PAR Technology Corp (PAR) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to your Q2 Earnings Conference Call. My name is Bruce (ph) and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If anyone requires assistance during this time, [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded for replay purposes. I would now like to turn this presentation over to our host for today, Mr. Chris Byrnes. Please go ahead, Chris.

Good morning everyone and welcome to PAR Technology's second quarter results conference call. Earlier today, we released our second quarter results. On the call today to discuss those results is PAR's Chairman and CEO, John Sammon; Ron Casciano, PAR's Chief Financial Officer, and Greg Cortese, ParTech Inc. CEO and President.

Before John begins with his formal remarks, I would like to take this opportunity 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 forward-looking statements. Forward-looking statements are made pursuant to the Safe-Harbor provisions of the Private Securities Litigation and Reform Act of 1995. I now would like to turn the call over to John Sammon, PAR's Chairman and CEO.

Thanks Chris. Good morning everyone. Today I will be presenting the results of our second quarter ending June 30, 2005. Second quarter revenues were 51.2 million, a 19% increase from the 42.9 million reported for the same period a year ago. This represents the highest second quarter revenue in our history. Net income for the quarter was 2.4 million, an increase of 79% over the 1.3 million reported last year. Earnings per share for the period were $0.24 per diluted share compared to $0.14 per diluted share reported last year. For the six-months ending June 30, revenues were 100 million, a 24% increase from the 80.8 million reported a year ago, establishing a new first-half record. Net income for the first six months of 2005 was 3.7 million, an increase of 79% over the 2 million reported for the first six months of 2004. Earnings per share for the period were $0.38 per diluted share compared to $0.22 per diluted share reported last year.

Looking at the quarterly revenue breakdown, product revenue for the quarter was 22.9 million, up 17.8% compared to the second quarter of 2004. This increase resulted from the strong demand for our hospitality products and the restaurant, hotel, resort, and spa markets. Service revenue for the quarter was 14.4 million, up 36.4% compared to Q2 of last year. This increase resulted from a growing install base in the restaurant sector in addition to the hotel and spa service revenues. Contract revenue was up 7.6% to 13.9 million for the quarter. This growth was consistent with our internal plan, yet lower than more traditional quarters due to the timing of revenue recognition of certain contracts. Our first quarter revenue was exceptionally high resulting in a below average second quarter growth rate.

Looking at margins, product margins for the quarter were 39.4% versus 32% last year. This increase resulted from higher software content in our product mix. We are particularly pleased with this margin increase (indiscernible)demonstrate the success of our strategic plan to improve margins to the software sales. Service margins were 24.2% versus 14.1% a year ago. This significant increase also reflects the growth of the software content in our hospitality business. Contracts margins or in our case pre-tax profits were 6.7% compared to 6.3% last year. This is somewhat higher than our traditional 5 to 6% pre-tax profit range and resulted from favorable contract modifications.

Looking at expenses, SG&A expenses for the quarter was 7.3 million versus 5.2 million last year. This increase primarily reflects the acquisition of Springer-Miller. Similarly R&D expenses 2.1 million this year versus 1.3 million last year reflecting the acquisition of Springer-Miller as well as some increased investment in new product development.

Breaking out the year-to-date performance, total revenue was a 100 million up 23.7%, product revenue was 43.9 million up 23%, service revenue was 27.8 million up 33.2%, and contract revenue was 28.2 million up 16.4%. Product margins were 39.1% an increase of a full 7.1 percentage points, service margins were 23.2% an increase of 9.6 percentage points, and contract margins were 6.1% a slight decrease of six-tenths of a percentage point. Overall margins improved to a full 5.6 percentage points.

Operating expenses were 19.6 million, an increase of 48%, net income was 33.7 million, an increase of 79%, diluted earnings per share was $0.38, an increase of 73%. Turing to some balance sheet highlights, our financial condition remains strong. Our receivable collection cycle remains very good, our days outstanding for our hospitality business are 64.5 days and our government business is 54 days. Inventory turns continue to improve to 4.72 turns compared to 4.3 turns at the end of last year. We have reduced our short-term debt to 1.9 million at 6/30/05 compared to a 10.2 million at the end of last year. Cash flow from operations was 3.2 million for the first half of 2005.

In summary we are very pleased with our record second quarter performance. Both our government and our hospitality businesses exceeded our internal plans and made this achievement possible. We are especially delighted with margin improvements in both products and services, reflecting a substantial increase of software content in our hospitality business. While much of this derives from the Springer-Miller acquisition, we are also experiencing an increase in our restaurant software sales as well. With a 19% revenue growth and substantial gross margin improvements, we were able to grow earnings per share by 71% to $0.24 a share, slightly higher than the street forecast of $0.21.

The results for this quarter are a reflection of the following facts. First, the hospitality market is very healthy with both restaurants and resorts investing in expansion and upgrades. Secondly, we have created and sustained long-term relationships with our hospitality customers, which has allowed us to gain market share not as a result of lower pricing, but rather delivering value, which has resulted in excellent customer relations. This I consider to be a strategically important accomplishment as we serve some of the largest most demanding companies in the hospitality sector. Through these long-term relationships, our customers have benefited from the value that we have provided, however, we had also benefited from these relations by building a valuable infrastructure which creditably creates deliveries and supports complex IT solutions for large global accounts. It is this asset that we are now leveraging to expand our hospitality business.

We are pleased with the improved results from the acquisition of Springer-Miller. This is the first example of our intended strategy of leveraging our considerable infrastructure to extend our hospitality business through strategic partnering with exemplary software companies. Our investments to increase software content is beginning to payoff and this can be seen by this quarters improvement in both margins and profits.

We are pleased to report a 62% increase in international hospitality product revenue this quarter, as we have been striving to increase our international sales. Particularly gratifying is the fact that this growth resulted from several new customers such as Latoria, which is a large Korean corporate owner of many restaurants and cafeteria outlets, Habi (ph) a burger chain Saudi Arabia, Subway in Latin America, and Gloria Jean's an international coffee chain with operations widely distributed around world.

Our government business continues to perform quite well at 7.6% revenue growth this quarter. This marks the 146 consecutive profitable quarter for our government business and with a backlog of 110 million, we are assured of continued strong government business. In addition to the government revenue growth in both IT outsourcing and implied technology we also benefit this quarter by the restore (ph) of DOT funding to our logistics management program. While we expect continuation of government funding, we're also beginning to develop an embryonic commercial business, and to date, we have installed over a 1000 cargo made systems and chassis and mobile generator sets. While we are long way from establishing a successful commercial business, we are nevertheless gratified by the small first step. Our strategy for this area is to continue to pursue government-sponsored container security programs as a main store end goal of establishing an information-based commercial business. On another note, it was gratifying to have been listed in 2 national business magazines noting our most recent financial performance. We were listed number 34 on Fortune's Small Business Fastest Growing Companies and number 15 on Business 2.0 Magazine's List of the Fastest Growing Public Technology Companies.

We are off to a strong start in 2005, as represented by our year-to-date performance. For the year, we had forecasted revenue growth in the range of 15 to 20% with accelerated earnings. Based on results today, we feel that revenue will grow at the upper end of the range with corresponding acceleration in earnings. This completes my formal remarks and now I'd like to open the session to take any questions.

[OPERATOR INSTRUCTIONS]. Tony Brenner, Roth Capital Partners.

Two things. First of all, you mentioned with respect to the government contract margins, favorable contract modifications, what exactly does that mean?

On the contracts that we have Tony, there will be from time to time modifications of the contract. There will be engineering change orders to the contract and adjustments to the work schedules. When this occurs, frequently under fixed price contract, it allows us to price the work change appropriately and often times that will result in a more favorable bottom line on a particular contract. So, basically they are change orders on government contracts.

Second question regarding SG&A. Your SG&A expense was essentially the same as it was in the first quarter and the year-over-year increase I presume mostly reflects the acquisition of Springer-Miller. As we go forward, will there be savings from that acquisition effected? Could we expect SG&A to subside somewhat from these levels or will they remain constant or even increase?

Tony, we expect as we go forward, SG&A as a percent of revenue will decrease. You will see some growth in the actual dollar amount, as we supplement our organization as needed in certain areas. And that is the trend you should expect going forward, Tony.

Steven (ph).

Nice quarter, gentlemen. I wanted to try and get a little more color on revenue side of the equation. First of all, can you talk a little bit about what you are seeing on the Springer-Miller side in terms of either absolute dollar contribution or what type of growth that part of the business is achieving?

Well, we don't break out specifically the components of our hospitality business, but all factors of our hospitality business are enjoying very, very favorable growth. As you may know, the strategy that we have had with Springer-Miller is basically to leverage our infrastructure to take their products into our international market and then we were beginning to do that, and part of our strategy was to sell a part of our hardware through their channels, and we are beginning to do that. We are also advancing our sales activity in the chain business. And so the business is performing as we expected it to perform, the Springer-Miller business that is, and they are growing along with our restaurant business, and the overall hospitality business certainly has some very favorable growth.

And speaking of the chain business in the non-restaurant and hotel and spa segments, if I recall correctly, you were dedicating some greater resources, I suppose, you saw nice opportunities outside that core base and I just wanted to get a sense of exact lease to critical point in terms of the major contributions for revenues and is that the growth profile of those areas higher than in the core business?

No, I would say that there's nothing to specifically report. There are some chains that we currently are servicing. (indiscernible)is a notable chain that we have and we're very pleased with the progress that we've been making and we definitely have a strategy to grow that aspect of the business, but there's nothing specific to report and there hasn't been any specific revenue that we have enjoyed in this past quarter relative to the chain business outside of the normal business that Springer-Miller has been doing.

And touching on the government contract business and the gross margin, do you expect those to return to the longer-term 5 to 6% trend, or are they going to be a little higher going forward?

I think we feel comfortable with the 5 to 6% range, although I would think that the trend would be on the high side of that range, as we move forward.

One last question. John, you mentioned that in terms of the revenue growth, you specifically mentioned that you were not having to give up anything on price to get new business. Are prices remaining stable or you actually able pass on price increases in this environment?

I would say prices are remaining stable. I think our cost follow pretty much the cost in the PC market space. On our hardware, what we do is we tend to hold the price and give more functional features within the products that we offer. The new ViGo product that we have released has an extensive number of options available to our customers. It's being received quite well, the pricing is quite competitive in the market space. As we increase our software content in our solutions, of course, we see increased revenue from that and we also see improved margins as a result of more software content. Does that answer your question?

Yes, it does.

Our next question come from Jush Hoder. Please go ahead.

Two quick questions. One is, can you give us your customer concentration this quarter? How much do you see your top two customers represent, and I have a follow up?

For the quarter, McDonald's revenue was 29% of total consolidated revenue and Yum Brands are next largest customer with 13% of total consolidated revenue.

29 and I didn't capture the other one, I am sorry.

13%, Yum Brands is 13%.

Okay. And in terms of your business at McDonald's, I know, we've spoken this, this was a multi-year roll out, where you might just be sort of in the middle of that roll out, is that a fair assessment or do you think, you know, some other roll out that's happening this year in terms of their -- new machines will even accelerate into next year?

In terms of McDonald's, we have reported in the past that we've been refreshing our number of their stores, but there's quite a lot of replacements to be done in their 13,000 domestic stores and their international stores, which is approximately the same number, there's quite a few older systems that need to be replaced. The hospitality market and restaurants in general is the very active market right now. Our pipeline continues to expand, our opportunities continue to expand. So we think that the hospitality market, in general, and specifically in restaurants is going to continue to be strong throughout 2006. So, if I look at 15% to 20% growth this year, and may be toward the high end of that range, there is nothing that -- there is nothing at all that would seem to contradict that you should continue to grow 15 to 20% next year as well we are in the process right now of doing our strategic plan, the process goes on in to our ALP (ph) plan, so it is a little premature to be talking about the specifics of 2006. I can just tell you that our general goal in business is to grow the topline at 15%, and accelerate the bottom line, and we want to do this in our core businesses, and we want to pursue the leveraging of our infrastructure as we have been talking about for the past year, and have recently done with Springer- Miller. So, I think we still feel comfortable given what we know about the hospitality market and the strength of our infrastructure. We do feel comfortable on the topline growth at the 15% range. But as we move through our planning cycle, we will get more clarity relative to 2006, and will be able to talk more specifically later in the year.

Okay, great. Thanks so much.

Thank you. Our next question comes from Carl Duff (ph). Please go ahead sir.

I'm going to go back to the G&A, if I may, can I get a little more color on it, you had obviously seen some of the increases from Miller, yet the percentage increase is heck of a lot more than your revenue increase which obviously must have (indiscernible)Springer Miller. Can you give us little more color on what's going into that to cause the rate of percentage increase at this point in time, and also a little more color on the R&D in terms of what product specifically you might be investing the new money in to cause that to be at this point rising at such a rapid rate as well?

Yes, just to repeat the primary reason for the growth in SG&A is the Springer-Miller acquisition that was completed last October, being a typical software company, SG&A cost of the software company usually run higher than what our traditional SG&A has been in the past, so that's why you see the numbers that you see, but that is the primary reason, the job, if you look at our core business, we talk about how we are able to leverage the infrastructure, that is continuing. There was no need to make any large investments in our restaurant SG&A component. I'm sorry, go ahead.

If you break out the revenue increase at Springer-Miller and the revenue increase and the percentage increase in SG&A, the SG&A must be growing at a greater rates than the revenue based on your topline revenue, I'm looking at the whole Company, is that correct?

Well, like I said, we don't break out the components of revenue. Just to say that, you know, the SG&A is within our plan, and I think you'll see slower growth as you get comparable quarters with Springer-Miller down the road, and we are comfortable with the number, we have spend a lot of time controlling our SG&A costs and paying attention to that line item, and we are confident we are at the right level. You also asked about R&D, again the increase in R&D is primarily attributable to the Springer-Miller acquisition, last October, and of course the R&D investment is centered around software development, as well as continued efforts to improve our hardware offerings, both in the area of cost reductions and new hardware products.

Thank you.

[OPERATOR INSTRUCTIONS]. Stephen (ph). Please go ahead sir.

Yes, just a couple of follow-up guys. Do you have the D&A number for the quarter?

Yes, Steven. The depreciation and amortization number for the quarter was about 900,000 making it about 1.8 million for the six months.

And what's in that other income line?

Other income line contains foreign currency gains and losses and some rental income from the portion of our headquarters' facilities that we lease out. Those are the main components of the other income line.

And finally, John I wanted to ask you if you've given any thought to succession planning and what that might look like or when we might hear the Company talk about those type of issues?

No, I don't know if it is appropriate to be talking about those issues. I intend to be around for a while as far as my position is concerned, but we have -- we do have succession plan internally in all of our business sectors. And, so we have identified individuals, potential candidates to move up within the organization and it is an ongoing and active planning program that we conduct as a normal course of our annual planning.

Geremy Shan (ph).

Hi guys. Congratulations on the quarter. One quick question on the shareholders. The number of shares outstanding has increased this quarter, that's just normal stock option grant or is it something else?

Yes, Geremy that's been as a result of stock option exercises during the quarter.

[OPERATOR INSTRUCTIONS]. We don't seem to have any questions at this time. Shall I hand it back to you, gentlemen?

Yes. Well, thank you for your interest in PAR. We appreciate you listening in today. Goodbye.

Alright, thanks a lot gentlemen. This conference call has now finished. I would like to thank you for attending and wish you all a good day. Thank you and goodbye.