PAR Technology Corp (PAR) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2004 PAR Technology earnings conference call. My name is Meagan, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS.)

I would now like to turn the presentation over to your host for today's conference, Mr. Chris Byrnes, Director of Investor Relations of PAR Technology. Please proceed, sir.

Thank you, Meagan. Thank you and good afternoon, ladies and gentlemen. Welcome to PAR's fourth quarter earnings conference call. I hope by now everyone has received a copy of our results that was sent out at 4:00 p.m. Eastern Time today.

On the call today to discuss the Company's fourth quarter results are John Sammon, 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 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 turn the call over to John Sammon, to give his formal remarks. John?

Thanks, Chris. Good afternoon. Today I'll be presenting the results for our fourth quarter and the year ending December 31st, 2004. Fourth quarter revenues from operations were 51.4 million, a 25 percent increase from the 41.2 million reported for the same period in 2003. This represents the highest quarterly revenue ever, exceeding an earlier record in the second quarter by fully 20 percent.

Net income from operations increased 72 percent for the period, to $1.9 million, or 20 cents per diluted share, compared to 1.1 million, or 12 cents per diluted share reported last year.

For the year ending December 31st, revenues were up 25 percent, to 174.9 million, compared to 139.8 million reported one year ago. Net income increased 132 percent, to 5.6 million, or 61 cents per diluted share, compared to 2.4 million, or 27 cents per diluted share reported last year.

Clearly we were very pleased with our record performance for both the quarter and the year. Our strategic initiatives aimed at accelerating growth across our business segments and improving the fundamentals in our hospitality business, specifically led the way towards achieving our record results.

During 2004, we invested in product development and our corporate infrastructure to grow our technology sales. We increased product sales in our hospitality business by nearly 29 percent and service revenues grew a comparable 25 percent.

Our government contract revenues rose 20 percent, with both our IT Outsourcing and Implied Technology sectors contributing about equally to the ongoing success.

The past quarter we completed the acquisition of Springer-Miller systems. This acquisition strengthens our software capabilities and enables us to development the next generation of hospitality management systems for the hotel, resort and spa markets.

In summary, we are pleased with our financial performance and business achievements of 2004. We have created strong momentum and product development, marketing efforts and margin improvement initiatives and we look forward to a good 2005.

Now looking more specifically at quarterly results, product revenue for the quarter was 23.3 million, up 20.8 percent, compared to the fourth quarter of 2003. This increase generally reflects the healthy hospitality market, strong sales to McDonald's, a few new accounts and revenue from our new resort spa business.

Service revenue for the quarter was 15 million, up 41 percent compared to Q4 of last year. This increase resulted from a growing installed base and significant professional service revenue derived from the resort and spa markets.

Contract revenue was up 16.7 percent, with 13.2 million for the quarter, reflecting a strong government market, particularly in the IT Outsourcing sector of our business.

Looking at margins for the quarter, product margins were 36.1 percent, versus 36.6 percent last year. This small decrease was due to lower product margin derived from the rollout of a technology upgrade to support credit and debit sales for a major account.

Service margins were 21.9 percent, versus 12.3 percent a year ago. And this increase was due to higher professional service margins earned in the hotel-resort sector. Contract margins were 5.5 percent, compared to 6.4 percent last year. This is generally in line with our traditional 5-6 percent pretax margin range, though slightly depressed this quarter due to some startup expenses related to a new engineering service contract.

Looking at expenses for the quarter, SG&A for the quarter as a percent of total revenue was 13.5 percent, essentially unchanged from last year. R&D expenses were up 60 percent, to 2.4 million, reflecting the integration of the hotel-resort sector and in investment in other product development activities.

Now looking at the year in total, revenues were up 25 percent, to 174.9 million. Both sectors of our business contributed to this increase, with hospitality growing 27 percent and the government sector growing 20 percent. Net income increased 132 percent for the year, to 5.6 million, or 61 cents per diluted share, compared to 2.4 million, or 27 cents per diluted share reported last year.

All comparative statistics were excellent for 2004 compared to 2003. Product revenue was up 28.7 percent. Service revenue was up 24.4 percent. And government contract revenue, up 19.8 percent. Product margins were down 1.4 percent, to 33.8 percent, due to lower chronic margins derived from the rollout of the technology upgrade to support credit and debit sales for a major account.

Service margins improved by 1.1 percent, to 16.2 percent, yet were somewhat depressed by lower margins on the same technology upgrade programs. Contract margins were good for the year, running 6.5 percent. SG&A as a percent of total revenue was down 1 percent, to 13 percent for the year, while R&D increased to 6.3 million, up 18 percent over 2003.

As we exited the year, the product backlog stood at 15.4 million, compared to 9.8 million last year. And the government backlog continued to be quite healthy, standing at $112 million.

I'll turn the discussion over to Ron for some additional comments, relative to our balance sheet.

Thank you, John. Good afternoon, everyone. I'd like to review some balance sheet highlights. First, our cash position has improved by $7.2 million from a year ago, to the current balance of 8.7 million. Our receivables have only increased by around $800,000, despite a 25 percent increase in revenue. This is due to improved collection efforts. Our days outstanding for our hospitality business are around 55 days, versus 71 days a year ago. In our government business it is a constant set around 57 days.

The Company reduced its inventory balance by nearly $5 million and improved its product inventory turns to 4.3 times for the year.

We have $10 million in short-term debt, related to the acquisition of Springer-Miller that was consummated on October 1st. And we have 19.8 million of unused availability under our current bank lines. Cash flow from operations was over 19 million for the year. And it was due to several factors, including the operating profit and the inventory reduction.

I'd like to turn it back to John for some summary remarks.

Thanks, Ron. Well summarizing for the year 2004, we finished substantially ahead of plan. At the end of 2003, we had forecasted growth on the top line in the range of 15 percent, with acceleration of profits on the bottom line. And without Springer-Miller acquisition, revenue grew nearly 22 percent, while operating income increased 88 percent.

I think we accomplished quite a lot in 2004. First, we created a growth strategy, based upon leveraging our strongest asset, mainly the infrastructure we have built to develop delivery and support IT solutions to major account locations distributed around the globe. This is something which we have done successfully over the past 25-years, as evidenced by the fact that we have retained and enhanced our improved vendor status with the world's largest restaurant corporations, through five generations of equipment.

The strategy is simply to team up through acquisition, or by some other type business relationship, with smaller software companies, which are enjoying success in the niche of the hospitality market. By leveraging our unique relationships, we hope to deepen and accelerate penetration of the niche market, thereby broadening PAR's reach into the large and growing hospitality markets.

On October 1st of last year we executed on this growth strategy by acquiring Springer-Miller Systems, the leading software provider of high-end hotel, resort and spa products. We have successfully operated one complete quarter, producing a slightly accretive contribution. Additionally, we have begun selling our traditional point of sale products into their accounts.

If we just look at our restaurant technology business, I think we also accomplished quite a lot there. Back in 2003, we signed a contract with Yum! Brands and commenced a rollout to all corporate US KFC restaurants. And by the middle of 2004 we have successfully completed these installations on time and to the complete satisfaction of KFC. While we have completed this phase of the contract, we believe that the contract could be of great strategic importance, since it has positioned PAR as the primary future supplier of point of sale systems to Yum! Brands.

Also in 2003 we signed a contract with CKE Corporation, which operates about 3,400 restaurants made up primarily of Carl's Jr.s and Hardys. In 2004 we successfully installed 550 of their stores and extended the contract to deliver an additional 1,000 CKE stores in 2005.

At the end of 2004 we released to manufacturing our fifth generation of point of sale system, incorporating many new features, including faster processors, more memory, larger customer displays, wireless and integrated credit and debit capabilities.

Early in 2004 we were selected by McDonald's to rollout a technology upgrade to virtually all their US restaurants in support of debit/credit purchases. To date we have successfully completed thousands of their restaurants, on schedule, earning the praise of the corporate staff there by sustaining and enhancing our 25-year long relationship. Based upon customer satisfaction with the delivery and support of our IT Solutions, we increased our market share with the two largest restaurant corporations in the world, that is McDonald's and Yum! And we achieved this by delivering better value, not lowest pricing.

In our government business in 2004, it formed very well, achieving both record revenues and profits. This was achieved by posting substantial gains across our Applied Technology segment, as well as our IT Outsourcing segment. Margins were above average, reflecting excellent performance in our imagery technology business, as well as some favorable closeouts on fixed price contracts. We expect continued growth in our government business, based upon the current opportunity pipeline and our substantial current backlog of $112 million.

Before I leave the subject of government business, I want to just provide a brief update on our Logistics Management program, since I know there's considerable interest in this area. In August we commenced work on a $2 million contract to conduct a joint technology demonstration with both the Department of Transportation and the Department of Homeland Security. Specifically, we're working with MARAD, which is the Marine Administration Division within the Department of Transportation. And they're responsible for ports. And also it's a joint program with TSA, which is responsible for port security.

And under this contract we're doing a couple of things. We're completing the reengineering of our product, which is going to substantially lower its cost. And secondly, we're creating an interface between our cargo watch system and TSA's National Terrorist Risk Assessment System, known as the Integrated Intermodal Information System. What our interface will provide is real-time tracking as well as container security information to a centralized database, for the purposes of counter-terrorism, intelligence indications and warning, and real-time risk assessment.

In summary, as we look forward to 2005, we plan to continue focusing on growing our hospitality business, following the growth strategy outlined above. We are planning for significant margin improvements in both products and services as the software content of the hospitality business increases.

Our plan for our government business is basically to continue the internal growth, which has been in the range of 15 percent or better per year over the past four years. We feel we can continue the momentum of 2004, and accordingly have put together a PTC Corporate Growth Plan based upon top line growth in the range of 15 to 20 percent. With success on the top line we are again planning for accelerated bottom line growth, due to the natural leveraging in our commercial business. Based on these facts, we are looking forward to another good year in 2005.

Before ending I just want to mention that this week Roth Capital initiated coverage on us and that we will be presenting at the Roth Conference in February, out in California. It's February 23rd, I believe, that we're going to be presenting.

That ends my formal presentation. I'd like to now open the session for your questions.

(OPERATOR INSTRUCTIONS.) Tony Brenner, Roth Capital Partners.

Thank you. John, can you give a sense of the contribution from Springer-Miller in terms of product and service revenues and perhaps gross profits in the fourth quarter?

Well, Tony, we don't breakout Springer-Miller. We're just reporting in our hospitality sector. And you'll see that hospitality's product and services in our presentations. But I can tell you that the revenue -- Springer-Miller was about a $17 million a year company in 2004. We did about $4.5 million in revenue, and as I indicated to you in the presentation, the bottom line acquisition was slightly accretive for the quarter. Product margins and service margins with Springer-Miller are going to improve our overall product and service margins. We're looking to 2005, that product margins will probably move to the higher 30s. We expect that service margins will move to the mid to lower-20s.

So, I would say that typical of a software model, Springer-Miller is going to be improving the mix with software, both on the product side and the service side, and therefore, the margins will move as I just indicated.

Okay. And with, at least for now, Springer-Miller continuing to operate at least its physical (inaudible) autonomously, there won't be significant reductions early on in SG&A or R&D, is that reasonable?

That is reasonable. That is exactly what our plan is. We're moving slowly in terms of making any decisions along those lines. We want to make certain that we understand this business. We're spending a great deal of our time working with the Springer-Miller folks and they are working with our folks. We are putting together joint programs to move their products into our international sector. We are doing some integration at the Help Desk level. We're looking at some opportunities in the service area, where we can share resources.

We're also looking at some software products that we have that we feel will be applicable in the hotel and resort market. And conversely, there's some very nice software, application interface software that is becoming a standard within the hotel industry, that has been pioneered by Springer-Miller and it's a product which we are selling. We have installed about 100 properties around the world. It's called Diplomat. And we're looking at the opportunity to bring that application interface software and tools into our market space. So we're moving down the path of integrating at the product and service and marketing levels currently. And as I indicated in my remarks, we're already selling some of our traditional point of sale products into their account space, even in the fourth quarter.

Sam Buhrman, Bayberry Capital.

Good afternoon, gentlemen. Congratulations on the quarter and the year. A couple of questions. What percentage at McDonald's are you completely finished with upgrading their POS systems?

It's probably about 50 percent of what they're looking for. And of that, during 2004 -- of that 50 percent we did in 2004, approximately 25 percent of that was done in the fourth quarter.

And is there a 50 percent balance to be done in 2005, or is that stretched out for several years?

No, it's to be done in 2005.

And what about the upgrades on their debit cards?

That's what I'm talking about. I assume that's what you were talking about?

I was talking about POS hardware and debit cards.

Oh, okay. From a hardware standpoint we have no firm contract with McDonald's, never have. We just sell over a period of time and basically try to build market share over time. And we've had an excellent year last year and the year before and we keep building market share and taking share away from the other parties.

And with respect to the debit/credit, that was my first answer.

Okay. Can you tell me then what percentage of hardware systems were completed with McDonald's and how much you believe is left?

That's a continuing thing. There is no real percentage. Every year we probably -- of the new systems or of the total systems that are changed out in a year, we probably pick somewhere around 47 percent of the systems.

Sam, maybe I can add a little bit to that. There's quite a large installed base. There's over 13,000 domestic restaurants with McDonald's and probably another 13-14,000 around the world. We're in probably more than half of the restaurants in the domestic -- in the US space.

And we look at it from the perspective of when did the equipment go in. Back in the late '90s, '98 and '99, we installed a large number of systems into the domestic McDonald's marketplace. And we did so, because they were implementing a program they called "Made for You," which was a new way of displaying the orders from customers, which required an upgrade of the old point of sale systems. Now those systems have gone in maybe six and seven years ago. The typical life of the systems are in the seven-eight to 10-year range, depending on whether they're franchise stores or corporate stores. And so there's a substantial amount of equipment that will be replaced over the next couple of years. And we've been in another cycle in the last couple of years, we've been installing and replacing systems that were installed prior to 1998.

So as Greg said, it's sort of like an ongoing thing. There are some peaks and valleys, but I think what is important to note is that I think we're climbing to a peak. I think there's many many more systems to be installed within the McDonald's account. And that's true also in our other accounts. In the Yum! account, in Taco Bell specifically, we put in a great number of systems back in the mid-'90s, mid to late '90s, and so there's quite a lot of systems to be replaced there as well.

So we feel that the replacement market is quite good for us. And as long as we keep excellent relationships, which we have done, we would expect to benefit from those relationships and replace our own systems as the need arises.

In addition to the older systems that John talks about, actually over the last year or two years and also probably going out about two more years, there are Olivetti systems, which are required to be replaced and also another vendor, an unapproved vendor, who had approximately 1,000 systems and now there's about 750 of those systems which have to be replaced by the end of 2006 also. We will get a share of those also, a good share of those.

I might add, beyond just replacements, although McDonald's has scaled back drastically in terms of their capital investment for new stores, they still are opening up 300-plus stores per year, plus satellite locations. And when you think about that as a number, 300 restaurants would be a very major chain. And yet that's a reduced growth for McDonald's. So, McDonald's is quite a vibrant account for us and for both new sales and for replacements.

And the other question I wanted to ask you, is you had given us the sales number for Springer-Miller, the top line. Do you have a bottom line number for '04 at Springer-Miller?

No, we're not breaking that out. I didn't mention though, that after amortization and interest expense, that it was slightly accretive. And we do expect it to remain accretive and grow.

Tony Tristani, Astral Capital.

Hi, good afternoon. Great quarter. A few questions. On gross margins, there was a nice pick up. I guess that was because of Springer-Miller to some extent in the quarter. But what's intriguing is you forecast some further improvements in 2005, in both service and product gross margins. What will be driving the further efficiencies in 2005, besides the mix?

In terms of the margins themselves, I think it's just a product mix issue on the product side. We are planning for substantially more software in our product mix in 2005, versus '04. Similarly, in the service side, there's quite a lot of recurring revenue that occurs in the software model that we'll be adding to our service revenue and also improving substantially our margins. So the margin increases in both product and services are a direct consequence of having more software in our product mix.

Is there a further opportunity to squeeze some margin on the service side to use your existing national and I guess some extent, global service organization to use in the growth phase for Springer-Miller?

Yes, there certainly is. And as John said earlier, we're taking that very slowly first, and making sure that we understand all the issues before we start taking action in that area.

Okay. And second question on margins, maybe not 2005, maybe it's in 2006, but in your core business before adding Springer-Miller you were driving towards operating expenses down to the 15 percent level. As you grow the business in 2005 and get into 2006, do you think there's an opportunity to get your overall company's operating expense back down to that targeted level?

Tony, we think very much so. We've always talked about being able to leverage our infrastructure and being able to handle the additional top line growth with a much lower rate of expense increase. And 2006 should expect that trend to continue and the operating expense ratio to come down.

So, just a kind of summary, it was a combination of improving margins and more efficient expenses as you grow, it's potential on the out years to get to the double-digit operating margin kind of numbers.

We believe that's very likely.

Okay. And final question is, how big of an opportunity do you think -- Springer-Miller appears like it was a great entrepreneurial type organization, grew the business to 17 million in revenue, but it seems like the market opportunity is pretty large and you guys are probably more professional managers. How big of a market opportunity in a few years or 10 (ph) do you think you'll be going after as you expand into also the high-end hotel market?

Well we think there's quite a lot of opportunity for the combination of our strengths and Springer-Miller. They have an excellent product. They dominate the high-end of resort market space. And they dominate it because they've built a system that focuses on customers. There's a very customer-centric concept that underpins their product.

And as loyalty programs become bigger and bigger in all of hospitality, knowledge about your customers becomes fundamental. One of the most attractive things I find about their product is that that fundamental concept is they designed it around this guest (ph)-centric idea. So therefore, it starts with a great product, I think, and a great reputation in a segment of the market space.

What they don't address is major chains, hotel chains. And the reason that they don't address them is because frankly, because they're a small entrepreneurial company as you suggested. In order to deliver to major chains, like the customers that PAR has traditionally had, you have to have a different infrastructure and to be able to deal with major accounts. And dealing with major accounts is more than just a product, it's everything about delivery and service and support over the life of the solution that you're putting in, and you've got to deliver it where those customers are. And many of the major chains, the hotel chains, are international and global.

And there in lies the synergism and the basis of this strategy. Since PAR has the credibility and has the infrastructure to deliver these solutions and support these solutions and Springer-Miller has a great product, we feel that we can feat (ph) very favorably on the high-end hotel chain market space and so we look for some opportunities along those lines.

We also have a dynamite spa management software package called SpaSoft, which dominates the high-end destination spa market space. And that market, as you probably know, is an expanding market with a lot of opportunity. In fact, all the major hotels are adding spas. That is, upscale hotels are adding spas to their facilities, which gives us another opportunity for penetration.

So we feel that there's quite a lot of opportunity with Springer-Miller, because of the position that they have, the product that they have, the expanding market space itself, the health of that market. All those factors come to play such that when you integrate our strengths with their strengths, we think there's quite a lot of growth opportunity for both of us.

Bryant Regan (ph), Sterne, Agee & Leach.

Hey, John. On the R&D front you did, what was it, $2.3 million in the quarter. Will that go back to a more normalized level of like 1.3-1.4 or can we use that number going forward?

That will be the number going forward. Remember this is the first quarter with the Springer-Miller research and development staff. So, that will be a guide for going forward.

David Lavigne, EdgeWater Research.

Hey, guys, stunning quarter. Sorry I'm fixated on Springer-Miller, but I'm going to try to see if I can't ask this a different way. I think, John, that you referenced -- didn't you reference some numbers with respect to sort of Springer-Miller pulled out of the equation? I think you said the revenues grew 22 percent without Springer. Did I hear that quite right?

That's correct.

And then there was another line after that, that I think you referenced net income. Did you do that? In fact, maybe you said it was up 88 percent or something without Springer-Miller.

Yes, 88 percent is what I said.

That was operating income, Dave.

Okay. The other thing I was curious about is, I think at one point there was kind of an event or you suggested that there were some things that maybe occurred in McDonald's International, where maybe you didn't have quite the same amount of presence as you do domestically. And I'm wondering if there's anything that has happened with respect to that or if maybe I just misunderstood that? But are there things going on internationally at McDonald's that are perhaps a little bit better than they've been, say in the past?

I think the simple answer is yes, they are improving relative to our opportunities in the international market. I'll let Greg take it from there.

Yes, we did say that in the past. And there were some things holding us back in the past, relative to international. And we are working those issues and they look very very positive. So therefore, there should be an increase in international sales going forward, in McDonald's.

Jeremy Du (ph), Wedbush Morgan Securities.

Yes, it's along the same line of questions of international expansion. What percent of business from international is it today and what's 2005 look like for international opportunity?

Our international business is about 13 percent of our hospitality business for the year 2004. And going forward, as Greg said, there's new opportunities in '05, and we anticipate that the revenue will grow in '05 in the international area.

And do you see any potential constraints in terms of your revenue growth? You guys have done a great job growing the revenue, both the top line and the bottom line. For example, hiring needs, ability to get new product lines?

No, I think we feel fairly comfortable with supporting the growth that we see, the opportunities that we have. We put together a plan that says that the top line should grow in the range of 15 to 20 percent and we have staffed and have a bottoms-up plan to support that kind of growth.

(OPERATOR INSTRUCTIONS.) Jeremy Holland, Wedbush Morgan Securities.

Outstanding quarter, gentlemen. I was wondering if the growth plan, 15 to 20 percent top line includes another acquisition or if you believe you can reach that goal as the Company stands today?

Specifically, it does not plan for another acquisition. It is our plan with our internal growth from this point forward. We will continue looking at the execution of our strategy and we have ongoing, active programs to look for additional opportunities. But there's nothing specifically planned at this time.

Francisco Penafiel, Noble Financial Group.

Thank you. Good afternoon, gentlemen. Great quarter. One question. Related with tax rate, I have seen that for the last quarter the tax rate was about 43 percent, compared to 38 percent for last quarter and from 36 percent from last year. Could you comment on that and some guidance for 2005 expectations for this line?

In the fourth quarter of '04, we had some adjustments to some deferred tax assets that caused the rates to be higher than normal. They were one-time adjustments. And going forward we expect the rate to be in the 38-39 percent area.

Gavin Taylor, TerraNova Capital.

Good afternoon, gentlemen. Just a quick question. I was curious as to why, with the increase in cash you guys currently have, you decided to increase your USIF (ph) lines of credit? And I was also curious -- I may have missed something here, but why have the intangible assets increased over the past year by about $8 million?

The line was increased for the purposes of doing the acquisition. And you can take the second portion, Ron.

Gavin, first, just to follow-up on the line, we expect that line will be reducing in 2005. As far as the intangible assets, the growth there was all due to the purchase accounting for the Springer-Miller acquisition.

And there are no further questions at this time.

Well thank you very much for the interest in PAR. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.