term contracts which over time will average out to the more typical 5 to 6%. Turning to expenses, SGNA expenses for the quarter were 4.7 million down 6.9%. R&D expenses were 1.4 million up 15.7% from last year reflecting an investment in our logistics management program.

Summarizing we feel that our business is recovering nicely from the softness in the restaurant sector over the past 4 quarters. Our sales to McDonald's are back on track as McDonald's business continues to improve and management strategies become clearer. Last quarter we announced a big win at Young Brands, specifically a contract for the rollout of POS systems to KFC domestic. This rollouts has commenced, contributing significantly to Q-3 revenue and will continue into next year.

As I explained last quarter this one is strategically important, beyond the domestic KFC rollout, for the following reasons: First KFC franchisees typically purchase their POF systems from the corporately approved suppliers. Currently KFC domestic franchisees operate 3800 stores bringing the total of franchises in corporate KFC domestic opportunities to 5,200 stores. Secondly although our contract is with domestic KFC it was negotiated with Young Management for The Young Brand contracts and with the intent of Young Brand to purchase POS systems office master agreements. Considering the strong position PAR holds in the Taco Bell sector for the past 20-years and the fact that PAR is one of only two approved international suppliers it is likely that PAR a strong business relationship over the next decade with the world's largest chain which currently operates all 32,000 stores worldwide. For these reasons this win is both significant and strategic. Additionally recently we had another significant win having been selected by Chic Fila as their POS supplier for all their 1200 stores. Q-3 sales were positively impacted by this important win and we anticipate strong sales for the highly successful chain over the next few years.

On another bright note, restaurant product margins remained at 34.2% reflecting higher software content in our product [inaudible] compared to historic margins earlier in this decade. We view this as an important accomplishment since we have, over the past several years, invested a significant money and effort to create feature-rich software targeted to our restaurant market.

This quarter we successfully released a new version of our Enterprise POS software, Fusion 3.0 which has been in development for the past 2 years. Extensive field tests and many restaurant concepts indicate that we have a robust, reliable and easy to use product which meets our intended design requirements. We now look to increase software sales over the next year based upon market acceptance of this important product.

Traditionally we do not run a very large POS backlog since some of our major accounts simply fill their requirements using prenegotiated agreements with 1,2, and even sometimes 3 approved suppliers. Although these long standing business practices have not generally changed, our backlog [inaudible] Q3 stands at a record $12 million reflecting new contracts including those with KFC and CKE which owns Hardees, Carl's Jr's, [inaudible] and Green Burrito.

In Q-3 our government business was slightly behind our internal plan due to program delays and slower than anticipated start ups on new contracts. Contractual work has begun to accelerate in several new programs and thus we expect the [end of the year a hunt plan] in our quarter government business. Never-the-less our overall government business is being negatively impacted by a funding hiatus in our logistics management program. Our logistics management project involving container security is widely acknowledged as a high priority program and we do anticipate the [resumption] of funding next year. The future of our government business remains quite good considering the pipeline of opportunities which we are pursuing as well as our record current backlog of $138 million.

Looking into the future in Q-4 we anticipate revenue growth in the range of 15% with a very significant improvement of the bottom line compared to 2002 Q-4. Beyond Q-4 take into consideration all known factors, particular in the improved help of the.hospitality sector and the resulting turn around of our POS business we feel that our overall business will experience top line growth over the next year in the neighborhood of 15% with a much higher improvement in the bottom line. This ends my formal remarks and I will now open up the session for questions. Mike?

Once again to key up for a question please press star one to ask a question; press star 1 on your key pad. Star 1 to ask a question, ladies and gentlemen. We have one question here from Jeremy Holland from Ecapital Corporation. Go ahead.

Congratulations guys on the strong quarter. A quick question is where do you see the greatest opportunities in the hospitality sector for your POS systems and terminals?

I think our traditional accounts of Yum and McDonald's are very strong and will continue to be strong going into the future particularly with the Yum account, as I indicated, the contract we signed recently with them has positioned us well. McDonald's rebound, having gone through financial difficulties of their own, is boding well for us. Next year we have a convention year with McDonald's, every two years they have a international convention and that's always a strong year for our point of sale business.

But beyond that we are looking to grow our business with new accounts, leveraging our infusion software which is Enterprise software that links the store back-offices to above the store, and with the release of the infusion 3.0 product we are looking to bring on new accounts and so our major opportunities, to answer your question, Jeremy, I think, beyond our traditional accounts are accounts that will come in because of attractiveness of the Infusion product. We have a number of clients that are in the process of testing the software, and so we expect our sales to be driven by new opportunities created by Infusion.

Can you also comment on where you think inventory levels will go from here?

Hi, Jeremy. Ron Casciano. Jeremy, we started out the year with higher than normal inventory levels we have been able to bring those down throughout the year; we still have a little more work to do, and we think we should see a slight further decline in the fourth quarter, and then continuing that -- number into next year.

The major reason for the ramp-up in the past year has been in customer service as we released a new product within the last year; the requirement for service parts as well as the addition of some new customers that provided more service contract opportunities for us. Those factors have caused air ramp-up in the inventory on the front end. But we are working on it. And we are--plan to gradually bring the levels down over time.

I'd also like to answer your other question Jeremy, we have seen significant growths outside of the food services sector. Sales to theaters, cruise lines, spas, theme parks; there's a number of new opportunities that seem to be developing for us for our products, and so we are looking for significant growth in that sector as well.

Great sounds exciting, we're looking forward to hearing more positive announcements Thanks.

The next question comes from Michael Barrish with Lazarus Investment Partners.

Good afternoon. great quarter. Can you perhaps give us some color on the announcement the other day of a new relationship with this kinetic's company? And where is there overlap or what sectors are they covering that you don't really do yourselves?

This is Greg. The relationship with Kinetics--Kinetics is the number one kiosk or self-service provider for the airline industry. They have about 77% of the market. They approached us-- we basically approached each other-- to go after the food service and the entertainment areas-- cruise ships, theaters, et cetera in order to bring their technology forward.

But the technology we are bringing forward is primarily their self-service multimedia software piece. The hardware piece, although in the beginning, we will be working with them in designing the hardware piece for our market, that would be something we would be doing ourselves in the very short-term. So it would become our hardware, their software, our services and infrastructure going forward. But the relationship we have is to take the self-service into the food service and into the entertainment and nonhospitality areas we are currently involved in. I just came back from a food technology show and it is being very well received.

A lot the fast-food restaurants and a lot of the entertainment people are looking to put kiosks and take that model that is basically used in the airline industry into their particular markets. And a quick service they are looking at it from a of almost having a cashless speed line, so they are combining two things here, not only the self-service kiosk, but also an electronic payment or cashless piece that will help speed people through the line and at the same time provide them with good service.

Okay. And can you give us perhaps some more commentary, I know you had developed some relationships with cruise lines and a theater chain. Have there been any additional progress with other operators as well.

Yes there has. Hopefully, Lowes is the biggest one, and they are still rolling; we hope to get another segment of Lowes and roll it into next quarter. Another division of theirs that would be substantial.

We think that we have one other company--two other companies we are working with and that are very close. One we hope we would be announcing very soon the other one will probably be the early part of the next year.

Thank you.

The next question comes from Sam Bergman with Bay Barry Capital Management.

Good afternoon.

.

Good afternoon.

Nice quarter couple questions one with regard to research and development. Can you give us an idea about where the numbers will be in the next several quarters. I know it was ramped-up this quarter. Is it going to run at the rate of this quarter or some what less in going forward.

This is Greg. There will be a slight increase going forward in line with this quarter a little bit larger in the next few quarters as we come out with some new products--new hardware products in R&D. And they should be out by midnext year.

Midnext year.

Yeah. There will be a slight increase in each quarter for the hardware side.

Is there any plans to break out the software revenue as we look to next year--in the quarterly report?

Not at this time, Sam.

Can you give --.

Sam, I'd like to follow-up on Greg's comment on the Rand D. There's one offseting factor not part of the POS business. In the third quarter, we experienced about $300,000 of R&D relating to the LMS project that we had predicted we would have due to the funding hiatus. So that will not reoccur at the same level going forward. That would be -- when you look at the the consolidated number that will be an offset to the comments that Greg just made.

I see. And the software revenue, towards debit -- I should say credit payments and credit card use at McDonald's has there been a tremendous amount of McDonald's stores changing over to that system where you have extra revenue on the software side?

There are a lot of McDonald's turning over and rolling out debit/credit. It's their software not ours. Therefore we are doing a significant number of installations and roll out but there's no software element with that.

What about the other chains that you're dealing with right now?

They are experimenting at this time and are beginning to roll out--are looking for solutions trying to find the right solutions to go forward. In some case its could mean additional software revenue to us and in others, not. In all cases it's an amount of software they have to upgrade and purchase the module for debit/credit.

If the product manufacture or how you manufacture--what particular event that may have occurred sometime this quarter or anytime this year when you were able to stem the rising costs of perhaps manufacturing of products either implemented or plan to implement as you go forward?

We have a cost reduction program that runs continuously and what we do as a matter of course. And what we do is that every year we put together a program at the beginning of the year to do cost reduction within our products. And then it's a significant reduction, and normally we meet those objectives. So, as a general answer would say that we have cost reduction as a part of our culture here. And have always reduced our product costs every single year, simply by engineering changes we incorporate into the product or buying opportunities that we have, but we always give an objective to the manufacturing sector of our company to reduce manufacturing costs.

John, has anyone done comparison of outsourcing to hardware or not?

We have looked at that. We have we assemble here basically. We buy parts from various places; our mother board is not manufacturing by us. It's designed by us. That is as far as we will go. When you look at the products itself the labor portion of the product is small. Therefore, when you try to analyze taking it overseas or along that line it doesn't make sense, and we have highly qualified people putting out the best product in the industry, and it's not something we want to tamper with too much. We put out the most reliable product of any POS vendor has out there.

Thank you very much. I'll let somebody else get on.

We have a follow-up from Michael Barrish of Lazarus.

Can you perhaps give us some color on the security tracking systems? I -- I realize there's been the hiatus on the spending, I believe you were engaged in a couple of beta tests, I wonder if you are further along in terms of being able to identify the efficacy?

I think that what we have shown with the test that we have in place is that the equipment is reliable it does what it's supposed to do in terms of the location of the chassiss as they are moving about. What we have found is that the price point is not an attractive price point to the industry at this point and time. I think I reported earlier on this, Mike, that we felt that we had to bring the cost down probably about 50%.

Right to 50 cents.

Yeah, down to 25 to 30 cents that's correct. That's about 50 cents now. And we are working towards that objective. But in parallel with that, we feel there are areas of particularly good area for us for a couple of reasons. One is that we are in the mainstream of the Homeland Security prospects--the security tracking of containers and expect we will get some funding next year from Homeland Security. We are tracking a number of programs, which would be government programs to demonstrate the efficacy of the product for the security purposes. But there's also a lot of talk in the government about the possibility of mandating the tracking of containers and should that happen the price point isn't terribly relevant it's going to become a requirement.

In parallel with all of this, the cost of implementation for this technology is coming down. As the 9-11 requirements on the 911 requirements for cellular phones comes into being there has to be GPS coupled with cellular communications--what happens, Mike, the cost of the 2 functions the GPS and the cellular modem come down in cost. We are going through a period of time where the costs are going to come down. The government is very much interested in the security aspects of the product. The product maybe mandated for security reasons but in any case the cost is coming down. We will stay with in area with the intention that something good is going to come out of it in the next couple of years.

Unfortunately we had the hiatus in funding, that has cost us money but I think it's a good investment to stay with this particular area. On the good news side of it we have earmarks that have been, approved on the senate and house side. And they are going to be going through resolution committee in the very near future. So I think the funding is going to be coming along for the area, and for the reasons I indicated we want to stay with it.

Right. Thanks.

You're welcome.

We have a follow up question from Sam Bergman.

Just a couple remaining questions. Research and development, can you tell me aside from the 1.4 million on the P&L. How much was funded by the government or what figures did the government fund in any of the projects in that quarter?

Sam, the R&D line and all on the commercial side. Generally speaking it was an anomaly this quarter we put the logistic management into that area. But that line is completely commercial and none of that money comes from the government.

Okay.

The government research we are involved in, Sam, is covered under contract and included in the cost to contract line.

Can you give me any benefits in the banking industry right now in terms of selling your hardware right now? I know you had a couple of contracts in the past; is there still activity there or not if.

There is still some activity there. We have software bar in that area who buys the equipment and is moving forward but not at the rate I would like him to. We are looking into that.

In the nonhospitality area sales will be up well over 100 percent over what they were last year and probably at least another 50 or 60% more next year, we are anticipating, that is being done with essentially 1 1/2 people and next year we will add another person. The area we started off with and have good success with and now we will do more investment in it as as we invest in it we're going to find more and more bars, swimmers, too other than our banking bars and other areas to take our hardware into.

I would think that if McDonald's is using the hardware that a lot of the top-notch chains where they are able to move customers so quickly because the hardware is good, I think the banking industry would want to do the same thing and want to use more of the hardware equipment.

One of the things we tried do. Some of the competitors build for retail and try to move into the hospitality area with hardened requirements. We took it the other direction it's resonating well. They really like the fact [inaudible] because the live cycle cost is much less.

Our next question comes from Jeremy Holland with Ecapital corporation.

One more question. How is the bidding pipeline looking for government contracts?

It's looking reasonably well. I think the pipeline is somewhere between $30 and $40 million of programs that we are looking to bid in 2004. We are being a little bit cautious in the area, there's--with this Iraq situation and the --amount of dollars required to fund -- dollars to fund Iraq we are seeing hesitation with some of the government customers. We are being a little bit cautious how that sorts out.

The pipeline, to answer your question directly, the pipeline looks pretty good--we have been effective in terms of the win rate on the jobs. But I introduce a thought of caution because we don't know how this is going to sort out--the dollars have to come from somewhere and there's a struggle for the dollars within the government. But we have take into account and when we have looked at next year and think that we can sustain a 15% growth in that range, that's already taken into consideration, the impact of -- take into consideration the impact of Iraq funding.

Thank you.

There are no other questions in queue at this time.

Thank you for listening in on our call. Good evening.

Ladies and gentlemen, thank you for your participation this afternoon, you may now disconnect.