PAR Technology Corp (PAR) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PAR Technology First Quarter 2006 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Mr. Chris Byrnes, Director of Investor Relations.

Thanks, Sam. Good morning, everyone, and I'd like to welcome you to PAR Technology's First Quarter 2006 Earnings Conference Call. I hope by now everyone has received a copy of our first quarter results. Here, on the call today to discuss those results, our PAR Chairman and CEO, John Sammon, and the Company's Chief Financial Officer, Ron Casciano.

Before John begins his formal remarks, I would like to first read our disclaimer. Statements made on this call may contain forward-looking statements. Any statements made on this call that do not describe historical facts are forward-looking and 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 PAR Chairman and CEO, John Sammon for his remarks.

Thank you, Chris. Good morning. Today I'm going to be presenting the results for our first quarter ending March 31, 2006.

First quarter revenues were $52.6 million, a 7.9% increase from the $48.8 million reported for the same period a year ago. This represents the highest first quarter revenue in our history. That income for the quarter was $2 million, an increase of 54% over the $1.3 million reported last year. Earnings per share for the period were $0.14 per diluted share compared to $0.09 per diluted share reported last year, an increase of 55.6%.

Looking at the quarterly revenue breakdown, product revenue for the quarter was $23 million, up 9.6% compared to the first quarter of 2005. This increase reflects increased sales to two new accounts, Papa Murphy's and Corner Bakery, as well as an increase in international sales.

International product sales were up 12.1% due to increase sales to McDonald's and direct sales of Springer-Miller and PixelPoint products by our international sales staff.

Service revenue for the quarter was $13.7 million, up 2.6% compared to Q1 of last year. Service revenues for the quarter were negatively impacted by the timing of the installations.

Contract revenue was up 10.3% to $15.8 million for the quarter. This growth resulted primarily from our advanced technology segment involving the development of software to assist air force command level personnel in the air battle planning.

Now, turning to margins, product margins for the quarter were 44.4% versus 38.7% last year. This increase resulted from higher software sales in all of our hospitality segments including quick serve restaurants, table serve restaurants, hotels, and spas. We are particularly pleased with this margin increase since it demonstrates the success of our strategic plan to improve margins through software sales.

While we expect product margins for the year to significantly exceed the 41.4% of last year, we don't necessarily expect to have quarterly margins running at the 44.4% of this quarter, each and every quarter, as that margin will be determined by the product mix in every quarter.

Service margins were essentially flat at 22.1% versus 22% a year ago reflecting the impact of the timing of installation schedules associated with some customer rollouts.

Contract margins, or in our case, pretax profits, were 7% compared to 5.5% last year. This is higher than our traditional contract margins, and is the result of a favorable cautionary adjustment on our logistics management program as well as higher than usual profits on fixed price contracts.

Looking at expenses, SG&A expenses for the quarter were $8.1 million versus $7.4 million last year. This increase reflects the acquisition of Pixel as well as increased sales, expenses, and commissions.

R&D expenses were $2.9 million versus $2.3 million last year reflecting the acquisition of Pixel as well as increased investment in new product development.

In summary, we feel that our record first quarter performance was quite satisfactory. We are very pleased with the product margin improvement reflecting a substantial increase of software content in our hospitality business, and especially pleased that software sales were up across all segments of our hospitality business.

With increased software sales and good government performance, overall gross margins increased 3 percentage points to 27.3%. With controlled operating expense increases including Sarbanes-Oxley's cost and fully expensed stock options, operational income rose to $3.1 million, an increase of 58%, and EPS increase by 56% to $0.14 per share.

The results of this quarter are a reflection of the following facts. First, the hospitality market continues to be healthy with both restaurants and resorts investing in expansion and upgrades.

Second, we continually enjoy excellent and 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 been the foundation for the excellent customer relations. Third, we are pleased with the creative results of our acquisition of PixelPoint Technologies. With a successful rollout of the Pixel software and the Corner Bakery stores, we will have another example of our intended strategy of leveraging our major account and professional services infrastructure to extend our hospitality business through strategic partnering with exemplary software companies.

Fourth, our international hospitality business grew at 14% reflecting increased sales to McDonald's and new sales of Springer-Miller and Pixel Products to our direct international channels. This latter accomplishment is gratifying since it is, again, another example of our intended strategy to leverage our international infrastructure to deliver newly acquired software products to global markets. Although it is too early to declare success, I believe, nevertheless, it is quite noteworthy.

Fifth, our government business continues to perform quite well, marking the 139th consecutive profitable quarter for our government business with ITL sourcing, applied technology, and logistics management factors contributing to the above average profitability. With a backlog of 102 million, we feel that we have a good foundation for continuing a strong government business.

We are off to a good start in 2006 as represented by this quarter's performance. For the year, we have forecasted revenue growth in the range of 11 to 15% with accelerated earnings. Reflecting on the fact the second half revenues have always exceeded first half revenues, we feel that we are on track to achieve our forecast.

I'd now like to open the session to take your questions.

[Operator Instructions] Jim Yin with EKN. Please proceed sir.

Well, thank you. Can you quantify a little bit about what do you expect software like -- I mean, the software portion of your product revenue is and what do you expect going forward? Are you saying -- do you expect it to increase significantly or marginally throughout the course of the year?

Jim, as you know, we don't breakout the software in our product revenues, but it is, obviously, reflected in -- the software is reflected in the margins and, as you see, the product margins were significantly increased this first quarter over the first quarter of last year, and we had a very rich quarter in software this last quarter, and we continue to expect that our software sales will be strong as the year unfolds.

We don't necessarily feel that the 44.4% that we achieved in the first quarter is going to be the run rate for the rest of the year, but we do feel that we're going to be significantly higher in product margins due to software sales than we were last year.

So, I think you can take the fact that the software sales have been increasing and will continue to increase as we move forward. We're putting a lot of emphasis, as you know, on software through the acquisition of Springer-Miller and Pixel, and investments in our own internal software, and it was particularly gratifying, I thought in this last quarter, to see that software sales were across the board in spas, hotels, table serve, and QSR, and particularly pleased that we started to see some sales of software through our international channels which is precisely the strategy that we had in mind when we had picked up these additional products from Springer and from Pixel.

So, I think as time goes by we're going to see increased software content in our product mix, but from quarter to quarter we can't expect to be running exactly the same percentages because it depends upon when we are, actually, making software deals and shipping software.

I hope that answers your question.

Do you expect that margin to go up throughout the course of the year or you expect it to stay level?

Well, as I said, I think it's going to be a significantly higher year than it was last year. I believe last year we were around -- what is it? 41.7 was it, Ron? But, I think it's going to be significantly higher than it was last year and we feel particularly good about the performance of this quarter.

Okay. Okay. Last quarter you mentioned something about [inaudible]of certain product, is this somewhat related to the impact of Hurricane Katrina or do you think that's mostly behind you, and can you mention -- do you expect the [inaudible] some of your customers somewhat corrected in the Q2 or Q3 contracts?

As we said in the fourth quarter, there was -- the impact of the hurricane did impact our revenues in the fourth quarter and, as I said in our last conference call, we expect the revenues that we didn't get in the fourth quarter to start unfolding throughout 2006. As I said last time, there are many stores that were destroyed in the Mississippi and Gulf Coast area, and many of these stores are still not open and they will be opening throughout the course of this year.

We also had some delayed sales to Carnival Cruise Lines as we've indicated. There were a couple ships that were taken out of service in order to house relief workers and others in the New Orleans area, and these ships are being put back into service. And we expect them to be fully back into service by the end of the second quarter, and we expect that business to be unfolding at that time.

So, I think the business is coming in, but it's coming in as the recovery is taking place.

And, is that main reason why you're optimistic that the overall growth rate will achieve your intended growth rate target, 11 to 15%, even though the Q1 we felt was below that?

No, I don't think it's solely that. I think there's always been a seasonality in our business as long as we've been in the commercial business, and that seasonality we expect to happen in this year. We, typically, run something like 53% of our business in the second half and about 47% of our business in the first half and, so we think that this will be the case this year, and some of that business that we didn't do last year due to the hurricanes is coming in, it's coming in the second quarter and, I think it's just unfolding. It's not going to be a spike in our business, it just unfolds as the recovery takes place, and that's just a piece of the business which contributes to the higher percentage of business in the second half.

Okay. Thank you. [Inaudible], I'll get back in the queue.

Thank you, Jim.

Traci Gregory with Mohawk Valley Business.

Yes, I had a question about the government systems business and that's where you have the $102 million backlogged, and I noticed that it's one of the areas where the Company seems to be actively hiring new employees particularly engineers, and I'm wondering if this something where you're looking for further growth in this business or is this just to accommodate current needs for employees?

No, Traci, you're quite correct. This segment of our business is growing, as is the commercial side of our business. We had put out a forecast at the beginning of the year that we thought our government business would grow in the range of 13 to 15%, and I think we're on track for that. It's ramping up in the year, so it didn't quite achieve that in the first quarter, but we're still on plan and this segment of our business has been highly reliable in terms of our forecasting ability and, so we feel good about our forecast growth in the 13 to 15% range for this year.

As you know, this is a people business. As we win contracts, we expand our staff, and it's almost linear as the business goes up in revenue, you have to staff up with people in a proportional way, and so the hiring of engineers and service personnel will continue throughout this year.

Okay. Thank you.

You're welcome.

[Operator Instructions] Jim Yin from EKN.

Can you tell me a little bit about the revenues on your largest two customers for the quarter?

Well, our largest customers are McDonald's and -- well, the government would be our largest [inaudible] 30% of our business comes from our government business and 70% comes from our commercial, but within the commercial which is, I think, the intent of your question, our largest customer contributed 25% of the revenue in the first quarter and Yum! was our second largest customer in the commercial sector and that contributed 10% of the total.

And, have you have a better gauge of what type of revenue expectation is from Burger King?

Well, that's an interesting question, Jim. We just returned from the Burger King convention and, as you know, we are one of four food suppliers and software to the franchisee community and we had a very good convention, and we're quite optimistic that we're going to participate in the opportunity as represented by that approved status that we have with the franchisees, but I think we're cautiously optimistic about the business because we see a lot of confusion within the account itself.

The Burger King organization has a strained relationship with their franchise association, and 90% of those stores are owned by franchisees and they all make they're individual decisions, and with a strained relationship the corporation does not have a lot of impact on what those franchise do and what they buy, although, I think that they will buy virtually all of their purchases will be with a pool of suppliers, but I also think there's some confusion in the marketplace relative to the performance in the stores.

I think with the confusion in the market space above the IPO and same store sales, and the departure of their CEO, it's a confusing situation, and with all that said, we are participating in the business that's coming forward and we have forecasted some -- a lot of future business from Burger King. We think it's going to develop slowly over this year and into next year. We don't expect a big spike in business because of Burger King because, I think, of the comments I just made relative to the individual decisions that have to be made, and the fact that not all the franchisees are enjoying big comparable increases of year to year sales.

So, I think that it's an opportunity and we cranked it in, in a conservative way.

So, it somewhat [baked] into your growth rate estimates of the year?

Yes, in a modest way.

In a modest way. And is it right now, as far as you know, coming above expectations or below your previous expectation three months ago?

I think it's about what we expected three months ago. We've been dealing with Burger King accounts for a lot of years and we are seeing the stress within that organization. We have seen the improved performance in the last couple years, but nevertheless, I still don't feel that it's quite as strong an account as some of our other QSR accounts.

I have a question about your R&D. I know it went up sequentially on the prior quarter. Are you -- this is somewhat and, maybe, anticipation of new products coming in the pipeline and, if so, can you give us some ideas what these products are?

Well, you're correct. There's two elements of the increase and, one is the PixelPoint acquisition which, of course, is new products for us coming into our channels and beyond that, there is investment in both our hardware and our software side, and the specifics of those products I don't care to get into right now, but we do expect to release new products within the second half of this year.

And, can you give me some idea if it will be table serve, quick serve, or in the hotel industry?

Well, it's going to be in all of them.

All of them.

Yes. Some of our hardware products have been designed for all of the segments of the market that we are serving the software, and we are continuing to make significant investments in software itself.

Okay. Thank you.

You're welcome, Jim.

Matthew [Templer] with Performance Capital.

Thank you. Good morning.

Good morning.

Could you just review, again, what's going on in the service line of the business and when you expect that to correct, and then what you need to focus on the gross margin side of the service business, and what started there, first and second half of the year?

Well, Matthew, the first quarter -- well, let me start by describing the type of business that we do. We are, primarily, a [teur] one supplier, which means that we sell to restaurateurs that have many, many stores and when we do business with -- whether it's the individual licensees or corporate stores, we tend to have a quite a few rollouts and when you do rollouts, you tend to ship your equipment to a central place or you stage the equipment, and then our installers go out and install the equipment within a geographic area, and we don't recognize the service revenue until we actually install the equipment.

So, the situation in the first quarter is that most of our orders came in at the end of the first quarter and as a consequence we didn't get the installation revenue within the period. So, we will expect that installation revenue to pick up in the second quarter and the remainder of the year.

Okay. And, then, so it's just the margin -- you expect the margin to bounce back to do what we were seeing at the end of the year on the service side as last year?

Yes, I believe that would be a good assumption. Ron, do you want to add anything?

That's correct and we expect the margin to move back up to the area, at least, to where it was last year.

Okay. Thank you.

You're welcome.

Steven Pinsk with Noble Finance Group.

Good morning, gentlemen.

Good morning.

Good morning.

Questions for you. Going back to the service segment, if we look at it sequentially, service margins declined and also service revenues declined. Presumably more of the restaurants that you sell to that were affected by the hurricane open throughout the quarter than what was opened in the fourth quarter. So, I guess, maybe, you could touch on why there was this sequential decline there.

Steven, this is Ron Casciano. If you look at the service revenue for the quarters for last year, it was growing quarter to quarter and then first quarter of '06, it was down from the sequence that you're referring to. And as John mentioned, the major reason for that was just the timing of a lot of the installations that we had planned, and that is the number one reason we are growing our base. We've added more service contracts in several areas and we expect the service number to increase as we continue throughout 2006.

Okay. When you say 'timing of installations', are you referring, primarily, to the hurricane affected --

No, this is just in general, across our customer base.

Okay. Were there any customers that represented a major proportion of the timing issue? Was it just one or two, or for whatever reason, it was --

No, it was across several customers, not tied to any particular one.

Okay. And, you're not concerned that this somehow portends a slowdown in the overall growth in the industry?

No. No, we don't. No, we haven't read anything or, really, seen anything relative to a slowdown in the industry. It seems to -- seemingly is still robust in terms of the restaurants and the hotel side of things. So, we haven't seen that.

Okay. On the product side, you did the 44% gross margin and if you look back over the last couple of quarters, I guess, starting with the third quarter of '05, you then up in that low to mid 44% range, and John, you had mentioned, kind of, don't expect that to continue indefinitely, and I was just wondering given that it's been pretty steady over that 40%, why you think it might change from there?

Well, I didn't mean to set any alarming signals relative to the product margin. It's just that the timing of when software is shipped varies and, so we want to have some fluctuations in that margin. The software controls that margin significantly and, so from quarter to quarter, it's going to be directly a function of how much software is shipped in those quarters, but I'm certainly not here to set any signals out that we don't expect to have a very significant improvement over the year. As it averages out from quarter to quarter, significant improvement over what we ran last year [technical difficulty]

We feel very good about our software business and I hope I am conveying that, that the strategies that we've had for the acquisitions seemingly are working in our favor at this point and time, and our own internal software is being sold very successfully and, so we feel good about our software content and our product mix. I suppose it's going to vary from quarter to quarter, that's the only message I'm giving.

Okay. But, that variance doesn't sound like it's going to be extremely large. For example, we wouldn't expect to see it back down to 38 - 39% in a particular quarter or could it do that?

No, we don't expect that.

Steven, for the year we expect it to be up over the year for 2005.

Right, right.

But, no, we don't expect anything under 40 as you mentioned.

Okay. On the service gross margin, the hurricane issue and the delayed installations, when we look at the 22.1% gross margin, obviously, that's down sequentially and flat year over year, do you expect the gross margin on the service side to continue to expand?

We do, as we said earlier, we expect it to grow to levels comparable to what they were last year and hopefully a little bit north of that.

Okay, okay, fair enough. All right, just a couple of housekeeping items, Ron. Do you have D&A and CapEx for the quarter?

I do, Steven. D&A was about $983,000 for the quarter and CapEx was about $450,000.

I may have missed this, but did you breakout what the international growth rate and the U.S. growth rate was in the quarter?

Yes, we did. Overall, the international sales were up 14%.

And, when you were at the Burger King convention, did you, actually, win any business while you were there?

We had some very significant opportunities that we are pursuing. At conventions we don't normally sign contracts at the convention itself. So, there's been the places where you derive the opportunity and find out who are the real buyers and get your focus -- get your organization focused on specific deals, and we have several of those.

Okay, very good. And, then the last question I had for you, do you have the specific date of when McDonalds will be holding its big franchise convention?

Yes, next week.

Is it all week?

It's a convention that's all -- an international convention that's held every two years and it's normally in the May timeframe and, so this year it's the first week of May.

Okay. Is it the entire week, is what I was asking?

Oh, I'm sorry. It starts on Sunday and, I think it ends on Thursday, I believe.

Okay, very good. That's all I have, gentlemen.

Okay. Thank you, Steven.

Thanks very much.

Ladies and gentlemen, I'm showing no further questions in the queue, so I'll turn the call back over to management for any closing remarks.

Well, thank you for listening in our quarterly results conference and if there's any follow up questions, you can reach either Ron or Chris at our corporate headquarters. Thank you, again. Good-bye.

Thank you for your participation in today's conference. This concludes the presentation.