PAR Technology Corp (PAR) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 3 2005 PAR Technology earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Chris Byrnes, Director of Financial Relations. Please proceed sir.

Good morning everyone. I would like to welcome you to PAR Technology's third quarter earnings conference call. By now all of you should have received a copy of our Q3 results. Here with me today to discuss those results (technical difficulty) Ron Casciano, the Company's Chief Financial Officer, and Greg Cortese, CEO and President ParTech Inc.

Before John begins with his formal remarks, I would like to remind everyone that 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. And 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 PAR's Chairman and CEO, John Sammon for his formal remarks.

Good morning. Today I'm going to be presenting the results for our third quarter ending September 30. The third quarter revenues were 52.2 million, a 22% increase from the 42.6 million reported for the same period a year ago. This represents the highest third quarter, and in fact the highest revenue quarter in our history.

Net income for the quarter was 2.5 million, an increase of 47% over the 1.7 million reported last year. Earnings per share for the period were $0.26 per diluted share, compared to $0.19 per diluted share reported last year, an increase of 37%.

For the six months ending September 30, revenues were 152 million, a 23% increase from the 123.5 million reported one year ago, establishing a new nine-month record. Net income for the first nine months of 2005 was 6.2 million, an increase of 64% over the 3.8 million reported for the first nine months of 2004. Earnings per share for the period were $0.64 per diluted share, compared to $0.41 per diluted share reported last year, an increase of 56%.

Now looking at the quarterly revenue breakdown, product revenue for the quarter was 22.9 million, up 24% compared to the third quarter of 2004. This increase resulted from strong demand for our hospitality products in the restaurant, hotel, resort and spa markets.

Service revenue for the quarter was 15.1 million, up 29.7% compared to Q3 of last year. This increase resulted largely from the hotel and spa service revenues. Contract revenue was up 14.1% to 14.3 million for the quarter. This growth was derived from an increase in our IT outsourcing business.

Looking at margins. Product margins for the quarter were 42.1% compared to 34.4% last year. This increase resulted from higher software content in our product mix. We were particularly pleased with this margin increase since it demonstrates the success of our strategic plan to improve margins through software sales. Service margins were 23.6% versus 13.5% a year ago. This significant increase also reflects the growth of software content in our hospitality business. Contract margins, or in our case pretax profits, were 7%, unchanged from last year.

Looking at expenses, SG&A expenses for the quarter were 7.5 million versus 4.9 million last year. This increase reflects primarily the acquisition of Springer-Miller. R&D expenses were 2.9 million versus 1.2 million, reflecting the acquisition of Springer-Miller, as well as some increases in investments in new products.

Breaking out the year nine months to date, total revenue was 152.2 million, up 23%. Product revenue was 66.8 million, up 23%. Service revenue was 42.9 million, up 32%. And contract revenue was 42.5 million, up 16%. Product margins were 40.1%, an increase of 7.3 percentage points. Service margins were 23.3%, an increase of 9.7 percentage points. And contract margins were 6.4%, a slight decrease of .4 of a percentage point. Overall margins improved a full 5.9 percentage points. Operating expenses were 29.8 million, an increase of 52%. Net income was 6.2 million, an increase of 64%. And diluted earnings per share was $0.64, an increase of 56%.

Turning to some balance sheet highlights. Our financial condition remained strong. Our receivable collection cycle remains very good. Our days outstanding for hospitality are 62 days. And for government it is 55 days. Inventory turns were 4.6. That is a significant improvement over last year. Our long-term debt is 2 million, and we have no short-term debt, with an unused line of credit of $20 million. Year-to-date cash flow from operations was 7.5 million.

In summary, we're very pleased with our record third quarter performance. All segments of our businesses performed quite well, making this achievement possible. We are especially delighted with margin improvements in both products and service, reflecting substantial increase of software content in our hospitality business. While much of this drives from Springer-Miller acquisition, we are also experiencing an increase in our restaurant software sales as well.

With a 22% revenue growth and substantial gross margin improvements, we were able to grow our earnings per share by 47% to $0.26 per share, slightly higher than the Street forecast of $0.25. This multiple of bottom line growth over topline growth is accomplished by the inherent leveraging possible within our hospitality business. And this is a pattern we expect to continue indefinitely into the future.

The results of this quarter are a reflection of the following facts. The hospitality market is very healthy, both restaurants and resorts are investing in expansion and upgrades. We have created and sustained a long-term relationship with our hospitality customers, which has allowed us to gain market share, not as of the result of lower pricing, but rather by delivering value, which has resulted in excellent customer relations.

This I consider to be a strategic and important accomplishment as we serve some of largest, most amending companies in the hospitality sector. Through these long-term relationships our customers have benefited from the value that we have provided. However, we have also benefited from the relationships by building a valuable infrastructure, which credibly creates and delivers and supports complex IT solutions for large global accounts. It is this asset that we're now leveraging to expand our hospitality business.

We are pleased with the continuing accretive results from our acquisition of Springer-Miller. This acquisition was the first example of our intended strategy of leveraging our infrastructure to extend our hospitality business through strategic partnering with exemplary software companies. On October 4 of this year we closed on the acquisition of PixelPoint, which represents another step forward in the execution of our growth strategy.

With Pixel we now have an excellent table service software product, which we can sell through our worldwide channels. We expect to grow the Pixel business by leveraging not only our sales channels, but also our formidable service organization, since we believe long-term customer satisfaction depends not only on superior technology products, but equally on superior customer support. Within PAR, service is a center of excellence and the foundation of a very competitive infrastructure.

Our investments to increase software content is paying off. This can be seen in this quarter's improvement in both margins and in profits. We are pleased to report that our international revenue is up 35% year-to-date, reflecting our strategic objective to grow our international hospitality business. We fully expect this sector of our business will be an increasingly larger percentage of our total business for three reasons.

First, international sales to our traditional QSR customers will grow substantially over the next few years. Secondly, Pixel software is an international product, supporting in five languages, and is already installed in 25 countries. We're now well positioned to grow our restaurant solutions throughout the 95 countries where we are already doing significant business. And lastly, we are investing in infrastructures to sell the complete line of Springer-Miller products throughout the world.

Our government business continues to perform quite well, with a 14.1% revenue growth this quarter. And this marks the 147th consecutive profitable quarter for our government business. And with a backlog of $108 million, we are assured of continuing strong government business.

In addition to the government revenue growth in both the IT outsourcing and applied technology, we also benefited this quarter by the restoral of DOT funding to our logistics management program. Additionally, we were recently officially noted by government representatives that we can expect additional DOT contracts in the amount of at least $7 million over the next six years, assuring continuance of this program. Our strategy has been, and continues to be for this area, to continue to pursue government-sponsored programs as a means to our end goal of establishing an information-based commercial business.

Summarizing, 2005 performance has been very good as represented by our year-to-date performance. At the end of last year we had forecasted revenue growth in the range of 15 to 20%, with accelerated earnings. Based on the results to date, we feel that revenue will grow at the upper end of this range with corresponding accelerations in earnings.

It is possible that we might see a slightly lower than analyst forecasted revenue in Q4, due to the impact of hurricanes. We have had several planned installs delayed and service revenues temporarily suspended from hundreds of destroyed restaurants. We believe this impact will be short-lived as facilities are rebuilt and return to normal business over the next few months.

As these facilities reopen, we will benefit from the sale of hundreds of new point-of-sale systems and the restoral of service revenues. In the event that we do experience a slightly lower revenue in Q4, we will nevertheless expect to have record quarter revenues. And we remain very confident that we will meet analyst earnings per share forecast of $0.29.

As we look forward to 2006, reflecting on our achievements this year and on our business pipeline, we have now established a plan to achieve topline growth in the range of 15% with continuing acceleration of the bottom line.

That concludes my formal remarks, and I would like to open the session to questions.

(OPERATOR INSTRUCTIONS). Mike Grossman.

I've got two questions. One on the SG&A line. Just kind of going forward, can you talk about what kind of percent of sales we should expect to see in the SG&A? And is there investment in marketing going forward for some of these new initiatives, or are we going to continue to see some operating leverage?

I will turn that question over to Ron.

SG&A has been running in the mid 14% of total revenue. We expect that trend to continue into next year, maybe slightly lower. We will be making some strategic investments in sales and marketing as we plan to expand the distribution of our products, especially our newly acquired software products.

And then the second question relates to the increase in software sales you're seeing in the restaurant side. What is driving this?

This is John. What is driving it is our IN.fusion product. It is a suite of software that runs the front of the store and the back office and above the store. And it sales to customers such as Pappa Murphy's, which we announced this quarter, and other accounts. The software is particularly useful in the environment -- particularly the above the store aspect of the product, which provides a Web-enabled ability to roll up data from multiple stores and provide that data to the management of the restaurant chain through a browser. That is a particularly important function that is being delivered by the IN.fusion product. And it is the success of this product that is driving the sales.

Tony Brenner.

A couple of questions. You mentioned that international sales were up 35%. I wonder what role China plays in that gain? How important is that with respect to the international part of the business?

There are no sales this quarter in China. So the direct answer to your question is that it had no impact. But I do think China is very much of an important geographic area for us. And we had some very, very good news delivered to us in this past quarter by a couple of our very major accounts, where we have been asked to take on more responsibility for delivery of solutions in the Asia-Pacific area, as well as in the Africa continent. When we consider where we're very strong internationally this complements our geographic presence rather nicely.

On a previous question there was a question about are we going to have some additional marketing expenses. And Ron did answer that in the affirmative. In particular, the expenses are going to be in the expansion of our geographic presence in the international sector, and specifically in China. We expect to do a considerable amount of business over the next few years in China, in India, in Russia and in the African continent. So we expect to see an increasing percentage of our revenues coming from international.

And international is going to be a very important part of our strategy going forward. As you possibly know, we have introduced the Springer-Miller products into our international channel. We are in the process now of introducing the Pixel product into our international channel. And so it all plays together quite nicely the fact that we're getting an expansion of geographical presence from our major customers, McDonald's and Yum!, and with that it enables us to extend your channels. And with additional products from Springer-Miller and Pixel, we feel that international sales will do nothing but grow into the next several years.

With respect -- with regard to Springer-Miller, a year into the acquisition are all Springer-Miller sales now bundled with equipment -- both equipment and software, or are there instances where you're still selling only software to new accounts?

It is both. We're selling our products into the Springer-Miller accounts and also the Springer-Miller software is going in without our equipment. It is an area of focus for us going forward. We would like to see increasing hardware sales into the Springer-Miller customers. And I fully expect you'll see more of that happening in the future.

Lastly, could you provide any sort of update regarding the logistics management system that you have been working on with short-term contracts?

I think we had some very, very good news in this past quarter. As I indicated in my formal remarks, we received a notification from the government that within the Transportation Bill that has been signed, we will be receiving funding over the next six years. And the amount of funding is minimally going to be $7 million. That puts a foundation under this government business of ours. But as you know, we have been working towards the objective of leveraging this government funding for the purposes of creating an information business.

In that regard we have established relationships with numerous owners of assets -- mobile assets -- that would be interested in having GPS tracking for more efficient use of those assets. In particularly we have put our units on generator sets which are used to generate power for refrigeration units that are mobile. We have put our units on reefers, which are refrigerated containers. We have put our equipment on containers themselves. And we have put our equipment on tanks that go on ships. They are just containers that contain -- that carry liquids. And we have also put them on chassis.

We have also built many interfaces to security devices in order to meet the Department of Homeland Security's interest in assuring security of containers. We're also building interfaces into refrigeration electronics so that as reefers are being moved around the globe, we can be monitoring the temperature, and therefore the health, of the contents of those refrigerated units, and be able to report an event such as the refrigeration unit failing or the generator set failing. So not only can we track the location of these refrigerated units, we can also monitor the health of the contents of those units.

And we think that is a particularly nice focus for us. And so we have established tests with numerous companies. We have about 1,200 units all told in test. And we have not yet had a breakthrough in terms of creating a stand-alone business, but of course that is our intention. Does that answer your question?

Yes.

Jim Yin.

Can indicate how well your sales opportunity of PixelPoint and Springer-Miller -- can you tell me a little bit about the pipeline and that compares to the pipeline prior to the acquisition on a stand-alone basis?

It is very early with PixelPoint, since we have just closed on October 4. But we're doing quite well with that product already. And we are quite confident that we're going to be seeing some sales coming along as a consequence of having that software flowing through our channels. It is early in the game with PixelPoint, but we're quite optimistic about the product that we have just acquired.

We think it is a product that will sell well into major chains. We think it is a product that will sell very well internationally. And we feel that with our infrastructure, our service infrastructure we have in place already for our major accounts, we will be able to complement the dealer organization that Pixel has.

As far as Springer-Miller is concerned, it is in a growth mode. The hospitality market space and high-end resort hotels and spas is a prolific market, and the product is selling well into that healthy market space. And so I think Springer-Miller's acquisition has been accretive from the beginning, and it continues to work very well within our infrastructure. It is a good example, I think, of how we can leverage our infrastructure that we have built over the years with major accounts, and use that infrastructure to deliver additional hospitality products.

Can you give me a year-over-year revenue -- Springer-Miller what it did in Q3 of last year versus what was kind of -- I know you can't -- you don't break it out by division, but can you give me like an indication of the growth of that as a result of the acquisition?

As you know, we don't break out that revenue. I can only tell you that the business is very healthy. We're very pleased with the business, and we have continuing optimism for the growth of that business.

Can you give me an indication of how fast the gross margin for the product revenue is going? I know you're saying that software license is growing. Can you give me like a rough percentage of what it is now and what do you expect it to be -- software as a percent of product revenue in the future?

We're not breaking that out and forecasting that at this time.

How high do you think -- well, let me ask you this. How high do you think the gross margin for the product revenue could go, now that they already exceeded your somewhat internal target of 40%?

As you know, as software content increases, we're going to see increasing product margins. We have seen product margins of that raise from the 33% level to the high 30s and 40% over the past year. And we expect to see continued growth as software content continues to increase. Our focus is clearly on software. The acquisitions that we have made are purely software companies. And we are investing in our own IN.fusion software. So software is very strategic to us.

We recognize that it is important, not only for the purposes that you are asking about, and that is margins, but it is also important in terms of value-add to accounts. With strong software it gives us the opportunity then to follow in with sales of hardware and service. And so software certainly is in our minds as a major driver of our business. With success, you're going to see continued improvement in the product margin and service margins.

About the revenue that is being delayed after we saw the hurricane, is it strictly being delayed or it is permanently pushed back -- is it being pushed up on Q4 to Q1? Do we see all of that then being recognized in Q1 as a consequence of that?

First of all, we're not certain that there will be a shortfall in the revenue. It is a possibility, and I wanted to just make that point that there is a possibility. We're not totally certain that that is in fact going to even happen. But specifics behind it are very real. We had -- we have contracts for delivery to several cruise lines and spas, and because of the hurricane, that business has been delayed until 2006.

At as far as the revenue from restaurants, it is service revenue that we're not getting that we would have gotten. Of course, we're not going to charge customers for service when their establishments have been destroyed. It is something we're rather proud of. I will just mention is that we have asked for volunteers within our Company to go down and work in the hurricane destroyed areas to help our customers with their business. And I believe we have 28 people that are in those areas running stores, such as McDonald's and Yum!

And is a very positive thing that I think that our corporation is doing. It is another indication of the relationships that we have with our customers. And as a consequence of doing what we should do as a good corporate citizen, we're deriving lots of goodwill. And there's no question in our minds that the couple of hundred stores that have been destroyed are going to be buying our equipment. And we're going to do far more business as a consequence of those hurricanes. So it is -- if we have any shortfall in revenue, it is going to be small, and it is going to come back in 2006. We have contracts in place that we are going to be delivering to the cruise ships. And as far as the restaurants are concerned, they are going to becoming back online in the next few months.

There are no more questions in the queue at this time.

Thank you very much for listening into our conference call. And have a very nice day. Thank you.

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