PAR Technology Corp (PAR) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 4, 2003 PAR Technology earnings conference call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Chris Byrnes, Director of Financial and Investor Relations, please proceed, Sir.

Thanks, Kelly. Good morning, everyone, and welcome to PAR Technologies' fourth quarter and year-end results conference call. Here today to discuss these results are John Sammons, PAR's Chairman and CEO, Ron Casciano, the company's Chief Financial Officer and Greg Cortese, CEO and President of PAR Tech, Inc. Before John begins his formal remarks, I want to read our disclaimer.

This conference call contains forward-looking statements concerning the company's strategic clients, market opportunities, liquidity and future growth. These forward-looking statements are neither promises nor guarantees, but are subject of risks or uncertainties that could cause actual results to differ materially from those set forth in these statements. The company cautions investors not to place undue reliance on these statements, which are currently only as of the date of this conference call. I'd now like to turn this call over to PAR Chairman and CEO, John Sammons.

Good morning. Today I'm going to be presenting the results of our fourth quarter and the year ending December 31st, 2003. Fourth quarter revenues from continuing operations were 41.2 million a 20.3% increase from the 34.3 million reported for the same period in 2002. This represents the highest quarterly revenue in the past four years and the second highest ever. Net income from continuing operations increased 266% for the period to 1.3 million or 15 cents per diluted share, compared to 363,000 or 4 cents per diluted share reported last year. When discontinued operations are included, earnings per share for the period was 12 cents per diluted share compared to 4 cents per diluted share reported last year.

For the year ending December 31st, revenues from continuing operations were 139.8 million, compared to 133.7 million reported one year ago. Net income from continuing operations were 2.8 million or 32 cents per diluted share, compared to 2.6 million also 32 cents per diluted share reported last year. When discontinued operations are included, earnings per share for the year was 27 cents per diluted share, compared to 9 cents per diluted share reported last year.

We are very pleased with our near record performance this quarter, having weathered a difficult climate for selling software, hardware and services to the hospitality sector over the past year. We have seen increasing interest in activity in this sector of our business reflected in product sales being up 25% for the quarter. Additionally, we experienced a 13.3% increase in our government contracts business in spite of some program delays and a funding hiatus in our logistics management program.

As for the year, earnings were flat due to the extremely slow start in the first half reflecting the sluggish from performance of the restaurant market in general and specifically the difficulties of McDonald's transition to a new management strategy. However, we're delighted with our strong second half performance with revenues growing 17% and operating income increasing 159% as compared to the first half.

This is a trend we expect to continue throughout 2004. That is, revenues growth in the range of 15% with accelerated bottom line increases.

Now, looking at quarterly revenue breakdown, product revenue for the quarter was 19.3 million, up 25% compared to the fourth quarter of 2002. This increase generally reflects an improving hospitality market with strong sales to McDonald's, Yum brands, Chick-Fil-A and CKE.

Service revenue for the quarter was 10.7 million up 19.9% compared to Q4 of last year as the result of a growing installed base. Contract revenue was up 13.3% to 11.3 million for the quarter. We are particularly pleased with this internal growth in light of the fact that last year's revenue included full funding of our logistics management program, whereas this year we received very little revenue due to a DOT funding hiatus. Absent the LMS program government contract revenues grew at 21% rate.

Moving to margins, product margins for the quarter were 36.6% versus 35.1% last year reflecting higher software content in our product mix. Service margins were 12.3% versus 16.6% a year ago. Two factors largely caused this decrease. Bonuses and benefits paid in Q4 and an increase in E and L reserves. Additional reserves were taken in conjunction with a voluntary termination of an unprofitable service contract. As a consequence of this action, we have eliminated future continuing losses on this contract and now expect to see improving service margins.

Contract margins, or in our case pretax profits, were 6.4% compared to 4.9% last year. This is slightly higher than our traditional 5% to 6% pretax profit range and resulted from favorable execution on some fixed price contracts.

Now, turning to expenses, SG&A expenses for the quarter were 5.5 million, virtually unchanged from last year. R&D expenses were 1.5 million, up slightly from last year. Summarizing, 2003 finished as we had forecast. At the end of 2002, we forecasted a slow start for 2003 due primarily to the difficulties McDonald's was experiencing as it moved to a new strategy under new management. We correctly anticipated these difficulties and determined that they were temporary and predicted a return to a growth pattern established in the previous two years. In the first half of 2003, revenue was down 7%, but turned around in the second half with a strong growth of 17%. We believe, we have accomplished quite a lot in 2003.

In our POS business we signed a contract with KFC and commence to roll out 800 domestic stores about half of which will be installed this year. We believe that this contract is strategic as the positions parse the primary future supplier of point of sale systems to all of Yum brands. We added several important new accounts including LOS theaters, Steiner Leisure PAR, Chick-Fil-A, CKE and in the fourth quarter Bojangles. We successfully released infusion, our new enterprise software suite, which is now operating smoothly in more than 12 different restaurant concepts totally more than 1,250 restaurants. We continue to improve product margins throughout the year ending at 36.6% in the fourth quarter and then for the year our product margins were 35.2%, up 2.2 percentage points from 2002, reflecting increasing software content in the product mix.

In our government business we continued our success of recent years in winning several new IT communications out sourcing contracts including our first Army contract, rounding out our capabilities portfolio to include all three services, navy, Army, and Air Force. We signed a large image processing and archiving contract, positioning our company as an important integrator of the next generation digital processing system for several government agencies. We successfully protected our investments in our logistics management program through a difficult government funding hiatus. Very recently we were successful in winning a $2 million program with the Department of Transportation to continue the development of a chassis and container tracking system and we anticipate beginning work under this new program in late Q2 of this year.

As we look forward to 2004, we feel that we can continue the momentum of the second half of 2003 and accordingly put together a growth plan based upon top line growth in the range of 15%, with success on the top line we are planning for accelerated bottom line growth due to the natural leveraging in our commercial business. Based upon these facts, we are looking forward to a good 2004. That ends my formal remarks and I'd like to open the session to your questions.

[Operator Instructions] Your first question comes from Sam Bergman of Bay Berry Capital Management. Please proceed, sir.

Good morning, gentlemen. Excellent quarter, keep up the good work.

Thank you.

Couple of questions. First of all, in the product category, can you tell me how much of the increase year-over-year did software sales or -- constitute that increase?

Sam, as you probably know, we have not broken out our software versus our hardware in the past and it's not our policy to do so. But I can tell you that the software content is rising in our product mix and it's reflected in the improvement in our margins. As I indicated in my formal remarks, the product margin was up 2.2 percentage points for the year, which is due entirely to the software increase.

Can you tell me how much that software increase was? Without being part of the product mix?

It was in the range of 55%, 60%.

OK. You also tell me in terms of McDonald's do you have a percentage amount of how much McDonald's business accounted for in the year 2003? I know what it was the prior year but roughly do you have some percentage for us on that?

You know, Ron -- Ron will take a look at that, Sam.

Yeah, Sam, good morning. McDonald's business was 24% -- I'm sorry, it's about 27%, 28% for the year of total consolidated revenue.

Now, on the amount of stores of McDonald's forecasted '04 to do I guess most of it was done in the second half of the year, was that roughly 7, 800 years stores? And what was your percentage of -- how do you point to those stores?

Are you ask asking 2003 or forecasted 2004?

2003, excuse me.

2003.

What was the question?

The question is how many stores did McDonald's open in 2003, first half, second half, and how many did we get.

I don't know the exact number, but I would say that as a percentage, whatever that number was, we usually are running around 48% of what they have.

So, on the conference call McDonald's had just about a couple weeks ago it seems like they were going to double the amount in '04. Would that mean that your business would double in '04 with McDonald's or is that a wrong figure to use?

That might be a wrong figure because maybe a lot of that is international, and international we don't pick up as much as that larger percentage as the international market. However our business with McDonald's should improve significantly during 2004, primarily because the fact it is a convention year and when there's a convention year we usually have an increase -- significant increase in sales. They have a convention every two years.

OK. And the only other question I want to ask you is in terms of your service -- your service contracts, what's the average service contract percentage that is spent versus somebody buying a hardware product from hard technology? What do they normally spend on service? Is there a contract that goes with the hardware component?

Yeah, there's a -- that's hard to say, Sam, only because there's so many different options. We have a -- you could have an on site contract, which is certainly much more expensive. You could have a depot contract. You could have an advanced replacement contract. You can have a combination contract. There are just so many different factors that come into it.

Is there an average percentage that the majority -- let's say 70% of the majority that buy hardware from you will take or not?

Like 10%.

Like 10%.OK, thank you very much.

Your next question comes from Bernard O'Brian of Wedbush Securities.

Hello.

Hello.

Is that Wedbush or Wedbush, Morgan. Good morning, John and others. I'd like to ask the broader question about your balance sheet. Have our concerns about the New York Stock Exchange review of your balance sheet now gone away?

Yes, they have. We are above both requirements and that is behind us.

That's good news.

Your next question comes from Jeremy Holland of Ecapital Corporation, please proceed, Sir.

Good morning, gentlemen.

Good morning, Jeremy.

I was curious what the POS backlog stands at today.

Jeremy, this is Ron, good morning; it's about $10 million at the end of the year.

And I notice you made more progress on inventory reduction. Is that flattened out or is there some more work to go there?

Year-over-year, we made some good progress on inventory reductions. And looking ahead to next year, there's more progress to be made. We're still working very hard at that area.

And any comment on the bidding pipeline in the government business?

Yeah, I think it would be normal. In terms of our forecast, we're forecasting a growth in the range of 15%. Our contracts range from a short-term of 1 year or 18 months to a long-term of five-year contracts. Some contracts will be ending this year and we have replacements in the pipeline for those contracts and on top of that, we have opportunities that, on a weighted basis, we feel will win sufficient numbers in order that we can achieve the growth range in the range of the 15% that we have forecasted.

Thank you.

You're welcome, Jeremy.

[Operator Instructions] We have a question from Sam Bergman of Bay Berry Capital Management. Please proceed, Sir.

Just one last question, in terms of what's the pipeline for the POS business right now?

Well, as Ron just mentioned, the backlog is $10 million going into the beginning of the year. But as you possibly know, and the -- we've never run a very large backlog in our point of sale business. The business model is quite different in the fast-food industry. We achieve our position, our competitive position, by competing for the corporate approval. And once we have the corporate approval, then that gives us license to sell to the corporate stores and to the franchisees. I think going back to our anticipated growth for this year in the range of 15%, when we look at our opportunities, we see that we have about 93% of our target revenue with existing accounts. So, we have pretty much identified where we're going to get the revenue growth for this year. Additionally, we have the rollout contracts that are ongoing, the largest of which is the KFC rollout, which is going to be 400 to 500 stores this current year. So, based upon all those factors, we feel that we are in a good position to achieve our top line growth objective.

OK, thank you.

You're welcome.

Your next question comes from Mike Barrish of Lazarus Investment Partners. Please proceed, sir.

Good morning and fine end to the year. Can you give us or elaborate a little bit on this funding award from the Department of Transportation? What will you be doing with this $2 million contract in the way of evaluation and development of the chassis and container program?

Actually that's an ongoing discussion we're currently having with the Department of Transportation. There are two competing interests. One interest has to do with the strict transportation interest of tracking assets and utilizing the information to improve the nation's transportation system. That would be the primary interest of the Department of Transportation.

A secondary interest or I should say a second interest; not diminishing it relative to the first is Homeland Security's interest. And their interest, of course is security and their particular interest is the container that sits upon the chassis as it's being moved. Both those are legitimate interests of our country and the Department of Transportation has a joint program with Homeland Security and the two agencies are in discussion currently to determine exactly what direction they want to give us under the contract that we anticipate we'll be given in the second quarter.

So, I think it's premature to tell you an exact answer for that. I think it's all good news in the sense that we will be getting funding to continue our program to install more of our units on chassis and as part of that, we will no doubt be installing and integrating security devices with our unit. So, I think in any case, we're going to be covering both bases, both interest groups and doing our best to position this opportunity as an ongoing commercial business going forward.

OK. Thank you.

You're welcome, Mike.

[Operator Instructions] There are no further questions in queue at this time. Please feel free to proceed with your closing comments.

Well, thank you for the interest in PAR. We'll be available for any additional questions that you may have. Good-bye.