PAR Technology Corp (PAR) 2004 Q3 法說會逐字稿

Welcome to the Q3 2004 Par Technology Earnings Conference call. (OPERATORS INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Chris Byrnes, Director of Financial Relations. Please proceed sir.

Thanks and good morning ladies and gentlemen, and welcome to Par Technology's third quarter earnings conference call. I hope by now everyone has received the copy of our results that was sent out at 7:30 AM Eastern time today. On the call today to discuss the Company's quarterly results are John Sammon, Par's Chairman and CEO and Ron Casciano, the Company's Chief Financial Officer. Before John begins his formal remarks, I would like to read our disclaimer. Certain Company information on this call may contain forward-looking statements. Any statements on this call that do not describe historical facts are deemed forward looking. Forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. I now would like to introduce John Sammon to give his formal remarks.

Good morning. Today, I am going to be presenting the results for our third quarter ending September 30, 2004. Third quarter revenues were 42.6 million and that's an 18.4 percent increase from the 36 million reported for the same period a year ago. This represents the second highest quarterly revenue in our Company's history. Both segments of our business contributed to this result with the restaurant hospitality growing 17.5 percent and the government growing 20.7 percent. Net income for the quarter was 1.7 million, an increase of 113 percent over the 813,000 reported last year. Earnings per share for the period were a hundred -- up 111 percent to 19 cents per diluted share compared to 9 cents per diluted share reported last year. Looking at the quarterly revenue break down, product revenue for the quarter was 18.5 million, up 19.1 percent compared to the third quarter of 2003. Now this increase generally reflects a healthy hospitality market with strong sales to both McDonalds and CKE.

Service revenue for the quarter was 11.6 million, up 14.9 percent compared to Q3 of last year. This increase resulted from more installations and growing install base in two IT upgrade programs for a major account. Contract revenue was up 20.7 percent to 12.5 million for the quarter, this growth derived from increases in Image technology and IT outsourcing contract. Moving to margins. Product margins for the quarter were 34.4 percent versus 34.2 percent last year, this increase resulted from increased absorption associated with higher manufacturing volume, though slightly depressed by lower margins on the IT upgrade programs. Service margins were 13.5 percent versus 17.1 percent a year ago. The primary reason that contributed to this decrease was the increased use of third parties to assist us with IT upgrade program mentioned earlier. Pardon the background noise, we are at the FS Tech hospitality program here in Florida and so we're sitting here in this room with the landscaper outside, but I think we've chased him away. Contract margins or in our case pretax profits were 7 percent compared to 4.6 percent last year. This increase resulted from the exceptional performance in our Imagery technology business as well as favorable margins achieved on certain fixed price contracts. Trying to expense this, SG&A expenses for the quarter were 4.9 million, up 3.8 percent from last year, but a 1.6 percentage point lower as a percentage of revenue. R&D expenses were 1.3 million or approximately 7 percent of product revenue and they were virtually unchanged from last year. I am now going to turn the discussion over to Ron for some comments relative to our current balance sheet.

Thank you, John. I would like to review some balance sheet highlights. Pleased to report that our cash position has improved nearly $4 million from last year up to 5.5 million at the end of September. We have reduced our receivables by 3.8 million due to improved collection efforts. Our days outstanding for our hospitality business are running around 67 days and our government collection cycle is about 52 days. We have also lowered our inventory balance by about 800,000 even as our business has grown. Manufacturing inventory turns have improved to 3.9 times, up from 3.2 times from the last year. We continued to have no short-term debt on our line of credit sales as of September 30, as we have paid off nearly $7 million of debt since the balance sheet date, last December. We have $20 million available or working credit availability under these lines at the end of September 30. Cash flow from operations was $12.5 million through the first 9 months and was primarily due to operating profit for the period and the receivable reduction discussed above. Now, I would like to turn it back to John for some summary remarks.

Well in Summary, we were very pleased with our near record third quarter revenue performance. This was our second highest revenue quarter ever, which files a string of new records, starting in the last Q4 and continuing in Q1 and Q2 of this year. Both our government and our hospitality businesses probably contributed to this accomplishment. Our restaurant, hospitality business is being driven by several factors, which we can expect these are going to continue. First, the restaurant market is enjoying strong growth as people increasingly eat outside their home. Industries help industries as well as earnings repose from the restaurant sector continued to be quite positive. Second, there is a large population of old point sales systems installed in our customers restaurants, which must be replaced over the next few years, to support these programs, as credit, debit, gift cards, and wireless.

Since we are the primary supplier to McDonald's and Yum, the two largest restaurant chains in the world, we expect strong sales to continue. Third, we are engaged in roll out of CKE and KFC, which will continue throughout the remainder of this year. On completion of these corporate rollouts, we are expecting to continue strong sales with the franchisees of both CKE and KFC. Product margins improved this quarter to 34.4 percent. Yet, nevertheless what we do somewhat is the consequence of the 2 IT upgrade programs for the major customer. These programs required the delivery and integration of third party peripherals, which inherently carries lower margins. Absentees in these programs, product margins would have been 1 percentage point higher. On October 1, we broadened our region to the hospitality market by acquiring the assets and certain liabilities of Springer-Miller Systems. Springer-Miller is the prime, premier software solutions provider to the high end resort and spa markets, where integrated management software is installed in more than 1000 various high-end properties.

Their customer list represents the league members of the hospitality market and a small sampling of their customers include the following - in resorts, Amelia Island and Destination Hotels & Resorts, in boutique, City Center Hotel, Mandarin Oriental Hotel and the NY Palace, in gaming, Bellagio and the Mirage, in spas, the Four Seasons, Fairmont Hotels, in national parks, ARAMARK, Lake Powell, in golf and ski resorts, Pebble Beach, St. Andrews, and . Fairly, Springer-Miller is the leader in the high-end hospitality market. It is our intent to operate Springer-Miller as a wholly owned subsidiary, retaining all of its key personnel and continuing their very successful focus on their current market. Our plan is to leverage our reputation and infrastructure to extend their markets over time to include high-end hotel chain markets. We feel that we have much to offer in this pursuit, considering the long history we have enjoyed in serving the world's largest global restaurant chains for the past 35 years.

Additionally, we expect to begin selling our current point of sale products at Springer-Miller accounts, since our products are good fit at all point of sales, including the restaurants, the spas, golf courses, and the retail shops. The acquisition of Springer-Miller came about after a year long exercise to identify strong software companies, serving a prosperous niche market within a larger hospitality market. We are taking companies, which enjoyed a dominant position in their niche, which could substantially grow by leveraging our global major account infrastructure and the Company's market was one, where we could sell our point of sale products and services along with their products and services. Additional requirements where that company had to be profitable and growing, the acquisition had to be accretive, and the management team had to stay in place. We believe Springer-Miller acquisition meets all of our requirements, including being accretive.

Our government business performed quite well this quarter, posting substantial gains across both our high-tech segment, as well as our IT outsourcing segment. Margins were above average reflecting excellent performance in our technology business, as well as favorable completion of certain fixed-priced contracts. We expect continued growth in our government business based upon the current opportunity pipeline and our substantial current backlog of $115 million.

Before leaving the subject of our government business, I want to provide a brief update on our logistics management program, since there has been considerable interest in this area. In August, in late August, we commenced work on a $2 million contract to conduct a join technology demonstration with both the Department of Transportation and the Department of Homeland Security. Specifically, we are working with MARAD, which is the Marine Administration Division within the Department of Transportation, that's responsible for ports, and the TSA sub group, which is responsible for port security. Now, under this contract, we will complete the re-engineering of our product to substantially lower the cost, and second, we are going to be creating an interface, between our Cargo Watch System and TSA's National Terrorist Risk Assessment System, known as the Integrated Intermodal Information System. Our interface will provide real-time tracking, as well as continuous security information to a centralized database for the purposes of counter terrorism. Intelligence indications and warnings, and real-time risk assessment.

Now, taking a look at the future. At the end of last year, we forecasted 2004 revenue growth in the range of 15 percent with accelerated earnings on the bottom line. Now, it appears that growth, without the acquisition of Springer-Miller, will be closer to 20 percent, and with the acquisition the growth will exceed 20 percent. Additionally, as forecasted, we will deliver the accelerated earnings. For 2005, we anticipate revenue growth in the range of 15 to 20 percent with continuation of accelerated growth on the bottom line. This completes my formal remarks and I'd like to open the session to questions & answers.

(OPERATOR INSTRUCTIONS) Sam Bergman, Bayberry Capital.

Nice earnings to point. Nice top and bottom line. Couple of questions, first of all, regarding CKE. If you take the CKE Restaurants chain, corporate and franchisees, the rollout is going to take care of what percentage of the company by year's end. Do you have any idea on that?

Could you ask that again, Sam?

If you take the CKE Restaurants, corporate and franchisees, what percentage of the rollout would be already done by the end of the year?

Okay, Sam, we had an initial contract -- well, we have a blanket contract with CKE. We rolled out -- approximately half of their corporate stores in this current year in 2004, and we anticipate the other half in 2005. We've only done a very small fraction of the franchisee market space, and we're anticipating large amount of sales to their franchisees beginning in the fourth quarter and continuing on into 2005.

Okay, in regard to Springer-Miller, and their research and development, what are their yearly research and development costs? Do you have that figure in front of you?

Sam, this is Ron. We don't have the exact number, but it has been several million dollars, they -- being a private company in the past, they don't have an exact number for us to disclose, but it was several million dollars.

Your Research and Development department at PAR is mostly situated in Florida?

No Sam. We have an R&D department in our corporate headquarters in New Hartford and we have a software development group in .

Is there any consolidation going to happen between going forward?

We are not planning any consolidation. Our plan is to operate Springer-Miller as a stand-alone entity. We are involved in it. Our plan for Springer-Miller is basically to not disturb what is working so well. They are experiencing great growth and they are just shooting the light out in terms of delivering of their systems to the independent high-end resorts in spas. The business model is working quite well. What our plan is to do is to leverage what we know well and in what we have been doing for years and that is creating and delivering IT solutions to global facilities around the world in the hospitality sector. We have great credibility, we have gone through 5 generations of equipment with McDonalds and Yum and we know how to do that, that under the business. So what we are going to be doing is drain our knowledge, our processes and procedures and bringing them into Springer-Miller, we set up an independent group within Springer-Miller to focus on high-end resort chains and so our involvement is going to be in this new emerging portion of their business. And additionally we intend to sell our products or products into their current base and into their future of facility sales.

As I am looking at the software content you both have, the software content and the software content of Springer-Miller. It seems to me, they're selling much more software than you are, there should be some consolidation somewhere along the line.

Well Sam, there are different products. You asked about the R&D with Springer-Miller. Let me speak to that a bit. Springer-Miller has emerged from a small company that was focused on stand-alone resorts. They started in Stowe, Vermont and they focused on putting together property management systems throughout that resort community. So within resorts, there is much more than just a traditional property management. There are -- today there are spas, there are golf courses, there is outside activities, there is golfing events. And all these require the development of software. So their whole history has been in developing of software to provide an integrated solution for high-end resorts. So they -- in the contracts that they had in the time in the past, have been to develop customized interfaces to third-party software packages as well as to develop capability within their own . So what distinguishes them is that they have a very feature rich system which handles all of the elements of an upscale property whether it be a hotel or a resort and they have done an incredibly great job, in my opinion, of developing that integrated system and that is why they are doing so well in their market space. So we feel that, that software is different than the point of sales software that we have, that our hardware products and our services can be delivered into their market spaces. So we are having adding substantial amount of software revenue into our mix and it would -- I don't see that we are going to be integrating our organization at the development level. I think the people that develop the software for the resorts in the high-end hotel will be operating separately. We don't intend to disturb that. So I see it as a complementary opportunity for us. Our products are complementary to one another, PAR's credibility to go after the major change, I think is very significant and I think when we put their products with our credibility and our ability to deliver globally, I think that we have something that makes a great deal of sense.

Jeremy Holland of E Capital Corporation.

Operator, we cannot hear Jeremy.

Please hold just one moment. There seems to be a problem with Mr. Holland's line. We will now move to the next question. Dan Wittenberg, Noble.

Excellent quarter. Now, speaking of the fact that it was so strong, allow me to pose a question as to your 2 current divisions and that of your acquisition, is there any seasonality to any of those 3 divisions and their businesses?

Well, traditionally our core business in hospitality that is the restaurant businesses has had a seasonality to it, so traditionally the second half business exceeds the first half. That does not occur every year, but I would say generally speaking there is some seasonality to the business. So, I think typically we say that the second half is between 50 and 55 percent of the business and the first half is 45 to 50 percent of the business. As far as Springer-Miller's business is concerned, I am not aware, that there is much of a seasonality. Ron, do you have a comment on that?

No, I don't have a comment on the Springer-Miller business, but as John said, our second half of our core businesses usually run between 50, 55 percent of the total year and that's typically been our pattern, Jeremy.

David Lavigne, EdgeWater Research.

Great quarter. I am wondering if you can expand a little bit on, with respect to the logistics business. There is a lot of companies that provide some sort of GPS Tracking or whatever and actually even in the transportation business. So, I am just wondering if you can give us some sense of what -- your sense of the advantages of the system, I mean obviously you have some position in this space with respect to things that may be going on in the government side in terms of Department Transportation or whoever ultimately may let contracts on the government side in that business. But, I am just curious if you can give us sort of the 10,000 foot view of what your position is with respect to other companies out there and how you view what you are doing, the way that you are doing it as being maybe advantageous to a point where, at some point in the future we could expect maybe some kind of traction in that side of the business? You are obviously are getting traction everywhere else, I am just sort of looking at something else out there and trying to figure out maybe where that piece fits in?

Well, let me say that there really are 2 driving factors in this market space, as I see it. One is the commercial aspect of utilizing this technology to track assets as they move to the supply chain, so that is the commercial side of it. Then there is another element that has potential to drive the market and that is the security aspect of container security. We started off working with the Department of Transportation a number of years ago to demonstrate the commercial feasibility of utilizing this technology to track assets,. We spent a good deal of time establishing, I think, the premier relationships with the owners of chassis and containers. We have these relationships today, we entered into test with these companies and what we found is that we could make the technology work and we could adequately track the assets that being the chassis and the container as it moves to the intermodal, over the road, and over the rail, as it did that. What we also learned is that, that the customers generally were willing to pay what we needed to charge in order to create a profitable information business. Then along came the container security problem and we started focusing our technology towards demonstrations of how to use this asset tracking capability to also, to monitor security devices that were mounted on the container itself.

And we did a demonstration of this technology in conjunction with the Department of Defense program. Now the new contract we have is again has a commercial element to it and has the security element to it. Homeland Security has joined in a partnership with the Department of Transportation to fund this program like earlier this described. Now what is going to happen in this market space is still up in the air. There is a law, which is not being enforced, it is the Maritime Security Act of 2002, which requires the tracking of containers as they move into ports and move out of ports. The law is there but it is not being enforced and the direction of the technology is still up in the air. Now the contending ways of attacking the problems have to do with the technology that you use for communication, whether you use cellular communication or whether you use satellite communication. So you will find some companies pursuing the satellite route and other companies such as us pursuing the cellular route. The pluses and minus are that the cellular is considerably less expensive at half the cost of satellite, and cellular is ubiquitous along transportation routes whereas satellite is line of sight.

There is another issue whether or not the technology should be mounted on the container itself or whether just a sensor -- just the security sensor should be on the container and the communications device on the chassis. Our new products that we are introducing covers both aspects. Right now, the winds are blowing in favor of putting the technology on the container. It is going to be more expensive to instrument every single container. It is going to be very difficult to get the technology on the millions of containers that move around the world. It would be a far easier solution to get the technology on the chassis and then put just a simpler less expensive security locking devices on the container itself. But that's another factor. So, we've taken the approach -- as far as we believe that in order to have this technology embraced by the transportation industry independent of what the law says there should be a return on investment. That is just the tracking the commercial aspect of the problem should provide an incentive to buy the technology standing on its own. In order to do that, we have to get the price points down to the -- what we've learned over the past six years that the industry is willing to pay. We are very close -- in fact we are in the range with our new product. So that's a good thing.

On top of that, if the Department of Homeland Security lands on the strategy, which we are working with them to help them land on the strategy that is favorable to our direction, that is the cellular, and the chassis model device or the container mounted device that could substantially help our cause. Our strategy is to be in the right place at the right time. Because I think there is a convergence of factors here. I think price points are coming down which is positive for the commercial requirement, and I think that something is going to have to happen on the security side, either the law has got to change or the law has got to be obeyed. So, our strategy is to make certain that we are a player in the game as the game evolves. There are large companies moving into the sector, GE has moved into the sector, IBM has moved into the sector, Boeing, Lockheed. Some big players are being attracted into this sector. We have some partnerships going with Lockheed at this particular time interfacing into that TSA, Risk Assessment database system that they are putting together, and we are talking to the big guys just to see how we might partner up and play along with their strategies. So that's about as good a job as I can do in answering your question Dave. I hope that's helpful.

Jeremy Holland.

Congratulations on the outstanding quarter.

Thank you.

I had a few questions about the new POS system. What kind of product margins do you project for it?

Jeremy this is Ron. We're projecting about the same margins in hardware they were running now with improvement over time. So, I'd assure about the same and as we're able to cost reduce the new product, we hope that they improve.

What kind of impact will the ramp up for that system have on inventory level?

The biggest impact will happen gradually over time in our service parts area, Jeremy. As we outfit our field service organization and our depot repair organization with some parts for the new product. and that will happen gradually as we sell the new systems. We don't anticipate any long-term increase in our manufacturing inventory.

And when do you believe the first installations of that system will occur? Are you looking at '05?

Yes, pretty much '05, Jeremy.

Great, thanks gentlemen. Congratulations again.

(OPERATOR INSTRUCTIONS) You have no further questions at this time.

Well, thank you all for listening in to the phone conversation in announcing of our financial results. Good bye.