PAR Technology Corp (PAR) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Quarter One 2004 PAR Technology Conference Call. My name is Christine and I will be your coordinator for today. At this time, all participants are in listen-only mode. We'll be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press "*" followed by "0" and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Chris Byrnes, Director of Investor and Business Relations Please proceed, sir.

Thank you Christine. Good morning ladies and gentlemen and welcome to PAR Technologies first quarter results conference call. By now, all of you should have received a copy of our earning release that was sent out this morning. Here today with us on the call are company CFO, Ron Casciano; Greg Cortese, PAR Tec Inc. President and CEO; and John Sammon, Chairman, President, and CEO, PAR Technology.

Before we begin with John's formal remarks, I'd like to remind everyone that any forward-looking statement on this call is made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. I'd now like to turn the call over to PAR's Chairman and CEO, John Sammons.

Good morning. Since I am traveling today, I've just dialed into this call and up in the corporate headquarters is Greg, Ron, and Chris. Today, I am going to be presenting the results of our first quarter ending March 31, 2004.

First quarter revenues were at $37.9 million, a 24.1% increase from the $30.5 million reported for the same period a year ago. This represents the highest first quarter revenue in our history. Net income for the quarter was $736,000, an increase of 221% over the $229,000 reported last year. Earnings per share for the period were 8 cents per diluted share, as compared to 3 cents per diluted share reported last year.

Looking at the revenue, product revenues for the quarter were $16.2 million, up 32% compared to the first quarter of 2003. This increase generally reflects an improving hospitality market with strong sales to McDonald's, CKE and YUM! Brands.

Service revenue for the quarter was $10.3 million, up 21.7% compared to Q1 of last year. This increase resulted from more installations and a growing installed base. Contract revenue was up 16.8% 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’ve seen very little revenue due to a DOT funding hiatus. Absent the Logistics Management program revenue, government contract revenues grew at a rate of 26%. We have been notified of the award of a $2 million contract to extend our Logistics Management program and we anticipate that this program would begin in Q3 of this year.

Moving to margins, product margins for the quarter were 32% versus 34.7% last year. This decline was caused by lower software content and lower margins on certain special integrations contracts conducted for one of our major accounts.

Service margins were 13.2% versus 15.4% a year ago and there were two factors which contributed to this decrease. The first was an increase in installation expenses and the second was the modest increase in E&O reserves. Contracts margins, or in our case pre-tax profits, were 7.2% compared 4.8% last year. This is higher than our traditional 5-6% pre-tax profit range and resulted from an exceptional award fee on a particular contract and a favorable contract modification.

Looking at expenses, SG&A expenses for the quarter were $5 million, up 13.7% from a year ago. This reflects an increase in expenses resulting from an expansion of our sales staff. R&D expenses were $1.3 million, up 16% from last year as a result of a modest increase in new products investments.

Our cash flow from operations was $5.9 million, reflecting significant improvement in collections. We have been using cash to continually reduce long-term debt, which is now at $2.1 million. At the end of the quarter, our short-term lines stood at $2.6 million with an unused portion of $17.4 million available.

In summary, we are quite pleased with our record first quarter revenue performance. Both our government and our hospitality businesses contributed to this accomplishment. Our restaurant business is being driven by several factors, which we expect will continue for the foreseeable future. First, the restaurant market, in general, is enjoying strong growth as the population increasingly eats outside the home, and this trend is expected to continue. Second, there is a large population of old point-of-sale systems installed in our customers restaurants, which must be replaced over the next few years; in order to support this program is credit, debit, gift cards, and wireless.

Since we are the primary supplier to McDonalds and YUM!, the two largest restaurant chains in the world, we expect strong sales to continue. We are engaged in rollouts with CKE and KFC, which will continue throughout the remainder of this year. Upon completion of these corporate rollouts, we expect to continue strong sales to the franchisees of both these corporations.

Product margins were somewhat soft this quarter for two reasons. First, the software content was down primarily due to timing. We are engaged in several software trials and we are hopeful to close some of these opportunities in the near future. Secondly, this quarter we took on two large integration programs involving upgrading restaurants for a major customer, and these programs required the delivery and integration of third party peripherals, which inherently carry lower margins. For the long-term, we do expect product margins to grow as software content increases. However, as I said before, this will not happen every quarter as we cannot control nor predict the timing of large software sales.

Our government businesses performed quite well in this quarter, posting substantial gains across both our high-tech segment as well as our IT outsourcing segment. As I indicated earlier, margins were above average due to a favorable contract modification plus an exceptional award fee on a high-tech image processing program which reflects our customers' satisfaction with the delivered results. We expect continued growth in our government business based upon the current opportunity pipeline and our substantial backlog of $107 million.

Our SG&A and R&D were up for the quarter. We’re not finding any substantial increases for the remainder of this year and thus expect significant earnings improvement as revenues increase. Based on these facts, we’re looking forward to revenue growth in the range of 15% with accelerated earnings due to the inherent leveraging of our commercial business. This concludes my formal remarks and I'd like to now open the session to take your questions. Hello.

Christine.

Yes.

We’re ready for questions now.

Okay. Ladies and gentlemen, if you wish to ask a question, please press "*" followed by "1" on your telephone. If your question has been answered or you want to withdraw your question, please key * followed by "2". Please hold for your first question. Your first question comes from Sam Bergman (ph.) of Bayberry Capital. Please proceed, sir.

Sam Bergman (ph.).Good morning, gentlemen.

Hi, Sam.

Several questions. First of all, can you give us some details, if at all possible, on new data sites that your software/hardware has been installed recently for future contract awards?

Sam, we don’t provide that information, but I can address the general question. In our identified pipeline, we have customers that are already customers for our products, probably about 50 customers, they range from a few stores to hundreds of stores. Probably a couple of thousand restaurants are targeted for our software for the remainder of this year. Our new iN.fusion suite is in probably up to a 1,000 stores in different components. There is a front-of-the-store component, there is a back-of-the-store component and above-the-store component and all accounts don't take all the suites of software. When we look at -- across all the suites, there is several hundreds that have taken our product currently.

The iN.fusion software when we install it requires a setting up of databases, setting up of menus and often times for the larger accounts, doing some custom reports, which is a part and parcel of the business, and not exceptional. And so, when I look at these 50 plus customers and a few thousands stores, we are in various stages of setting up those databases and customizing the reports and with success in these undertakings, we expect to see the software increasing. But as I said, for the larger accounts, we can't predict exactly which quarter they are going to occur in, but in general, we think are on track with our iN.fusion software and that we think the long-term we are going to see improving product margins as software content increases.

Do you have any statistics on the iN.fusion suite being put in X amount of restaurants this quarter as new data sites versus the prior quarter?

I don't have that level of detail, I think I would like to just stay with what I had previously said that there is identified customers that are in various stages of testing our software, they are representing a couple thousand stores.

Okay. Can you talk a little bit about progress in overseas -- in Europe, Asia, I know your business there contributes, maybe, about 12-16% of the revenue?

Yeah, I think --

What opportunities are there overseas for stronger growth in '04?

I think there are excellent opportunities internationally. In fact, we just -- Greg and I just returned from a McDonald's convention, which is an international convention, where they bring together their operators from all over the world. They have this convention every two years. And I must say that I've been attending these conventions since 1980 and I have been to quite a few of them. I would say that this is probably the best one that I've ever been to relative to the appreciation that our major account has for the products and services that we provide to them so much so that there are meetings with the international community of McDonald's where they have asked us to take on a much larger role in the delivery of our products and the service of products in their international community. And when we look at where the growth is in new stores, we see that primarily in the international market space And while the statements are true of the McDonald's account, a similar statements can be made in our YUM! account. We do quite well in the international community and we expect that business to continue to grow. So, I would say the international opportunities are expanding for us.

Let me just ask on the CKE account, which is more American in relation to the other accounts. The rollout there is a long-term rollout, at which stage of the rollout are you in right now?

Well, I'd defer to Greg for the exact detail of that, but we are involved in the rollout of both the KFC and the CKE account. And in the KFC account, I think, we are just about at the halfway mark. And CKE, Greg, could you --

Yeah. At CKE, we're about halfway also. But that's halfway of the contract we had, which had a minimum number that they had to buy. So there is a significant upside on that. They like what they see, they've really enjoyed the new hardware, they've enjoyed the service we're providing and the relationship is very, very strong. So, I think it will probably mean the fact that our number will probably go up by 5 times as many stores as we have in the original contract as the minimum number.

I see. Thank you, Greg.

Okay.

The last question on the iN.fusion suite. Are there any upgrades in '04 on that product line?

There are --

What is the timetable for that?

I will defer again to Greg relative to that question.

Okay.

The most recent version was released at the end of the year, last year, and then we have a -- another version coming out. It should be out and released at the end of May; and then another one be beginning of July; and then a larger version release at the end of the year.

And that larger version at the end of year, what would be the completion factor of that particular suite of products, and where does it take you from -- on restaurant side from the front end to the back end in terms of being more feature-rich?

Pretty much from a features standpoint, we are pretty much as feature-rich as you can get. I think the issue that comes out in the larger one is something, which fills a couple of small gaps that we have in function -- not really functionality, but in the way it performs, or people are asking in [RFPs] and by then we should have every spot filled by then. And therefore it should be able to check every single box and every single [RFP].

Okay. Thank you very much.

Yeah.

Thanks, Sam.

Your next question comes from Daniel Morgan of Noble Financial. Please proceed sir.

Hi Chris. Hi Ron. Hi John.

Hi Dan.

Congratulations, good quarter.

Thank you.

You guys did a great job. Pretty much handily beat the estimates that I had out for the first quarter as far as revenue and also bottom line net income and earnings per share. I just had one question; you alluded to with the previous caller in terms of impact on cost of goods sold as far as, I guess, the McDonald's upgrade. Did that have a negative impact as far as gross margins in terms of the fact that I think you made a comment in regards to -- there was some lower margin sales in there that actually might have impacted gross margin a little bit. I wonder, if you can comment on that?

Yeah, let me just take the first part it and then turn detail of it back to Ron. I think you're correct in what you understood. I mean to say that there was lower margins for the this integration job that we did for a major account because in that integration we had to upgrade some software and some hardware and put in some third party peripherals and the third party peripherals inherently carry a lower margin. So, that did negatively impact our margins -- our product margins for the quarter. But I think the good news in this is the fact that we're taking on more of these integration jobs. So, in the past we would find that some of our major accounts trying to complete these jobs and trying to have multiple vendors to supply the upgrades to the restaurants. And I think that the fact that they are now starting to turn these programs over to us is a very positive event for us. And so, I think while the margins were impacted this quarter, I think in general it is -- it bodes well for our business. Ron, do you want to add to that.

Yeah John, good morning Daniel.

Hi, how are you?

John put a well -- there were couple of different products that we were successful in installing with major account, as John said, and they just carried a lower margin [beating] the third party products, which is good business for us, it will continue for the rest of the year, but as the other revenue grows and as our software content grows, the overall product margins will increase throughout the rest of the year.

Okay, can you talk a little bit about any new business that you signed in other hospitality markets other than what you consider your core business being YUM! and McDonald's, anything along that avenue that you can talk about?

Greg, do you want to take that?

Let me just go back to the other one first.

Okay.

I think that it goes back to John's earlier comment. One of our -- couple of our customers -- we just keep increasing our value to them and as far as they see, we provide the best integration through our infrastructure than anybody can because we are unique in the sense of the fact that we provide everything. We do everything directly. They’ve acknowledged that and as a result they have come back to us with two large rollout programs that do not involve our equipment, but involve upgrading equipment that's already in the field with third party equipment and -- but using our services and that's why the margins were low because we’re not selling actually product where we get a small margin on the -- we get some service margin -- I mean, from the standpoint of professional services and installation, but we also get only a small margin on the hardware they were putting in. But those are two major programs that are going on for the whole year.

Okay.

And there is thousands of stores being done throughout the year.

Okay.

But it bodes well for us because, again, it puts us in a position which we have never been in before actually whereby they have really realized that PAR is unique and that instead of going to anyone else, they might come back to PAR and outsource all this work instead of trying to find another party or trying to use more than one vendor.

Okay.

So that’s been good. As far as new business is concerned, no, I think we -- there is a not a lot of hospitality in new business. But as far as new accounts is concerned, it’s been primarily increased our market share in the accounts we currently have. And that's when the primary emphasis is right now. The others were in a number of [RFPs], we have a very large number of [RFPs] out and we hope to announce some wins in the very near future. And in the non-hospitality market, though there has been some additional wins, you know, things like the [Bronk Zoo]

Okay.

We mentioned [Chicago trends] I think in the last call, we’ve got some other amusement park-type places, and other places like transit authorities that are now using our equipment.

Okay. I'd like to put a question to Ron. In terms of looking out for the remainder of the year, I got my model based on previous information that we have in terms of expectations, you’re still retaining the 15% revenue growth rate. Would you expect -- you kind of alluded to it, but continued margin improvement as we go out through the remainder of the year compared to, let's they, what we saw in the first quarter?

Yes, Daniel, that’s what we’re forecasting is, continued margin and improvement as we go out through the balance of the year, both in product and service.

Okay, okay, I don't have any more questions. Thank you very much and congratulation, good quarter.

You have a follow-up question from Sam Bergman (ph.), please proceed.

Regarding the government side of the business, can you comment if it is several contracts in ’04 that are towards the end of the contract where margins can increase as they have in past when they are at the end?

Ron do you want to take that.

Yeah. Sam, most of our large contracts are still in the early part of their lives, a typical large contract for our IT outsourcing work runs 4-4.5 years. We won a lot of those in the last 18 months, so they’re still in the first half of their lives. So, we are not anticipating a lot of closeouts as -- during this year. However, you know, that doesn’t mean that we still don't have opportunities for better than average margin in that business through other means of managing, our overhead expenses is a good example of something that we obviously are always working on. And first quarter, John mentioned, we had a very nice award fee on one of our software development jobs involving inventory. So, there is a lot of other opportunities for improved margins, but there will be no major closeout this year.

Okay. Thank you and congratulations.

Thanks, Sam.

Thank you Sam.

Ladies and gentleman, as a reminder, it's “*” “1” for questions. We have a question from David Laving (ph.), please proceed.

Hi guys, how you doing? Great quarter.

Thank you. Dave.

I don't want to take you some place you don't want to be in, I know this is a place you don't want to be, so you can sort of -- you can duck this as much as you like. Seems like with a lot of the focus now we have, sort of, been on this focus for quite sometime, but I think even with some -- some reaction in some stocks even in the marketplace, it sort of suggest that maybe there is a little bit more emphasis that is starting to come about with respect to Homeland Security issues and things like that, but is there anything more that you can give us with respect to just a little bit more flavor on kind of where the logistic side of the business is at and whether or not you have any sense of whether or not there is -- maybe a little bit more attention or focus or urgency being created in that space, in general, that maybe applies to your logistics business?

David, I don't mind being there in terms of the question. Our logistics management business is in fact a contractual business, which is operating in our government sector. We've had significant funding over the past 6 years through the Department of Transportation and we have announced the fact that we've been notified an award of another $2 million that we start under our contractual arrangement beginning in the third quarter. The work statement for that particular effort is being defined at the present time. TSA, which operates under Homeland Security, is involved in writing that statement of work and there is a good possibility that it would be a joint program between the Department of Transportation and Homeland Security. There are some identified Homeland Security programs that are going to be bid in the future, but I must tell you that that was the information that we had received last year and those same programs have not come through [correlation]. It's my feeling that the things are going slowly relative to Homeland Security as it applies to the containers, which is the aspect that we would be involved with. But there is significant interest in the Department of Transportation in carrying on these -- the evolution of this platform, which we call, Cargo Watch, which is used to track the chassis and identify the container that's on the chassis and has interfaces for smart tags, which used for container security. We have conducted some tests with the Department of Defense relatives of some of these smart tags. So, we been involved with whatever is happening in that area. I think we are positioned well for it. But I really haven't seen a sense of urgency coming out of the Homeland Security relative to what they have announced as their number one threat to the country that is on unexpected containers. So, I think we are positioned well related to Homeland Security. But I haven’t seen any evidence of a lot of funding coming down the pipe for that -- for those activities. On the other hand, on the commercial side, there is a considerable interest for the technology that we have under test right now. And we are looking forward to continuing this as a contractual business under our government sector with upside opportunity for some commercial activities. And should Homeland Security come forward with some programs, I think we are in an excellent position. In fact, we are the only company I am aware that has any equipment that's installed on chassis, which carry the containers and what we have is a platform for reporting all activities involved in that chassis including the container security aspect of it. So, I think we are positioned extremely well, but I haven't seen any real programs or any large programs identified at this point in time.

Great, thanks John. That was very helpful.

Thanks.

Gentlemen, you have no further questions.

Okay. Well, thank you very much everyone. If you have any additional questions, please contact Ron or myself or John -- John is out of the office today, but we will get back to you as we quick as we can.

Thank you for listening in. Good bye

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.