PAR Technology Corp (PAR) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to third quarter 2006 PAR Technology earnings conference call. My name is Lauren 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 INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the presentation over to your host for today’s call, Chris Byrnes, Director of Financial Relations.

Thank you, Lauren, and good morning everyone. I’d like to welcome you to PAR Technology's third quarter 2006 earnings conference call. I hope by now everyone has received a copy of our third 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.

Thanks, Chris. Good morning. Today, I will be presenting the results for our third quarter ending September 30, 2006. Third quarter revenues were $48.5 million, a 7% decrease from the $52.2 million reported in the same period a year ago. Net income for the quarter was $550,000 thousand, down $2.0 million from the $2.5 million reported last year. Earnings per share for the period were $0.04 per diluted share compared to $0.17 per diluted share last year. For nine months ending September 30, revenues were a $154.5 million, a 1.5% increase from the $152.2 million reported one year ago.

Net income for the first nine months of 2006 was $4.9 million, a decrease of 21% compared to the $6.2 million reported for the first nine months of 2005. Earnings per share for the period were $0.33 per diluted share compared to $0.42 per diluted share reported last year.

Looking at the revenues, product revenues for the quarter were $18 million; a decrease of 21.4% compared to the second quarter of 2005. This decrease resulted from lower hardware sales, which have been largely pushed until next year pending the completion of certain software projects. As explained in our quarter pre-release three weeks ago, system deliveries are being delayed pending the completion of software from a third party under a direct contract with a major account, and additionally, the completion of Infusion software upgrades to some of our accounts.

On a more positive note, international sales continue to be strong, up 63.1% over last year.

Service revenue for the quarter was $15.1 million, essentially flat compared to Q2 of last year. Contract revenue was on plan at $15.5 million, up 8.3% from last year.

Looking at margins, product margins for the quarter were 42.3%, an increase of 20 basis points from last year. Service margins were 24.5%, up 90 basis points from a year ago. This increase reflects improved efficiencies in our service organization compared to last year. Contract margins, or in our case essentially pre-tax profits, were 5.6% compared to 7% last year. This result is somewhat lower than our traditional 6-plus percent margin range and it’s due to contract mix.

Looking at expenses, SG&A expenses for the quarter were $8.2 million versus $7.5 million last year. This increase reflects the startup costs associated with a new three-year CKE service contract, which we announced yesterday. Starting October 1, we began field service for CKEs 1,160 domestic company- owned restaurants, plus 500 franchise restaurants. Additionally, we expect still another 500 franchisee stores to sign up for field service over the next 12 months. A contract requirement was that we had to switch over all 1,160 corporate stores on October 1, and so we staffed up in Q3 to achieve this objective. The service transition was successfully accomplished as planned, but the startup costs for the three-year agreement were entirely absorbed in Q3.

This increase also reflects the acquisition of PixelPoint Systems, plus a significant increase in restaurant sales and marketing expenses. The increase associated with Pixel is a natural consequence of the acquisition, whereas the sales and marketing restaurant increase is an investment to ensure future growth, especially in our international markets.

R&D expenses were roughly unchanged, $2.6 million this year versus $2.5 million last year.

Summarizing nine months year-to-date performance, total revenue was $154.5 million, up 1.5%. Product revenue was $63.7 million, down 4.6%. Service revenue was $43.7 million, up 2%. And contract revenue was $47 million, up 10.7%. Product margins were 43.1%, which is an increase of 300 basis points. Service margins were 24.7%, an increase of 140 basis points. Contract margins 6.8%, an increase of 40 basis points. Operating expenses were $33.8 million, an increase of 12.8%. Net income was $4.9 million, a decrease of 21%. Diluted earnings per share were $0.33, a decrease of 21.4%.

Then summarizing, obviously the third quarter results are disappointing. Product and service revenues were off plan due to lower hardware sales caused by software delays. Government contract revenues were on plan with the end result being a total year-to-year revenue decline of 7%.

We continue to be pleased with our progress in the international business, which saw revenue, which is product and services, grow by 46.6% this quarter bringing year-to-date growth to 33.7%. This increase reflects especially strong shipments to China, which fulfilled our orders for the remainder of this year. Thus, we do not expect to see an increase in Q4.

We are also pleased with the extension of our service business with the CKE contract. This contract will not only be financially rewarding, but it adds to our already strong competitively distinguishing delivery and support capabilities. We see this win as a strategic event which will serve us well in the future.

Product, service and contract margins were all on plan for the quarter with product and service margins holding up reflecting an improved software content as compared to the years past.

Operating expenses for the quarter increased 9% compared to last year. SG&A increased due to Pixel international sales and marketing and investment in CKE service contract startup costs.

Lower than anticipated revenue, coupled with planned investments, resulted in lower earnings of $0.04 for the quarter. For six months year-to-date, total revenue was up 1.5% with international revenue up 33.7%. Year-to-date earnings per share were down 21.8% to 33%.

Now, we fully recognize that our shareholders want to know when we will recover from our temporary slump and return to double-digit growth. We are also very sensitive to the fact that recently we have experienced difficulties in forecasting revenues. This problem is due to revenue dependencies on completion of software projects, both third party and our own, and the fact that our business is largely book and ship with 85% sold through direct channels.

Given that we have not yet completed our plan for 2007 and the importance I place on our credibility, we will not be providing any specific future guidance at this time. This does not mean that we are pessimistic about our future. On the contrary, we are quite upbeat since we have many positive factors working to return us to the average growth rates established over the last five years.

The Hospitality market is healthy and is forecasted to continue to grow over the next few years. Our customer base is strong and we are growing market share in our major accounts. Our international business is growing and will continue to do so as we expand with our major accounts.

Our Government business is solid with large and growing backlogs. We possess the best infrastructure in our industry for creating, delivering and supporting IT solutions.

We will be announcing several new products and strategic alliances in the near future, which will build on our strategic plan of leveraging our unique infrastructure to grow our business.

I think these are all positive factors which will serve us well as we move into 2007 and beyond. I’d now like to open the session to take your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Sam Bergman with Bayberry Capital Management.

Morning, gentlemen. How are you?

Morning.

A couple of questions. Did you break out McDonald’s revenue for the quarter?

Hi, Sam. This is Ron. How are you?

Oh, good, and yourself, Ron?

Good. McDonald’s revenue for the year was about 26% of total revenue and that’s about what it was for the quarter as well.

Can you give us any guidance on McDonald’s business for the next year? Is it expected to be up, or is it expected to be flat?

Well, as I said in my opening remarks, Sam, we are not forecasting at this point in time. We haven’t completed our 2007 AOP just yet. But let me just give you just a high level view. Our McDonald’s future is very, very bright, we think. There are thousands of restaurants domestically that are going to be updated over the next couple of years. They are going to require new software and as a consequence of that new hardware. The expansion of the international market is strong with McDonald’s especially in the Asia-Pacific area, which is where as you know we are focusing our attention having opened up our office in China and have quite a lot of shipments in Q3 and in Q2 going off to China. So, I think our future with McDonald’s looks quite good. Our relationship with McDonald’s is probably as good as it’s ever been in our 25-year history, and so we look forward to a long-term financially rewarding future with McDonald’s.

In Springer-Miller, is that broken out on a quarterly basis in terms of the revenue?

No, it’s not, Sam.

It’s not. Can you give us any idea of their sell-through and how well they’re doing right now? I know there’s a couple of contracts in the news, but they seem to be on the small side.

Well, I think their business is reasonably close to the plan. I think and just again talking in general about the hospitality market and specifically the resort and spa market, I think it’s a very healthy market and I think we are doing quite well in terms of our market share in those market spaces. We do have successes in the small high-end chain market space. We are involved with Blackstone and Mandarin and these represent very nice growth opportunities for us. So I think we’re on track as far as that segment of our Hospitality business.

Okay, thank you very much.

You’re welcome, Sam.

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

Thank you. John, I didn’t write fast enough to catch all of the international revenue gains that you cited, but it sounded like there were three of them which was a little confusing. First, you said that international sales in the quarter were up 63.1%, and then later I think you said it was up 40 something percent. Could you clarify that?

Yes.

Tony, hi, this is Ron. I can clarify that. John said that international product revenue was up 63% for the quarter. And then he later went on to say that for the quarter total international revenue, which now includes service, is up 46.6%. And on a year-to-date basis that same total international revenue is up 33.7%.

Okay.

So, his first percentage was just product only for international.

I get it. You also cited some forthcoming announcements, including strategic alliances. Does PAR at present have such strategic alliances, or would this be something completely new?

We do have strategic alliances with quite a few ISVs, who have their own software and they leverage our infrastructure, our hardware and our services in order to deliver to their accounts. So we have had a segment of our revenue stream coming in from that partnering relationship, the strategic relationships. So, we have had a history of that and we have more opportunities along those lines coming along in the future.

I see. And lastly with respect to government contracts for the 950th consecutive time or whatever the number is, was this on plan or above? Yet, the trend line growth there is in double digits, and whenever you’ve projected growth and projected a double-digit growth the revenues this past quarter were up 8%. So when you say it’s on plan, I wonder if you’ve considered raising the bar on your planning as such?

No, we’re not going to raise the bar, but I think we should stick by our position relative to our Government business. As you point out, Tony, it’s been a very forecastable part of our business and we expect to come in as we had predicted at the very beginning of this year. And so I think we feel comfortable with our previous projections.

Okay, thank you.

You’re welcome.

Your next question comes from the line of L.N. Ganti with Thomas Weisel.

Hi, everybody, a couple of questions. First, a follow up on the McDonald’s account. I missed that, but can you give the number once again? What were the sales for this quarter for McDonald’s and also from the [Yahm] account?

The question before was, what percent of our revenue was McDonald’s for the quarter and it’s 26% for the quarter in the year of total revenue with McDonald’s worldwide products and service. For Yahm, it ran 15% for the quarter and we’re running 12% for the nine months.

Now, I view the majority of your international sales came from probably Yahm and McDonald’s. Are we actually seeing a slowdown for these two accounts in the domestic business? Can you talk about that a little bit?

Yeah, there’s a bit of a slowdown in the domestic business. We had some special projects that we carried on for McDonald’s in the years past and we have completed those projects, and as a consequence there’s been a bit of a slowdown. But the steady State business of replacement, our replacement business with McDonald’s, has been pretty steady and we expect that business to, in fact, increase. Not specifically next year, but some will occur next year and certainly in the next few years there’s going to be quite a large replacement business within the domestic side. As you probably know, McDonald’s growth is international primarily. There are some new store growth opportunities in the domestic markets, but relatively speaking the growth of new stores is in the international marketplace.

Okay.

Does that answer your question?

Yes. The other question was about your -– you talked about a new product introduction, some kind of [inaudible] clients. Where are we on that? How should we think about the R&D expense going forward?

Yeah, we are going to be announcing some products in the near future. The general question is about R&D and expenses. We have not yet planned our year in 2007 or completed that plan. We are working on it currently. My expectation is that expenses are going to be going up in R&D, as we see some very nice opportunities in the products’ area. There are some very significant trends happening within the market space relative to technology and certainly we want to be at the leading edge of those trends. And so I would expect, even having not completed the AOP plan, that we will have some increases in R&D next year.

Excellent. And the other question was probably on –- the gross margins for the contract of the Government business came in probably for the first time so low. Can you talk about that? I know you briefly touched upon it, but.

The margins quarter to quarter on our Government business have always fluctuated, but they average out in the 6-plus percent range. They’ve been trending up over the last few years as the higher technology aspect of our business, our contract business increases. The fact that they were down this quarter relative to a year ago is just a mix factor. The contracts that we’re completing, the contracts we’re starting up, it was just a contract mix. We certainly expect that we will average out again in the 6-plus percent range as we had forecasted in the past.

Okay, thanks.

You’re welcome.

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

Hi, good morning.

Good morning.

Could you please just give us more clarity on your operating income line? Maybe could you break out operating income by percentages, products, services and contracts?

Mike, we break out operating income in the 10-Q between Hospitality and Government, and that’s the only breakout that we give.

Okay. I don’t have the figures for this quarter.

Yeah, you’ll see that when we file the Q. So, for obviously our Government business, if you look at contract revenue less contract cost, that’s pretty much the operating income for the Government business. And if you do the math for the quarter, that’s around $800,000, and the balance would be the Hospitality business.

Okay, so as far as the contract gross margins go, those are also the operating margins?

Pretty close.

Okay. And then for the [CARLs], can you give us idea of the revenue opportunity of the 1,160 domestic stores and the 500 franchises? So maybe, the revenue opportunity there and what the incremental costs were this quarter and going forward, and just kind of return on investment?

Michael, we are not disclosing the financial details of the contract, so I’m not able to give you the answer to your first question. Do you want to take the second part?

Yes. For startup expenses for the quarter, as John mentioned, was the major reason why the growth in SG&A expenses. They ran about $600,000 for the quarter.

Okay. Is there a reason you’re not breaking out the financial terms of the contract? Won’t it appear, I mean won’t it be obvious in the following few quarters?

Yeah, I think it will be obvious, but it’s a request of our customer and we always try to comply with the requests of our major customers.

Okay, great. Thank you. I’ll get back in line.

You’re welcome.

Your next question is a follow up from the line of Sam Bergman with Bayberry Capital Management.

Hi, just a couple follow ups. One on integration of Pixel and Springer. Have they both been pretty well integrated into the company?

Sam, no, I would say not in the case of Springer-Miller. The form of the integration at the spa soft level there’s some integration in the sales activities. In the products area, there is increasing amount of hardware going through the channels to the customers of Springer-Miller. But there hasn’t been an integration beyond the products and the spa soft sales activities.

But in the case of Pixel, there is more of an integration at the development level, and there will be more integration at the sales through the dealer channel. There will be an emphasis in the future on the dealer sales channels for the Pixel product. We think it’s an excellent product for that channel. And then we are seeing increases in the international dealer channel for that product as well. So, since we have a professional organization dealing with the ISVs and dealers, there will be some more further integration of that activity as we move into 2007. So the integration with Pixel is moving towards a direction where it will be integrated into our organization, probably by the end of 2007.

But right now, the development staff up in Toronto operates under the auspices of our general software organization, but there are special requirements of the dealer channel that are best handled up there and so we will continue to do that development. But as far as a strategic issue, we would expect that the guidance and the architectural directions of the products will come out of our central software group.

Now, regarding the R&D for the new products in 2007, what percentage would you expect the R&D number to go up for these new products?

Well, we’re not forecasting at this time since we haven’t completed our AOP for 2007.

Can you give us any idea?

No, I don’t think I feel comfortable at this point in time specifying that, but I would say that there is an expectation to significantly increase our R&D. I think there is some very good strategic opportunities for us, and so as we work through our plan we’ll define what that investment will be. But I can say that I expect to see a significant increase in R&D next year.

And the last question is, can you repeat or mention to me what the earn out is from Springer-Miller when it was first acquired?

I’m sorry. We cannot disclose the details of that subject.

Okay, thank you.

You’re welcome.

Your next question is a follow up from the line of Michael Perna with aAd Capital.

The extra costs in the quarter, could you give us a better idea of how much of the extra costs came from staffing up for the CARLs versus costs from the Pixel Plus acquisition versus your sales and marketing international? I mean looking at the operating line the rest of the business made $150,000, so how much of those costs are going to be run through balanced income statement going forward and how much of them were one-time in nature?

Michael, we answered that the CKE startup costs ran about $600,000 for the quarter, so those are obviously one-time startup costs with no revenue associated with it. Beginning in Q4 we’ll obviously have the personnel, but now we’ll have the revenue to offset it. So, you won’t see that type of bottom line impact going forward.

Okay?

Obviously, it will turn around for the positive in Q4 as the contract begins.

All right, thank you.

You’re welcome.

[OPERATOR INSTRUCTIONS] There are no further questions in the queue.

Well, thank you everyone for listening into our conference call. Bye-bye.

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