PAR Technology Corp (PAR) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the PAR Technology first quarter results conference call. My name is [Annie] and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting 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 would now like to turn the presentation over to your host for today's call, Mr. Chris Byrnes, Director of Financial Results. Please precede sir.

Thank you very much. Good morning. I'd like to welcome you to our conference call this morning. I hope by now everyone has received a copy of our Q1 results press release. Here on the call today to discuss the 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, however, I would like to read our disclaimer. Statements made on this call may be forward-looking statements. Any statements made on this call that do not describe historical facts are forward-looking statements 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 morning. Today, I will be presenting the results for our first quarter ending March 31, 2007. First quarter revenues were $47.8 million, a 9.1% decrease from the record $52.6 million reported for the same period a year ago. Net income for the quarter was a loss of $1.3 million, compared to a gain of $2 million reported last year. EPS for the period were a negative $0.09 per diluted share compared to $0.14 per diluted share reported last year.

Looking at the quarterly revenue breakdown, product revenue for the quarter was $16.7 million, down 27% compared to the first quarter of 2006. This decrease is attributed to two issues, lower sales to our largest account and software issues delaying new rollouts. In the first category, sales to our largest account were delayed pending the release of third party software. The impact of the third party software delay which began last year is expect to persist through the remainder of this year thereby depressing both our hardware and service revenue. We are told by the account that an interim software release is due in Q2 which could somewhat mitigate this. The targeted software is scheduled for field trial late this year with general availability by late Q1 of next year at which time we expect to experience strong, pent-up demand.

Although sales to Yum brands were up quarter to quarter, there were, nevertheless, impacted due to business setbacks in KFC and Taco Bell caused by widely publicized unfortunate incidents which occurred in a few stores. KFC and Taco Bell operators have told us that their sales have suffered which has temporarily caused point of sale purchases to be delayed.

In the second quarter related to software, we did not replace the business associated with last year's rollouts of Corner Bakery and Papa Murphy's.

Service revenue for the quarter was $15.5 million, up 13% compared to Q1 of last year. Although service revenue was negatively affected by fewer installations, it was more than offset by the increase related to the new CKE service contract awarded last October. Contract revenue was on plan at $15.6 million, down 1.5% for the quarter. The slight decrease was caused by timing of new starts versus the completion of existing projects.

Looking at margins, product margins for the quarter were 38.3%, versus 44.4% last year. This decrease resulted from lower manufacturing, absorption associated with lower hardware sales, lower software content in the product mix, and discounting on hardware sales as compared to last year. This discounting is being done to promote sales in our largest account, to encourage hardware replacement prior to third party software availability.

Service margins were 21.7%, versus 22.1% a year ago. This decrease of .4% reflects lower installation revenue associated with fewer systems sales. Additionally, again this quarter we experienced some start up costs associated with the new CKE service contract. Contract margins, or in our case essentially pre-tax profits, were 6.7% compared to 7% last year. This decrease is in the normal range of variation associated with our governmental contracting business.

Looking at expenses, SG&A expenses for the quarter were $8.7 million versus $8.1 million last year, an increase of $600,000. This increase reflects our investments in the expansion of our dealer channel and our international infrastructure.

R&D expenses were $3.8 million, versus $2.9 million last year, an increase of $900,000 due primarily to software investments to build our next generation point of sale product on the Siebel platform.

Summarizing, clearly Q1 was not a good quarter, be it not entirely unexpected. We anticipated slower sales to our largest account due to the delay of third party software. But we are disappointed by lower than anticipated sales to Yum brands due to some unfortunate instances which impacted their business.

Last year we achieved record sales from rollouts to new customers. And this year we were unable to replace this business not because of the lack of opportunity as the market remains quite healthy, but rather due to timing of revenue flow. Additionally, we have turned down opportunities to compete for new business even when the accounts expressed high interest in our next generation product. We have taken this disciplined approach because we want to focus on and complete a few specific development projects for large strategic accounts which we feel in the long run will serve us better.

With lower product sales and depressed product margins, gross profit decreased. This, coupled with a $1.6 million investment increase in international infrastructure and software development, resulted in a decrease in operating income of $5.2 million, as compared to 2006 and a loss for the quarter of $1.3 million or $0.09.

As for the long-term outlook for the business, the news is mostly positive with the exception of product margins which we feel will be depressed for the remainder of this year due the discounting that I mentioned earlier. Otherwise, the news is all positive for the following reasons.

First, the hospitality market continues to be healthy with both restaurants and resorts investing in expansion and upgrades. Additionally, we continue to enjoy excellent long-term relationships with our hospitality customers. We believe that these factors provide a strong foundation for our future business.

Second, our major account sales slump is not caused by lost sales. And thus, sales will recover with pent-up demand once the third party software becomes available. Some recovery is possible in the second half of 2007 with an interim software release and the start of field trials targeted for the late in the second half. Once this targeted version is generally available, which is forecasted for the worldwide convention at the end of Q1 of next year, we then anticipate a very strong recovery with pent-up demand driving sales over the next two years.

As for Yum brands, we do not think that the effects of some bad publicity will impact our long-term business and expect to get back to plan as we move through the year.

Third, our international hospitality business grew 12% reflecting increased sales to McDonald's, YUM and a few new accounts. Sales to China were particularly strong this quarter, as well as, new sales to McDonald's Canada.

Our hotel and spa business performed on plan for the quarter growing 11% with new wins at [Pada Vedra] Beach Resort and two Capella hotels and resorts located in Ireland and Austria.

Fifth reason I think it's positive is that we've just released the first in the family of new low cost point of sale terminals targeted at the independent restaurant market. These products with new imbedded software for both Table Serve and QSR will be introduced to our channel partners in Q2 and will begin generating new revenues by the second half of this year.

Finally, our government business continues to perform on plan marking its 143rd consecutive profitable quarter in 16 straight years of on planned performance. With a backlog of $91 million, we anticipate another good year for this business.

Our logistics management division operated in within our government sector is making good progress focusing on the refrigerated reefer market with a competitive win of the JB Hunt account this quarter. While this market has potential, it nevertheless is properly characterized as being in the early adopter phase. We currently have several active pilot projects underway which will determine the pace of acceptance of this new technology.

Obviously, we are not off to a good start in 2007 as represented by this quarter's performance, nor do we expect that Q2 will be much better. We do expect sales to be improved somewhat in the second half pending completion of software projects. We will be taking actions to hold down expenses, but we do not intend to cut back on our investment strategy. Specifically, we will continue to invest in the following three areas, the development of our next generation software products based upon the [C-Bar] architecture, the expansion of our global channel business, and the build out of our international infrastructure with particular focus on China.

One final comment relative to forecasting, I regret that we do not have better visibility into our restaurant revenue stream. This is as frustrating for us as it is for our investors. But this is our reality. Since most of this business is book and ship as orders come in, mostly at the end of a quarter, we normally lack contractual backlogs and so we depend upon approved vendor status with our major accounts to win business. If problems develop with one of our major accounts, then those problems can have significant unplanned impact on our business.

New chain business is largely dependant upon availability of software which most always involves some amount of customization whether by us or a third party. But in either case, making forecasting difficult. Now we understand that this situation is unacceptable to investors. And it is most definitely unacceptable to us. It is precisely for this reason that we have decided to invest this year in our three-prong strategy to expand our customer base and channels, thereby reducing dependency and smoothing revenue flow.

Our next generation software initiatives is intended to win new chain accounts, thereby broadening our customer base, reducing dependency on any one account. An important element of our channel strategy involves the introduction of embedded software running on a family of low-cost terminals targeted at the independent restaurant market. While the software is configurable, no customization is involved. Success with this strategy does two positive things. It eliminates delays for customization and it serves to broaden our customer base.

Lastly, expansion in the international market reduces dependency in two ways. First, it broadens our customer base. And secondly, even within a single chain, the business patterns of different geographic regions tend to operate independently. In this fashion, our strategies deal directly with the lumpy aspect of our revenue flow. With more sources of revenue, a negative event in one account or geographic area may very likely be offset by a positive event somewhere else.

Due to all the uncertainties of this year and the pressure on product margins, we do not have confidence in our earlier guidance of possibly flat earnings for 2007. With this lack of confidence in our strategic investment commitment, we feel that the results for 2007 may be significantly less than our previous guidance, and possibly a small loss for the year. This is not to say that we are not striving to meet the previous guidance, but rather, simply to convey the fact that under the current circumstances, we cannot express confidence in that earlier forecast.

That concludes my formal remarks. I'd like to open the session to your questions.

(Operator Instructions). And your first question comes from the line of Mr. Ganti with Thomas Weisel.

Hi. Good morning, everybody.

Good morning.

Just a couple of -- good morning. Couple of book keeping questions, could you talk about that the sales breakup was in terms of geography. Hello?

International sales, sorry.

Ganti, as John mentioned, our international business grew 12% and now -- in the first quarter represented about 19% of our total hospitality business. The main areas of where those sales went to were china as John mentioned. We had success with McDonald's in Canada and Europe and Australia also contributed to where the majority of our international sales went to.

Okay. And would you want to break up revenues by customers for hospitality?

McDonald's revenue was 24% of the total business for the company. And that's 36% of the hospitality revenue. Yum brands is 13% of the total revenue of the company and 19% of hospitably revenue.

And was looking at the sales increase by 12% year on year, was that driven by new service contracts? Was it pricing? Or is the bulk up maybe due to the CKE contract?

The bulk of it was due to the new CKE which we started on October 1 of last year.

Okay. And could you tell us why inventories went up from 75 to 88 days sequentially, inventory?

Inventory balances have grown for a couple of reasons. First, we need more service parts on hand to properly service the new CKE service contract. And secondly, we had anticipated a higher demand for our product revenue during the quarter. And at the end of day, some of those orders did not materialize. And we had a build up in our manufacturing inventory. We're working hard to balance the year to turn that manufacturing inventory to a lower amount. And we are confident that we will.

And just a big picture kind of question, if you would want to take a step back and see (a little of) to all the contract (wins) that you had announced, Papa Murphy's, Burger King, and McDonald's, all of those restaurant chains, whom do you think will remain strong for you in terms of driving revenue growth for next year? I agree that the field is probably going to be not so great. But who are the key customers that you are targeting in the longer run?

The existing customers that we have will be continued to be a major source of our revenue going forward. Particularly, we feel very, very bullish about the McDonald's account that we have. We think that within that account there is going to be quite a lot of business going down in 2008 and 2009. We are installed with our own equipment in thousands of those restaurants. And our competition is likely installed in thousands of those restaurants. And all those thousands of restaurants add up to a large number that will have to be replaced in order to run some new software.

And so while we are suffering currently with delays in that software, we feel that next year and the year after there is going to be very, very significant amount of business within that account. Our strategy is really focused on broadening our customer base. And that strategy is really driven very heavily by our success in building out the next generation software product. And as I said in my formal remarks, we feel very good about the direction that we're going in. We have generated significant interest in the product itself. But we want to focus in on a few strategic accounts. And we want to make certain that we develop the software and meet our certain objectives to win those accounts. And with some success there, I think, we will then see several new accounts coming onboard and fulfilling our objective in our strategies of bringing on some new accounts.

At this point in time, I am not at a point where I can announce what those accounts are, but the answer to your broader question is that we look at 2008 and 2009 as a potentially very, very strong business cycle for us. Does that answer your question?

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

Thank you. Three things, first of all, John, you indicated that the decline in government contract revenues in the first quarter was on plan. And you also indicate in the release that revenue for the full year are expected to be on plan. (Always) suggested that that business should grow at a low double digit rate, is that what on plan for 2007 means?

I think it is probably very high single digit growth is on plan.

Okay. Second, are the delays with Yum still being encountered or will that -- will the shipments catch up with the delays during the balance of the year?

We're counting on the fact that the delays that we experienced in the first quarter will not persist for the rest of the year. That there are bumps in everybody's business and some bad news that was widely publicized certainly affected the sales of -- within Taco Bell and KFC. But we -- it is our best guess that that bad news is not going to effect the rest of the year, and that we will get back on plan relative to that account.

And lastly, I am a little confused by your discussion of discounting for your largest customer. You indicated that shipments are being further delayed. Instead of second half delivery, now it is mid first half delivery of the software, a little bit of, sounds like, Beta test software in the second half of the year. Is the discounting -- are you assuming that discounting will be ineffective in terms of boosting your revenues? I mean should -- will it -- is it incentive enough to induce that customer to take on most of this equipment or any of this equipment. What should we --?

Well, that's part of our uncertainty. Let me give you a little bit more color on that. There is cost in installing the new software. And while there is a lot of hardware out there that is old and needs to be replaced simply because it is old. And then there's new stores that are being opened, and they need equipment. And those two factors generate some business for us. But as far as the new software, that is going to require changing out of the thousands of systems that I spoke to earlier. And there is cost involved with that. And so there is reluctance on the part of the community to install hardware now and then have to pay more money for the installation of software at a later time. So there is reluctance to buy right now and go through that.

And so what we are trying to do is put an incentive in place, so that this year while these people are waiting for the eventual targeted software to become available that they would put in the hardware and suffer the expense next year when the software becomes available. And all of this presents some uncertainty relative to whether that is going to be a successful strategy or not. So the situation is in play right now. And we are working very hard to be creative in terms of alleviating the problem that this delay of software leaves with the vendors announced specifically.

John, in providing what guidance you did and suggesting that the year might be breakeven, what assumption did you make or is implicit in that for these shipments to ramp up on the basis of the discount?

We assume partial success of this program.

Okay. Last question, in the release, you refer to internal software development delays. My impression was that those were behind and that during the first half you had -- you were shipping that software. Is that correct?

I was -- I think we were speaking to the first quarter where in our product's mix we had less software in our mix in Q1 in this year compared to last year. And there are some delays involved with that. But as we look at the rest of the year, we feel rather good about our software position with our traditional products. And so we think that the software in our product mix will be quite good this year.

Thank you.

You're welcome.

Your next question comes from the line of Brian Murphy with Sidoti & Company.

Good morning. If we could just --

Good morning.

I'd just like to get a little bit more color on what is going on with the third party software provider. It sounds like this rollout is slipping out into '08 now. Are there any assumptions there as to the viability of the vendor? Or could you just give us some color about what you are hearing from the major customers and maybe what they are doing to handle this issue?

Well, we are not privileged to understand all the details of what our customer is doing relative to this software. They do tell us for planning purposes the information such as an interim release in Q2 and field trials of the targeted software beginning at the end of this year with every intent of having general availability of that software at the end of the first quarter of next year.

I'd answer the question at a high level which is where more I think our belief lies. And that is that this customer is an extraordinarily large corporation. And this program is extraordinarily strategic to them. This software is going to be their worldwide solution. It is in 10,000 restaurants already. And it needs to go into the remaining 20,000 restaurants. There is total commitment on the part of this large account to this software in making it successful. Any delays in the software relative to technical problems or delays that potentially come up relative to business issues with that company, would in my best guess, would be resolved because of the strategic importance of this software to the account and the investment that has already been made in that software. So it is our planned assumption that the dates that they have given us are going to be good dates in spite of technical problems or business problems.

Okay. Thanks. And swinging back to Yum, it looks like the year over year growth there wasn't too bad. Can you give us an idea of what your assumptions for that account were? Should we have been looking for something more along the lines of the performance that you had in Q4 from that account? I am just trying to get a sense of what on plan means for Yum.

Greg, do you want to take that question?

Yeah, I will take that. With respect to Yum, we were anticipating and still anticipate a -- not a large, but a significant increase in sales over prior years. The particular customer, in particular Taco Bell and KFC, have some very old equipment. We had projected that a lot of that would be turning over this year. We still believe that will be the case, however, based upon the unfortunate events of the fourth quarter and the first quarter, in particular Taco Bell and KFC, which caused some significant publicity. They saw -- at least we have been told -- their sales were down in the franchisee markets. And as a result, the franchisees were reluctant, at least at this time, to change out that equipment and make those investments.

And also swinging back to the contract revenue is a year over year decline in revenue in the government business something that you have ever experience before?

I don't know if we have or not but I can tell you that we are not at all concerned about that. And the reason at a high level why I am not concerned about that is the track record that we have in our forecastability of this business. And we make our plans in this business. And we had a plan that showed that we were going to be down. In fact, we were down. And we have a plan that says we are going to be up in the normal range of our growth this year, and we are reasonability confident that we will do that based upon our historical ability to run that business.

Okay. In the historical range of growth for the government business or what you are expecting going out beyond '07 is in the high single digit right now?

Yes, that is correct.

Okay.

Brian, I might add that we still maintain a very strong backlog as well in the business. It is over $90 million. And that helps us and continue with our confidence that is it going to continue to grow.

And just last question, could you go into a little bit more detail on the Corner Bakery and Papa Murphy's? What happened there?

Well, the comment was relative to the first quarter that we had significant amount of software sales in Q1 of last year in the two accounts that you just mentioned are the reason for that. And we didn't replace that business in Q1, causing, therefore, the margins to be effected and certainly the revenue to be effected as well. So those accounts are in the past. And what we are looking at now is the rest of this year. And as I said earlier, I think our software business is on track. And we expect to do well in software this year.

Okay. I will jump off and let somebody else on.

Okay.

(Operator Instructions). And your next question comes from the line of Vincent Colicchio with Noble Financial.

Good morning, guys.

Good morning, Vincent.

Morning.

Can you talk a little bit to change course here a little bit talk a little bit about China. Are you actually growing share there, maintaining share with McDonald's and Yum? What is going on?

Well, our China business is primarily with McDonald's at this point in time. We are the sole source provider to McDonald's. And so as they grow and change out systems and add new stores, we are getting 100% of that business. And that is our primary source of revenue in China at this time. We are also the primary supplier to Burger King. They have a handful of stores in China with significant growth plans. And we are the sole source supplier to Burger King as well.

Our plan is to leverage that position. It is a very fortunate position for our company to have earned the right to serve McDonald's in that rapidly growing market space. And so we are making investments in China. We've opened up our office in Shanghai. And we are staffing in that office for sales and support. We will also be doing some manufacturing in China as well. So we have big plans for growth in China. And we feel that our strategy is in fact on track and working.

Do you have any visibility to when we may see acceleration of growth in China?

I think we're seeing that acceleration right now. We did our first business in the second half of last year. And then in this first quarter we had significant amount of business in China. We expect to continue that trend going forward. As we establish more of an infrastructure in China, I think we will be able to access additional accounts in China. And we are in conversations currently with a few of those accounts in China. We feel comfortable that we are executing on our plans relative to China.

On the Spring-Miller's side, can you talk to any traction you may have in the pipeline with multi-site properties?

Well, we have a number of accounts. The Mandarin Oriental is one account that we have. And they are in an expansion mode. The Capella group that we signed some deals with in the first quarter is part of the West Paces Group which is a chain of high-end hotels. And we have established a good relationship there. Blackstone, we have a good relationship with Blackstone. And as they continue to build out in their strategy of rolling up hotels, that business is all coming our ways. Destination Resorts is another chain that we have. Those continue to grow. Greg, if you have anything to add to that?

The only thing I would add would be relative to the question before on china and how it relates also. You mentioned Mandarin. Mandarin is going to be building -- is building -- is in the process of building three hotels in China. And those are all PAR Spring-Miller's and other hotels. And in addition, Mandarin has decided to also use our hardware in those hotels.

Okay, thanks. I will go back in the queue.

You are welcome, Vincent.

Thank you. (Operator Instructions). And you have a follow up from the line of Brian Murphy.

Yes. On the lower gross margins, you sited that you have continuing startup costs from the CKE contract. How long do you expect those startup costs to persist?

Brian, they are going to continue for a little while yet into this year. And as we exit the year, those should be behind us. What we did last year is we won the corporate CKE web service business. And that kicked off like I said in October of last year. And now as we -- we're pretty much ramped up with that corporate business. And now our focus is on the franchisee community. And the costs as you start up cost we are talking about now is to ramp up to go out and win and service a large portion of the franchisee community. And that will be an ongoing effort during 2007.

Okay. And with the sequential uptake in R&D spending, that was a little bit higher than I had modeled. Is that a good run rate to use going forward? Or was there something going on there in the quarter that --?

No, it will maintain that run rate going forward and then could even go slightly higher as the year unfolds.

Okay. And do you expect that level to -- are you going to maintain that level into '08 as well?

Probably initially, yes.

Okay. Thanks very much.

You're welcome.

(Operator Instructions). It looks as if there are no further questions in queue.

If there's no further question then thank you for listening in. Bye.

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