PAR Technology Corp (PAR) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Second Quarter 2006 PAR Technology Earnings Conference Call. My name is Kelly 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. [OPERATOR INSTRUCTION]

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

Thanks, Kelly. And good afternoon everyone and I would like to welcome you to PAR Technology's second quarter 2006 earnings conference call. I hope by now everyone has received a copy of our second-quarter results. Here on the call today to discuss those results are PAR Chairman and CEO, John Sammon; the company's Chief Financial Officer, Ron Casciano and Greg Cortese, CEO and President of ParTech, Inc.

Before John begins his formal remarks, I would like to take this opportunity 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.

Thanks Chris. Good afternoon. Today, I will be presenting the results for our second quarter ending June 30th 2006. Second quarter revenues set a new record high of 53.3 million, a 4.1% increase from the 51.2 million reported for the same period a year ago. Net income for the quarter was 2.34 million, virtually unchanged from the 2.35 million reported last year. GAAP EPS for the period was flat year-to-year at $0.16 per diluted share. For the six months ending June 30th 2006, revenues were a record 106 million, a 6% increase from the 100 million reported one year ago, establishing a new first half record.

Net income for the first six months of 2006 was 4.3 million, an increase of 18.9% over the 3.7 million reported for the first six months of 2005. GAAP EPS for the period was $0.29 per diluted share compared to $0.25 per diluted share reported last year. In accordance with the Statement of Financial Accounting Standards No. 123 R, PAR is now expensing stock options and other share-based compensation. The 2006 second quarter results include non-cash, stock-based compensation expense of $95,000, compared to no such expense in the second quarter of 2005. Similarly, for the six months year-to-date results, they include non-cash stock-based compensation expense of 138,000 compared to no such expense in the first six months of last year.

Looking at the quarterly revenue breakdown, product revenue for the quarter was 22.7 million, a decrease of 1% compared to the second quarter of 2005. This decrease results from a combination of factors, the largest being lower-than-expected hardware sales and a slowdown in some of our movie theater markets. On the positive side, restaurant software sales and international sales continued to be strong.

Service revenue for the quarter was 14.9 million, up 3.3% compared to Q2 of last year. This increase was somewhat lower than expected due to less-than-planned hardware installations. Contract revenue was on plan, up 13.5% to 15.7 million for the quarter. Looking at margins, product margins for the quarter were 42.4%, up 300 basis points from last year. This increase demonstrates the progress of our strategic plan to improve margins through software sales.

Service margins were 27.2%, up 300 basis points from a year ago. This significant increase reflects the continuing improvement in our service business. Contract margins or in our case, essentially pre-tax profits, were 7.8% compared to 6.7% last year. This resulted in somewhat higher than our traditional 6% margin range due to an increase in high technology programs in our contract mix.

Looking at expenses, SG&A expenses for the quarter were 8.2 million versus 7.3 million last year. This increase reflects the acquisition of PixelPoint Systems plus a significant increase in restaurant sales and marketing expenses. The increase associated with Pixel is the natural consequence of the acquisition, whereas the sales and marketing restaurant increase is an investment to ensure continuing revenue growth, especially in our international markets. R&D expenses were 2.8 million versus 2.1 million last year, reflecting the acquisition of Pixel as well as increased investments in new product development.

Summarizing six months year-to-date performance, total revenue was 106 million, up 6%. Product revenue was 45.7 million, up 4.1%, service revenue was 28.6 million, up 2.9% and contract revenue was 31.6 million, up 11.9%. Product margins were 43.4%, an increase of 430 basis points, service margins were 24.7, an increase of 150 basis points and contract margins were 7.4%, an increase of 130 basis points. Operating expenses were 22.6 million, an increase of 14.8%. Net income was 4.3 million, an increase of 18.9%. Diluted GAAP earnings per share including the ones that [head] per FAS 123R were $0.29, an increase of 16.6%.

Summary, in spite of setting new record revenue, second quarter results nevertheless came in below plan. Product and service revenues were off plan due to lower hardware sales, while restaurant software and international sales were up significantly. Government contract revenues were on plan with the end result being total revenue growth of 4%. Hardware sales were lower than planned due to the unexpected timing of a shift in vendor policy from sole source to multi-vendor in one of our accounts. We are aware that the account always intended to have a primary and a secondary vendor, but nevertheless we are surprised by the sudden change. But most of our major accounts have a multi-vendor policy. In this particular account we have been enjoying a sole source relationship over the last couple of years. Although disappointed by the surprise, as with all of our major customers, we fully anticipate a strong continuing relationship as the primary supplier to this account. We are pleased with the progress in our international business, which saw a revenue growth of 39% in this quarter following a similar growth of 14% in our first quarter. During this quarter, we began shipments to one of our major accounts in China as a sole source provider for this expanding market. It's our intention to leverage this opportunity to significantly grow our China business and to extend our business throughout the entire Asia Pacific region.

Continuing on the positive side, we are very pleased with the quarterly margins with increasing software content, both product and service margins were up 300 basis points. We find it gratifying that our efforts over the past several years to increase software revenue is now paying dividends.

Government contract margin which as I said before is essentially pre-tax profit increased to 7.8%, a 190 basis point improvement. Traditionally, we have run margins in the range of 6%, but over the large few years we have seen steady improvement as we work to increase higher margin technology programs in the contract mix.

Operating expenses for the quarter increased due to planned investments in both sales and marketing and R&D. The sales and marketing investments were primarily related to our international expansion and particularly the Asia Pacific area. In spite of strong margin improvements more than anticipated revenue coupled with planned investments resulted in flat earnings of $0.16 for the quarter. Our six months year-to-date total revenue was up 6% with international revenue up 28%. GAAP year-to-date earnings were up 16% to $0.29.

Looking at the remainder of the year, we are anticipating a slightly slowing domestic hospitality market. Casual dining change and theaters have already shown some signs of a slowdown. We are optimistic that our domestic QSR market will not be affected and that our international business will continue double-digit growth. Additionally, we are confident that our Government business will remain on plan.

For the second half of the year we plan to continue investing in our sales and marketing infrastructure focusing heavily on the international market. R&D will reduce somewhat with the completion of several new product developments. Margins will, as always, depend upon product mix. We are anticipating continuation of good software content but we have planned for lower hardware margins due to pricing pressure in our newly established Chinese market. Additionally, government margins are planned to be lower in the second half due to startup expenses on new fixed price business.

For the year, we are taking down our beginning year revenue growth forecast from the 11 to 15% range. Considering the year-to-date performance and the market outlook, we now feel that revenue growth in 2006 over 2005 is more likely to end in the 6 to 8% range. Contributing to this growth hospitality will grow in the 4 to 6% range and government in the 13 to 15% range. Considering planned expenses and margin pressure we anticipate that the bottom line growth will be similar to the top line.

That ends my formal remarks. I would like to open the session for questions.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Tony Brenner of Roth Capital Partners.

Thank you. I have a couple of questions. One is, that I am not sure why -- I presume you are referring to consumer weakness in the movie and casual dining areas are affecting your business, and my impression is that casual dining and movies account for a relatively very small portion of your sales mix anyway. So, I am wondering if you can elaborate a little bit more on those two markets and what -- how it's affecting your top line.

Yes, Tony, this is John. You are correct that the casual dining is not a major portion of our business. Our major portion of business comes from the QSR market space. But, we do have a significant business in selling our hardware and services with VARs and to other market spaces including the theater market space. We have done a substantial amount of business over the last few years in the theater market space and this year in our plan we had had some revenue in -- a significant amount of revenue in -- for the theaters and that revenue has been slipping from the first quarter to the second quarter to the third quarter and now the fourth quarter and so we have basically decided that that's the weakness within the theater market space itself. I think it's well understood that the theaters themselves have not been enjoying prosperous times in the last couple of years and I think the slippage of this particular revenue I am speaking to is a reflection of that weakness. So, I would say that my comment isn’t directed at general weaknesses in the market space. I am really focusing on this particular revenue that we had in our plan for the theater market space and I think it is attributable to the fact that that market is soft, is not particularly strong.

That plan had presumed expansion of theaters to a greater degree than what we are in fact seeing?

Yes, I think so.

Okay, because my impression is that that market in fact has been slowing for many years.

I would agree with that. I think the news about the theater markets and the problems with it I think were probably evident last year in 2005. Nevertheless, with that weakness we were still doing business in the theater markets and we've had a strong reputation within those theater markets for an excellent product, and as a consequence of that our internal sales force felt that there was revenue to be had in 2006. But as a consequence of that weakness which existed in previous years, when we were doing business in theaters, it appears to be having an effect and as a consequence we have perhaps conservatively taken out the revenue that we had forecasted in the theaters.

Could you answer the part of the question about what portion of revenues those two sectors are, the bar and movie theater businesses?

Tony, this is Ron. We don't break it out other than -- of course we always disclose our major customers and certainly they are below that level. But, other than that we don't break out any further.

Tony, this is Greg. Give you an idea basically the fact that John was talking about is at the end of last year and actually from the middle of last year, we received input from couple of the major players in the theater market that they were going to change out their hardware and they were interested -- very, very interested in PAR hardware. That would follow along with the reputation we've developed in that market for our quality hardware. Instead of actually -- in each case they’ve actually put up either formal proposals or come to us and have products of ours in their lab now, they still intend to get rid of their older equipment and put in new equipment. It just turns out though they are having to delay that because this year is not improving when they originally thought that they might get some improvement this year with product. They are not seeing that improvement and therefore the either cash or capital is not available to do that at this point in time. And therefore they are pushing it further and further out. But, a lot of that equipment is very old. It has to be traded out and what we have seen so far is, at a minimum we are still picking up some business from them but it's a unique way whereby they are actually taking some of their equipment such as kiosks and actually replacing the internals of it with our equipment instead of buying brand new kisoks.

Thank you. Second question has to do with the fact that in the first quarter, your accounts receivable spiked off and service revenues were very weak relative to hardware, and that was attributed to a late in the quarter shipment, which haven't been installed. Yet, there is another spike-up in accounts receivable this quarter and just side-balling the balance sheet with cash down, accounts receivable up, your credit line higher, it looks like operating cash flow probably is again negative. I wonder if you could speak to what's going on in that respect?

Let me try it at the high level and let Ron take it at more detailed levels. At the high level Tony, every two years there is a -- more of our major customers have a convention, and there are convention specials that are given as incentives. It's a long-term tradition. And those specials involve terms on payments and this year we had that convention and those terms on payments exist for the whole first half of the year. And what you see then in response to the issue that you are bringing up is the fact that we do a significant amount of our business with this customer, and so for the first half of this year, we have extended terms that has ended, and we are at the beginning of the second half of the year, and so I think that's a major contributor to that point. Ron, you may want to add a little bit more to that, but that’s the general reason.

That's the most significant reason Tony. If you look at our operating cash flow for the first quarter, it was negative 6 million. For the year-to-date, we are going to report about a negative 6.7 million. So, the -- so we were much closer to -- much improved if you will in the second quarter than the first quarter. We fully expect that the receivables will be trending down as the promotional program has come to an end and expect a turnaround in the second half of the year.

And one last question, last year in the fourth quarter, your revenue growth tailed off sharply following the hurricanes. And I'm wondering if your guidance for the full year and the implied growth in the second half is fourth quarter weighted or are you not looking for a stronger double-digit gain in the fourth quarter?

Tony, traditionally most of our revenue comes in the second half of the year. That will be the case again this year and typically the fourth quarter is usually the largest revenue quarter of the year and again we expect that to be the case in 2006.

That doesn't answer the question.

Try me again then Tony, make sure I understood it correctly.

Well, last year, in the hospitality area and for that matter in the government area, your revenue growth slowed to low single digits in the fourth quarter from strong double digits previously, and I presume most of that was as a result of the hurricanes. So, you are preparing against a very easy period when we get to the fourth quarter, and I'm wondering if the guidance you provided is just even growth in the second half of the year or if it reflects a - I presume a stronger pickup in the fourth quarter, because of the easy comparison?

The second half of the year will grow faster than the first half of the year, and the fourth quarter should return to more traditional, where it's the largest revenue quarter, but will also approach the double-digit growth that we've seen in the other fourth quarters.

Thank you.

Your next question comes from the line of Michael Whitney of Taylor Investment Associates.

Hi, I have two questions. The first is building off Tony's earlier question. Now that the whole world knows that you had a special [stiff] going on for one special customer, what do you think the chances are that other customers are going to come looking for that, which could continue to impact your balance sheet? Secondly, now that the special program is over, will that -- are your expectations for the same level of sales for that customer looking forward or should we expect -- or have you built in some kind of decline given that you took good care of them in the first half of the year and then I have got another question, but I will hold off on that.

Well, to understand our business, this is not an exceptional [spiff] one time and this is a tradition that goes back for 27 years and every two years we have this convention and people come from all over the world, it is a huge convention, and there is an expectation that there is going to be some kind of a special for that show. And so it is normal process in our business. What we do with this major account does not affect in any way our business with our other accounts and so I don't see any possibilities of what you are suggesting happening, it hasn't happened in the past. I see no reason why it would happen in the future. As far as this particular customer and pulling in sales you are suggesting, and therefore leaving a gap in sales in the future, that is not the case. We have been -- this customer has been as I have indicated, he has been our customer for practically 30 years and so I think we understand the buying processes. We understand the effect of these spiffs and we have forecasted appropriately and in fact I think our business with this particular customer is going to do nothing but increase because of the relationship that has been established and the fact that this customer has now invited us into their China market which is a rapidly expanding market for them and has invited us furthermore into the other markets in their growth markets in Asia Pacific. Therein lies the reason for our investments in sales and marketing infrastructure to be able to grow on our business with this opportunity this major customer has brought to us. So I hope that answers your question. I don't see that this particular program, this benefit program that we had for this particular convention will negatively impact our business with that customer nor with any other customers.

Okay. You answered that very well. Thank you. The next question is I guess I have a hard time understanding, given the magnitude of the shortfall how much of this was in the movies and how much of it was from the one customer going from sole source to multi-source and could you just flesh out what happened there. Did that customer just stop buying when the decision was made?

Well we don't break that out. But the majority of it was in the account that I refer to going to the multi-vendor program. This vendor had made us aware a couple of years ago that it was their intent to have a primary and a secondary source. In the interest of full disclosure here, I think it is important that you understand how we came upon this miss. The majority of the miss for the year is tied up in this particular account. We have an excellent relationship with this account. We had a change in account management at the end of last year and during that change in account management we ran into some communications problems and as of a consequence of those communications problems there was the shift that was always intended to occur, it occurred without us anticipating it. We had revenue in our plan as we have had revenue in the last couple of years in our plan with this particular account. As a result of that the business that we have counted on in the first half has gone off to a competitor of ours. We have put a new account manager on the account, we have an excellent relationship with the customer. We have started shipping to that customer in the second half in a small way and we anticipate that we are going to be shipping more in the future and have a continuing strong relationship. The thing that is most disappointing to me is the fact -- not the fact that it had happened, but it caught us off guard because we didn't have the communications in place to understand that the shift was going to occur.

So, I think in going forward in the future, we are going to do a significant amount of business with this customer. I believe that we are going to be the primary -- we are the primary supplier and I think we will continue to be their primary supplier, and it is not different than any -- all of our other major accounts. Every one of our major accounts we -- they have a policy of having multiple vendors and in some accounts there are as many as 4 and in no account is it less than 2, and in this case it is 2 and all of our accounts are tier-I players, we are the primary supplier and we will be the primary supplier in this account. So, I think this is a temporary thing, the embarrassment that I have is the fact that we didn't see it coming and we have to take the lumps for that, but the good news I think in it is the fact that we are a strong supplier and then, we will be doing significant amount of business with them in the future.

Okay. The final question from me is given the precipitous decline in the stock over the last three months, has there been any discussion at the Board level of potentially adding debt and buying back stock?

We normally don't disclose our conversations with our Board but I can tell you that we have had Board meetings. We take it very serious the fact that the stock has not declined in a precipitous way. I don't feel that it's the right answer for the use of our cash. I think there is better uses for our cash than buying back our stock at this point in time. I don't believe that we have any plan in the near-term future to do so. I think we can talk more about what we know or don't know about the precipitous decline in the stock and maybe Chris can add some color to that and give you some views. It is a subject that we don't take lightly and have done a lot of studying in terms of understanding why it has happened, and how we compare against the general market space. I will turn it over to Chris to give you some of the results of our study.

Yes, Mike. I mean I am sure a lot of this you are familiar with already. Obviously, we have been caught up in the downdraft with the overall weak market in the small cap tech specifically and with our position of limited number of outstanding shares and to go along with that the size of the [float], obviously we have been beat up more than the peer group and so I see where you are coming from but I think that is what we look at as the reason and we just look to get back growing the company and getting on a plan and the stock price take care of itself.

Okay. Thank you very much.

Your next question comes from the line of Jeremy Zhu of Wedbush.

Hi guys, glad to hear that your international revenue is growing and I think that as of 2005, that is about 10% of your revenue and where do you see that going two years from now, and also, what kind of international infrastructure expansion do you have put in place as you have stated in your press release?

Well, perhaps Greg can help in answering to the question. Jeremy the top level answer is that we expect to continue double-digit growth into the future. We are making investments to support that. We are being helped internationally by our major accounts as they expand, and we see this as a real opportunity for us to build out our infrastructure throughout the world and to really focus on our international business. We have long-term plans to grow significantly a percentage of our business and I will let Greg speak to that point, but I think it is a very important part of our strategy and it is a reason why we have taken a short-term hit to our earnings to expand our infrastructure in the international market space and we are doing so in several countries and I will let Greg tell you the specifics of that.

The primary area certainly as John mentioned already, is the China market. We have started investing significantly in the China market. We will continue to do so. We will be opening up -- we already have office there, we will be opening up an assembly plant there for the Chinese market. This was helped by the fact that we were able to win a major account and the exclusive rights to that major account for their growth into that market and also for upgrades to their current stores in that market as they grow, which gives us a great foothold and is able to substantiate the reason for that office. That will continue to grow and our hope is that eventually, that we will be within say five or six years the same size as our operation here in the United States and maybe even larger. So, that is the primary area. The other area we are looking at and we have been investing in and we have a very good foothold in already is India itself, again with the same client or same clients. And we will be doing more direct there and more investment in that area also. Those are two primary areas. Our eventual goal is in the next couple of years that international will be somewhere around 30% to 35% of our total revenue.

Wow. Is that an American client or is that a Chinese client?

It's an American client (multiple speakers). International client actually -- worldwide, global.

Okay.

I guess, I really want to make sure it is clear. When I said 30 or 35% it is 30, 35% of the hospitality revenue, not total revenue.

Jeremy, this is Ron. Let me just add a few current statistics. As you said, international revenue was about 10% of our total business and it was 14% of the hospitality business. In the second quarter this year it is now 14% of our total business and almost 20% of the hospitality business, so you can see the trends happening there.

Does that increase your sales and marketing cost at all?

Yes, it is increasing some of the marketing cost.

What do you expect the margins of international business to be, is it on par with the US or different?

At this point in time, the margins of international have actually been better than even the US domestic margins. I see them probably trending a little bit down somewhat for the Chinese market here only because of the fact that at the present time the exclusivity that we have is primarily just for hardware, not total solution and as that develops into additional clients and as we add services and software to that then that should expand the margin. But over the next year it would probably be more along the lines of just the hardware market.

Okay. Thank you.

You are welcome.

Your next question comes from the line of [Michael Perna] of aAd Capital.

Hi, good afternoon gentlemen. Thank you for taking my call. My first question would be in regards to your comment that you didn't believe that a buyback would be your best use of cash at these levels. Could you please just quantify what your expected rate of return would be in India and China for the money that you are spending there, if buying back your stock wouldn't yield a better return?

Mike, we don't have any specific numbers that we are going to quote, but certainly this is our largest area. Our future growth is international and we feel that the most prudent way to use our cash and our resources is to invest in that part of the world and invest in our infrastructure as a lot of our major customers as everyone knows are expanding rapidly in that part of the world. So, it is a much better use of the cash and much more beneficial for the business.

Okay. But you wouldn't be willing to share an expected rate of return?

No.

And maybe on the cost side, maybe discuss what flexibility you have to take costs out of the system to try to offset any deleveraging there might be from the lower revenue expectations.

Mike, we always look at that and do our best to control our cost. There are some variable costs of course. However, at this time, it's prudent to continue our investment in the infrastructure especially in the international markets. So, you will see overall operating expenses not trending much either way in the second half of the year because of that.

This is Greg. Assume that we take that into consideration as we are looking at the revenues going out and obviously we are adjusting cost accordingly.

Okay.

Mike, we are looking at the long-term here, the long-term investment, because we have a temporary slowdown in the growth rate. We are still growing and we are looking at the future and we are trying to do the best things in the long-term for our business.

Okay. And maybe again on the movie theaters, I mean, considering you just did take it out of your budget it can only stress how helpful it would be for your shareholder base to give more color on how much of the revenue is coming from movie theaters?

We will take that under advice.

Okay. And maybe last question for John. Obviously, you are a large shareholder of the company, 40% of the company. What -- could you provide any color maybe on conversations that you've had internally on the intrinsic value of PAR Technology, be it from a multiple of your recurring revenues, from a replacement value for installed base or some of the parts with the consumer and the government business? With the value of your float, depending on where your stock shakes out tomorrow with the value of your float being only $60 million, what are your goals as a public company and what plans do you have to enhance shareholder value in the short term and long term.

Well, that's a big question. Obviously, as the major stockholder of this company, it's a significant issue in my mind, but as I have always looked at this company, I have always looked at it from the long-term view and I personally am very excited about where we stand. The values in the company, the way I look at it, the way I would answer your question, the values I see in the company is the infrastructure that we've put together. I think there isn't a company that I know of that competes with us that has the capability to create these IT solutions and deliver globally around the world to major customers and keep those customers coming back to us, increasing the business with us for 30 years in a row. That's a testimony to the fact that we have a very strong infrastructure. A couple of years ago, we decided to embark upon a long-term strategy whereby we were going to leverage that infrastructure by expanding our international market and expanding our software content which was a high value add part of the IT solution. We've been on a path of doing exactly that. We've had a couple of acquisitions that have brought in software that has been much appreciated within the company. We've taken that software and begun selling it internationally. We are very, very pleased with this major [inaudible] the opportunity that it has given us to expand our international footprint that we have which is considerable to begin with. And, the opportunity that we have in front of us to build on our infrastructure in some very large markets that are growing -- Greg mentioned China and India -- that all plays to the strategy. So, from my perspective as the major stockholder, I am really excited about what we have put together here. We've got more to do in terms of building out that infrastructure. The international infrastructure requires investments. So, we are investing. I think that investment would have been quite easily absorbed in our financials for this year if we had hit our revenue targets, and I have explained in total detail what happened on our revenue side. But it doesn't take me off the course in terms of how I want to grow this company, and I think the path that we've charted for ourselves the last couple of years, is a path that we are going to commit ourselves to, and so the values are going to be determined by the success of that strategy. We can see the success of the strategy in the numbers. So, you can see the margins continuing to increase. You can see the percentage of business we have in the international market increasing. So, we are on a path and I feel very good about that path. I am only disappointed that we had an issue of a surprise and didn't plan that in.

Okay. I agree with everything you said 100%. But just again, considering your customer base and considering your installed base, and considering how small the value of your float has become, have you had any conversations internally and why wouldn't it benefit you the most in the long term to place some sort of intrinsic value on the company? You would be the sole beneficiary.

I am not sure I understand what you are asking about, the placing in the intrinsic value on the company. You are talking about -- you talk about the float and then intrinsic value. Could you clarify your question?

Just placing a value on what you think PAR Technology is worth.

I think it is worth a lot more than it is right at this moment in terms of the price of the stock, and you will also note that I haven't been a seller of stock. I think the intrinsic value of my stock holding is quite large and we are not there right now. The market factors have contributed somewhat to the decline of our stock price, and I think the results that we are showing are solid and strong and our strategy for growing hasn't changed one bit.

So, I think this is a blip in time. I don't think that our stock is going to be sitting wherever it is for very long. I think that it is going to be appreciating. So, my answer to your question is that, it’s my belief and I vote with my shares that it is going to be worth a whole lot more in the future than it is now.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Steven Pinsk of Noble.

Good afternoon gentlemen.

Good afternoon.

Hello Steven.

How are you?

Good.

Good.

Just a couple of housekeeping items. First Ron, do you have your D&A number for the quarter?

It's about 900,000, puts us up to 1.9 million for the six months.

Okay.

And capital expenditures is about 400,000 for the quarter puts us up to 900,000 year-to-date.

Okay, any change in that Capex run rate over the balance of the year?

No, we are still forecasting around the $2 million number, which has been our plan all year along.

You talked about the trends in the quick-serve segment. What about the hotels, resorts and spas, are you seeing any change there in the type of demand or new orders?

No, I actually don't. The business seems to be about the same as it was a year ago. We haven't -- I haven't read any reports about the slowdown, we haven't seen that in our own business. I would say that the effects of the economy, higher gas price, energy prices has not had an impact nor would I expect that they would have much of an impact on our clientele. As you know Steven, our clientele are the five-star resorts and I think that the people that go to those resorts and go to spas that we serve are not particularly affected by the cost of fuel.

Okay. Fair enough. With your sales and marketing program and becoming more aggressive with that, it sounds like you've already begun to do that. And if that's the case, when did that begin?

At the beginning of this year -- well possibly in the tail end of last year and hitting full stride in the first half of this year. And there won't be any change in that going through the second half. Second half will be about the same as the first half.

Okay, so it's going to flatten out.

Yes, it is. Yes. That's correct.

When you say it's going to be flattened, are you talking about the percentage increase, or you are talking about the dollar increase?

The dollar, Steven.

You mentioned you are going to step up your R&D initiatives. Can you expand on that a little bit?

Actually, I think the R&D has -- it has been up in the first half of the year. It will keep coming down slightly in the second half of the year. We are going to be completing several new products in the second half of the year, they are coming to an end at this point in time. So, I believe that the R&D expenditures will be coming down in the second half as compared to the first half.

Okay, fair enough. In terms of the customer that went from the sole source to the multi-vendor account package, you indicated that the account manager or account management had been changed and there was a communication problem. Firstly, why was there a change in account management and secondly, was the communication problem internal or was it between PAR and the account?

Yes, I'll handle it. This is Greg. I think let's make it clear here. Basically what -- this client we knew, as John has stated, in fact this client was going to go to more than one source, probably for the last two years we've known that. As a result, we lucked out because of that fact that they were slow in moving in that direction and as a result, we were able to gain a significant amount of their base number of stores over that two year period. Now the communication really was more of a communication. There was two steps, two parts of it. One was the communication from the customer to ourselves and our account manager as to the interpretation between PAR would be the primary source and then he would have a secondary source, and that there would be a split whereby the vast majority would come to PAR off the stores and the smaller part or the minority would go to the other vendor. We assumed that meant, the fact as they changed out stores this year that we would get a larger percentage than the other person would get. The mistake in the communication there was -- the fact that we already had 80% of the stores and what they were trying to do was to provide at least a minimum number of some sort that it was significant enough to the secondary vendor such that he had some share of that market. So, as a result, basically what they did was they essentially bought from the other person to try to build up their percentage of their total base such that we are still by far the majority vendor and the other person is a minority, but until they achieve that number or that percentage they were buying nothing from PAR. So do you understand the distinction there between what we originally thought and what actually happened?

I do, and given the shift in who got the business, where did it fall out at the end of the quarter, was it end up being more like 60/40 or (multiple speakers)?

It was more like -- it was like 95/5.

No that was for the quarter.

Oh, I see what you’ve been saying. You mean the base right now. The price still more like, it is probably more like 75/25 right now.

Okay. And what about going forward or where it is going?

Going forward we expect them to continue to buy from this other vendor for a period of time. However they are now opening it up to us and realizing that it is getting closer to the number that they wanted. So, as a result we will now start probably taking the majority, starting probably around the fourth quarter or so or maybe the beginning of next year again. But there is still some more they need to buy from this customer in order to sort of give him to that percentage they wanted to get to.

And once they do that does it become a fair level playing field again, but they are going to have to buy in those percentages?

Yes at that point in time I think we would be -- at that point in time, it would be fair for the standpoint of the fact that we would be the primary vendor -- would be getting something like 60, it would be more like a 60/40 split, or 70/30 split going forward out of anything new that is coming out or anything -- any upgrades coming off.

Okay fair enough. The last question I have on the government contract side what is the current backlog and what do you see in terms of growth rate trends? I know you’ve said you are on track for your forecast, but just a bigger picture perspective?

The current backlog is $92 million in our government business, where the pipeline is quite productive in the basis of that we expect that we are going to come in as we have forecasted it as being beginning of the year with a growth rate in '06 over '05 in the 13 to 15% range and we feel comfortable that that will be the case. We haven't yet forecasted 2007, but if you look back at the history of our government business, we have been at a record of growth in the 15% range for the last four or five years and we will not be doing our planning, we are just beginning our planning cycle and we won't be completing that planning until the fourth quarter of this year. So, it would be premature for me to try to forecast into 2007. But with the new starts that are forecasted for the second half of this year, they continue on into 2007, 2008, 2009. So we would expect that we see that backlog building back up again and we have every reason to expect as a guess that we would have significant double-digit growth again in the future.

Okay terrific. That is all I have guys. Thank you.

Thank you Steven.

Your next question comes from the line of Tony Brenner of Roth Capital Partners.

Just one follow-up on this account, where you've gone from sole source to multi-source. You have got three customers, one being the government that accounts for a very large portion of your business, and I presume that this customer we are referring to is one of the brands at one of these three accounts?

No.

It is not. Okay.

No, it just happened to be one that was going to be changing out a lot of equipment this year.

Okay. Then I withdraw my question. Thank you.

Your next question comes from the line of [Jim Curran] of New Salem Investment Company.

Yes, I am wondering about your long-term outlook on R&D? Right now it looks like the run rate is around 10 million. So as you continue to grow internationally on all your growth prospects, do you expect to grow R&D portion of revenues as it is now, or will it kind of flatten out and then the proportion will go down?

It would be my expectation that we would be growing R&D proportional to the top line growth and so the percentage that we’d be expending in R&D would probably stay around that same percentage for the next couple of years.

This is Greg, we have been running somewhere around between 4.5 to 5.5, and probably we will continue to run in that range, probably higher in more than a 5% range and next year, probably, up closer to the 5.5 range percent of total revenue.

Longer term, three to five years, does that continue or do you see where you have kind of got a lot of R&D out of the way and you can penetrate the markets without as much -- ?

I think if you look back at our history, I think it is -- this is specifically talking about the hospitality market. I think you will see that it has been pretty consistent over the years. I mean, right now it is dropping maybe in the second half as we -- as John mentioned the fact we've had basically -- we're adding some additional products to our product line that will be coming up, being released probably in the fourth quarter or the beginning of next year. Most of that R&D has gone. We are now into V&V area, the purification and field testing area.

Okay. I’m thinking about your international business, it sounds like you are mostly leveraging your relationships with American-based, US-based international companies. I am just wondering to what degree you think you can kind of leverage that to springboard into maybe more local operators that are India-based or China-based or German-based that can add a lot of growth to your outlook.

That is certainly our intent. And this is the way we started our offices in many other countries and have business in many other countries, for that exact same reason, we used the leverage of the American-based companies to get us in there, we are winning those accounts and take those [development] office based upon those and then take those forward as we fill that market.

To what degree do you currently have foreign-based business?

I would say the international, total international accounts, 25 or 30% probably.

And then I guess just -- you said a lot about the aspect of the slowing economy doesn't appear to be affecting you much. I mean, do you have any projections about that if we go into recession like the quick service restaurants, and to what degree are you making any projections then for somewhat of a slowdown and how does that affect you?

We actually have considered that and it is not -- we wouldn't do this on our own. There are a number of professional services that project the future for the QSR market space and also our major customers have made statements relative to their feeling relative to the economy and how will it impact them. And what the consensus is that the QSR marketplace is somewhat impervious to small recessions and to the current situation with the energy prices. So, on the basis of other sources of information, our own observation of our current sales and the statements of our major accounts, we have taken the position as is reflected in our forecasting that we will have a very small impact on our business, there is no impact in fact on the QSR side of the business. The only impact that we see in the economy is the one I spoke to earlier and that's the theater part of our business.

Okay. Thank you.

Your next question comes from the line of Gregory Weirick of Transamerica Investment.

I was just curious, I mean obviously this communication issue was a big deal. I mean, it basically blew the whole year out of the water. I guess I am just wondering as you invest and expand your sales force what kind of controls or other procedures are put in place, so that when you are dealing with these large customers that stuff like this is better understood because, I mean obviously, it basically took all your business planning for the entire year and threw it out the window.

This is Greg again. Here it was our own at fault in a sense of -- from the standpoint of the fact that instead of having -- and that is why you see more of an investment in some of the SG&A this year and sales and marketing in particular. We were trying -- as we were growing and gaining customers, we picked up additional customers last year and you saw all those news announcements. We were trying to share account managers amongst accounts and that's the wrong way to go. You really need to have a focused account manager in most cases, especially if it's a major account and especially in this type of situation. I think it was that spreading of the resources last year that caused that miscommunication. That has been fixed.

So, what specifically are you doing to affect it?

We have been adding in -- investing in sales and marketing area to add additional very professional A type people to be account managers in our organization and to provide more account management attention.

Although the specific of it is that we've hired an account manager who is clearly an A player who has had 20 years of experience in the market space all focused on major account management in restaurant business and it's a person that we know very, very well. And he has come on board and we have actually put a staff under him to do the management of two major accounts and we have dedicated this particular person to that account that we had the problem with because we recognize it is very important to turn that situation back in our favor and I believe that that's happening. So, it's an embarrassment. I hope that you are taking this in a proper way. We wanted to have a full disclosure about this and we are telling you a lot of the detail of it for the purposes that you really understand the credibility of this organization and what happened and we want to answer all the questions relative to it. And we feel, as Greg said, that we have done the right thing in terms of fixing this issue and I think we will see the results as we move forward.

Are you guys getting any business out of China with Yum!?

We are in the -- not at this point in time.

Are you on the list or --?

List, that's something we shouldn't be discussing here.

For some reason I thought you were and we had them in the other day and they said that IBM is getting all their business in China. So...

IBM has been up to a certain point in time and they are in a process of looking for new ventures.

Because my impression was that IBM systems and hardware were like antiquated relative to the current city [yard].

No, that's actually -- there are definitely a competitor of ours. We usually domestically pretty much -- unless they come in with a reseller of software, where the person wants that particular person's software and therefore they are tied directly -- that reseller happens to be tied directly to IBM. We usually do not see them winning against us. I mean, to give an example, they were an approved vendor of McDonald's and then a year ago there were eliminated as an approved vendor of McDonald's.

Fair enough.

I think the key in China as far as IBM is concerned at the present time was the fact that they were -- was looking more from a service organization standpoint and Blue Express which was owned by IBM was the primary source for that software -- for that service. I think I would answer your question more generally, the answer just specifically is, no we are not doing business with YUM down in China. The answer to -- I think goes on -- beyond that -- those factors we have a strong strategic plan to grow out China and we are growing it out in with a different major account and it's our intend to do business with all of the restaurants in China that we can do business with. We have a strong relationship with YUM when you look worldwide we are the primary supplier to YUM. So, we would hope that we will have some opportunities to expand our business in that part of the world.

[John Smith, Mozaike].

Hi, guys. Quick question. International growth was how much in the quarter?

International growth was 39% in the quarter and it brings the year up to 28%.

So, are you sticking with your guidance of international growth of between 35 and 40'% for the year?

That was not a projection for the year. The question was what is our goal in international.

No. I mean I think I have this notice from maybe two quarters ago that you guys could -- that you expected international revenues to grow 35 to 40% for all of '06.

Well, certainly maybe within the reach, I would plan a little over than that for the balance of the year. But certainly, that actually compare to the growth rate last year, we are ramping up quite rapidly and beginning of the results of our investment over there.

Okay. And if I look at your quarter and just look at the operating expenses, could I just basically use that going forward, like the dollar amount. Is that the amount you would expect to spend in the second half or is there a higher spend in dollar amounts for the second half? And I use your operating expenses for this quarter to model that going forward.

If you look at the operating expenses for the first half of this year, if you look forward into the second half, you will see them trending down slightly in the second half. I am talking dollars.

Okay. And why is that because most of your investments in international have been made already in the first half?

We've made a large amount already in R&D but primarily not so much in the sales and marketing, but as John mentioned earlier R&D is trending down as we completed or near completion of some major development projects.

Okay. All right. Thank you.

You are welcome.

[Will Withourk, Withourk].

Hi, guys. The SG&A number, I assume in the first half on a percentage basis just to get more precision on that, about 15.36% or so. Should we look at the full-year average for that getting -- seeing some leverage or is a higher level of SG&A spending just going to be required in fiscal '06?

Well, as we have said earlier in the year that we expect the SG&A as a percent of total revenue to be trending down and our expectations are that when we finish the year it will trend down under the 15% level.

Should we see continued leverage then into '07 so that it stays somewhat significantly below the 15% mark?

As John said, we haven't finished -- we haven't really started our planning yet for next year. But, a lot of factors that go in there. But, it shouldn't -- based on what we know right now, it shouldn't vary dramatically next year.

So it should stay somewhere just below the 15% mark or so?

Yes, that's our expectations at this point in time.

Steven Pinsk, Noble.

Yes, I just wanted to discuss PixelPoint for a second and how the progress is going over in Europe with respect to penetration there and the additional distribution that you have now with the indirect sales force?

Actually last quarter, the second quarter was the -- as part of our integration plan, we turned over to our Regional Director's responsibility for the indirect channels in their particular regions and that happened for the first time last quarter. That will now be the way things will run in the future. They are now coming up to speed from a -- sales people there are now coming up to speed from a direct standpoint also. So, we are working to expand the indirect dealer channel in each of those regions and we are also now working to expand the direct sales of that product in the international markets.

And when will that happen and what is the timing on that?

I think you are going to see some improvements already next quarter, third quarter, and continuing to improve quarter-after-quarter.

Okay. Very good. Thank you.

You are welcome.

Jeremy Zhu, Wedbush.

Just a follow-up question to the earlier question that Tony asked on expansion. Do you have foreign language software capability?

Yes. Pixel is foreign language capable and that was one of the primary reasons we picked up Pixel. In addition, in our other product, InFusion product, our front-of-store has foreign language capability.

In China, are you partnering with the Chinese companies on the software side, or are you doing it yourself?

Right now this deal that we just won is just for the hardware.

Just for the hardware, okay. Do you plan to develop foreign language software for the [inaudible]?

Actually the Pixel can go into China already. It has already occupied [people] and we are also looking at partnering with Chinese organizations to develop further software there. But this is strictly corporate sales and they have their own software, it is just our hardware.

Right thanks.

Michael Whitney, Taylor Investment Associates.

Right, this is a question for John. It has been nagging at me for most of the call. So, I figured I will ask it, since we have been going on for a while now. You have got one customer that can account for a majority of the magnitude [inaudible]. And as the head of the organization John, why aren't you talking to customers of that size on a regular basis, so these things don't get out of hand?

Your question is, why did this situation get out of hand and why didn't I fixed that problem, I guess?

I mean why weren't you aware of this situation if this customer is as big as they seem to be?

Well, I can't know everything that is going on in my organization. This is a large organization and this -- a part of it does not directly report to me. I don't want to pass the buck here, I take full responsibility for it. However, there is just no way that I can know all the things that are going on within our organization.

This is Greg. I was talking to that customer and I was talking to them on a regular basis and what happened surprised me as much as it surprised everybody else in the organization. We had I thought very clear communication as to what was going to take place and it was a complete surprise to all of us and it still is somewhat of a surprise to all of us as to what transpired, and I am talking about communications that are happening on a weekly-by-weekly, monthly basis, top-to-top meetings, etcetera, tons of praise from the customer for us and our service capability and our product. It surprised all of us and it is time I guess -- I think we are all still -- a little bit of an amazement on?

I like to come back at that question. It implies something that I just don't think is actually true. It implies that we are not on top of our business that we don't have post relationships with our major customers. That is entirely false. If you look at the history of this Company, once we have won an account, we don't lose the account. Our customers have every opportunity to buy from technology companies and there is a lots of them. Every one of the technology companies that our competitors call up on, those are major account. And after all that is said and done, they come back to us after six generations of solutions, and they continue to expand our business with them. As Greg said very quickly, there's these meetings that they call top-to-top meetings where our top executives meet with their top executives. And we -- they rate us, and we always rate at the top of the scale in terms of the relationship we have. And those relationships aren't made at the top, they come from the bottom, they come from the complete organization delivering value to our customers every single day. And that when we go to these top-to-top meetings, we as executives either enjoy the -- what our organization has done or we go the other way. But the positive note is that we go positively. This -- the fact that I was so open with you in terms of telling you what this deficiency was, was intended for the purposes of being totally open and credible to let you know why we blew the plan. And I don't want you take it in the wrong direction to say that there's something wrong with our organization in terms of our relationships with these customers. These customers are long term customers of ours and this particular account, we've been doing business with them for a lots of years and we are going to do a lot more business with them in the future. We've had competitors come into accounts as multi-vendors and as Greg who has quickly passed over major accounts, major customers come into these accounts and disappear. I'm talking about very, very large capable corporations. They come in and they disappear. And why do they disappear, because they don't satisfy the accounts for the long term. So, I think what you should be hearing here, and I want to deliver this message is that we are on top of the game, we've got great relationship with our customers. The evidence is credible because of the history that we have and I have every expectation that we are going to do a ton of business with this customer going forward. I don't want you to misunderstand the openness that we've just gone through in explaining to you what the miss -- that was in the -- plan is for this year was for the purposes of being very open and credible with you.

That's fair enough. Thank you very much.

You are welcome.

Gentlemen, you have no further questions at this time.

All right. Thank you for joining in this conversation. Good night.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation and you may now disconnect. Have a good day.