PAR Technology Corp (PAR) 2007 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, welcome to the Q3 2007 PAR Technology results conference call. My name is Mike, and I will be your operator today. At this time all participants are in a listen only mode, and we will be taking questions at the end of today's presentation. [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, Chris Byrnes, Director of Investor Relations. Please proceed.

Thank you Mike, and good afternoon everyone. I'd like to welcome you to our Q3 conference call. I hope by now everyone has received a copy of our Q3 results and the press release. Here on the call today to discuss those results is John Sammon, PAR's Chairman and CEO; Ron Casciano, PAR's Chief Financial Officer; and Greg Cortese CEO and President of PAR Tech Inc.

Before John begins his formal remarks however, I would like to read our disclaimer. Statements made on this call today 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 provision of the Private Securities Litigation Reform Act of 1995. I now would like to turn the call over to PAR's Chairman and CEO, John Sammon, for his remarks.

Thanks Chris. Good afternoon. Today I'll be presenting the results for our third quarter ending September 30, 2007. Third quarter revenues were $51.6 million, a 6.3% increase over the same period a year ago. Net loss for the quarter was $862,000 compared to net income of $550,000 reported last year. The loss per share for the period was $0.06 per share compared to earnings of $0.04 reported last year.

Year to date revenues were $149.3 million, a decrease of 3.4% from the same period a year ago. Net loss for the year to date was $3.2 million compared to net income of $4.9 million. The year to date loss per share is $0.22 compared to earnings of $0.33 reported last year.

Looking at the quarterly revenue breakdown, product revenue for the quarter was $18.1 million, up 0.5% compared to the third quarter of 2006. Domestic sales to our largest account continue to be delayed, pending the release of third party software. The impact of the third party software delay, which began last year, will persist through Q1 of next year, thereby depressing both our hardware and our service revenue. Additionally, product revenue continues to be impacted by internal software delays.

Service revenue for the quarter was $17 million, up 12.7% compared to Q3 of last year. This increase is primarily related to the CKE service contract awarded to us last October. Contract revenue was on plan at $16.5 million, up 6.7% for the quarter. This increase reflects the start up of a large navy IT outsourcing contract.

Moving on to margins, product margins for the quarter were 40.9% versus 42.3% last year. This decrease is associated with the specific product mix in our hardware product line, which offset increased software content in the overall product mix. Service margins were 22.2% versus 24.5% a year ago, this decrease resulted from end of life charges for a discontinued terminal product.

Contract margins, or in our case essentially pre-tax profits, were 7.6% compared to 5.6% last year. This margin is above the 6% normal range associated with our government contracting business. It resulted from a one time favorable adjustment associated with a contractual claim, which in turn was partially offset by start up costs associated with a large naval IT outsourcing contract.

We traditionally run lower profits at the start of new fixed price contracts, which gradually improve over the course of the job. Since we have just begun a multiyear contract with the navy, our future contract margins will initially tend to run on the low side of our traditional 6%, gradually improving with time.

Looking at expenses, SG&A expenses for the quarter were $8.6 million versus $8.2 million last year. This increase, among other things, reflects our investments in both the expansion of our dealer channel and our international infrastructure.

R&D expenses were $4.6 million versus $2.6 million last year, an increase of $2 million associated with investments primarily in software.

In summary, although Q3 was not a good quarter, it came in as expected. With revenues delayed to both internal and third party software issues, coupled with increased investments in next generation software, channel expansion in China, we experienced a net loss of $862,000, or $0.06.

As to the long term outlook for the business, I think the news is mostly positive for the following reasons; our global hospitality revenues increased 6% this quarter, reflecting generally a healthy market. While there are some signs of slow down in the casual dining market, the QSR market remains robust. The high end hotel and resort markets remain strong in spite of any worldwide economic issues. This, coupled with excellent long term relationships with our hospitality customers, provides a sound basis for our future business.

Our international hospitality business continues to grow, reflecting some success of our investment strategy. While this quarter international revenue was up only 1.5% over last year, when we had a very large China order, year to date growth is up 7% above the corresponding period last year.

Our major accounts sales slump is not caused by lost sales, but rather due to delays of third party software, and thus sales will recover with pent up demand over a two to three year period once the software becomes available. We are currently installing a limited number of test stores with the targeted software, and while it is still too early to fully judge, the initial results are good. The targeted software release remains on schedule for April of next year, at which time we will begin to experience strong pent up demand over the following few years.

We are unable to predict the actual deployment schedule, since within the restaurants there are a number of competing areas for capital investments, yet we are very confident that thousands of restaurants will be upgraded over the two to three year period.

Our internal software issues are slowly being resolved, as we navigate the classic major chain acceptance process of lab tests, pilot tests and contracting leading to rollout. We are not in a position to predict the exact dates for success, but believe we have developed a solid product, and barring any further external issues, we are on the path to deliver the desired solution.

This quarter we announced two prestigious wins, Scotland's Gleneagles hotel, and Sea Island Resorts located on Sea Island, Georgia. Under these contracts we'll be providing completely integrated property management systems, which include our products to manage the hotel and associated properties, spa house, restaurants, retail shops, guest activities, and multiple golf courses.

Our government business continues to perform on plan, marking the 145th consecutive quarterly profit. Recently we announced the win of a $33 million navy IT outsourcing contract involving the operation of satellite communications facilities. We also announced a $3.5 million image processing technology contract involving air force intelligence production, and we announced recently a contract with NYK to rollout our logistics management system to track a fleet of generator sets used in intermodal transportation of reefers. NYK is a large Fortune 500 shipping company with a fleet of over 700 ships.

We anticipate announcing the win of still another large contract, which will soon bring our government backlog to a new record high, in the range of $160 million, guaranteeing the continuing success of this business.

The core of our business remains strong and we believe that we are making good progress in returning to profitability. As for 2008, we have not yet completed our AOP, and thus are not offering any guidance at this time. I would note, however, that our first quarter is traditionally our lowest quarter, especially in years that McDonalds holds it bi-annual convention where sales lag leading up to the convention. This is the case next year when McDonalds hosts it worldwide convention in April.

We are taking actions to hold down expenses but do not intend to cut back on our investment strategy. Specifically, we'll continue to invest in software development, global channel expansion, and international infrastructure extension. That completes my formal remarks and I'd like to open the session to your questions.

[OPERATOR INSTRUCTIONS] We have a question from the line of Brian Murphy with Sidoti and Company, please proceed.

Good afternoon, thanks for taking my question. Maybe Ron, for you, could you just give us the break out of McDonalds and Yum for the quarter?

Sure Brian, how are you? For the quarter, McDonalds was 24% of total revenue and Yum Brands was 16%; and for the nine months it's 25% for McDonalds and 14% for Yum.

Okay, great. Maybe if you could comment, if we were to strip out McDonalds and Yum from the hospitality business, how is the rest of the business doing? And maybe specifically you could talk a little bit about Springer-Miller and also the progress that you're making integrating Pixel Point and sort of developing your indirect channels.

I think the rest of our business is doing quite well. I think the government is on plan, as I indicated in my formal remarks our backlog is increasing, and on the basis of just the backlog that we have and the pipeline that we have, and the management we have in place, we feel very good about that business continuing in a very profitable fashion. The Springer-Miller business is doing fine. I think the market is healthy in both the spas and also in the high end hotels and resorts. We are making good progress, I think, in terms of international expansion in that business and we're pleased with the degree of integration that we have been able to accomplish over the last couple of years.

With Pixel I think we are integrated, I think we have done a good job in building out some of our dealer channels, especially in Europe. I think we've made nice progress in terms of bundling a Pixel product, a version of a Pixel product with a new family of lower priced terminals that we're offering through the dealer channels, and that's just beginning. So we're thinking that that's going to help sales going forward. So I would say in those specific areas that you've asked about, I think we're doing well.

Thanks, that's very helpful. And as we sort of exit the year, do you think, from a revenue standpoint, that 2007 will be up over 2006 overall?

I think it will be about flat.

Okay, great, thanks.

You're welcome.

And the next question comes from the line of Tony Brenner with Roth Capital Partners, please proceed.

Thank you. John I wonder if you could discuss what progress is being made with the effort to gain additional casual dining customers, particularly with the adaptation of web based software.

Yes Tony, I think we're making some progress. I think we've got some strong leads in that area. We've added products to the main software which run the casual dining restaurants that is pay at table, and what we call POS-ware, which is a wireless order taking device. And then coupled with that we have products that we've introduced this year called iQuality which is a product for assuring health standards within restaurants; so the combination of products that we have to offer is being received well, I think, in the marketplace, and I think we're satisfied with the progress that's being made in that particular area. And I'd extend it beyond just casual dining, it would be table service restaurants specifically.

Are there chain customers you can talk about?

Not at this time.

[Inaudible] is there anything to show for it at this time?

There's nothing that we are announcing at this time.

Second, from the government contract business, which again was on plan, backlog goes up every quarter, you're on plan every quarter, which I presume means that divisional management gets paid bonuses. You've got, over the past year, a whole new business of logistics management, which has made some penetration, yet revenues are up 1% for the nine months. I'm sorry; yes, 1% for the nine months. In the third quarter, it's comparing to a single-digit gain a year ago. Can we forget about this being a double-digit growth business?

Yes. I think it is not a double-digit growth business. I think that we will be returning to a high single-digit growth business next year.

Thank you; that's all I have.

You're welcome.

And our next question comes from the line of Paul [Dorph] with Dorph Asset Management LLC. Please proceed.

That's Carl Dorph. I was just wondering, with the software delays, I think I heard you saying they're going to be running through to April. Have you noticed that you may have lost any business at this point in time? And/or, do you anticipate that, as a result of it, you could or will lose some business?

No, Paul. We don't believe we've lost any business. The software delays that we were talking about relative to April is with our major account and there, that account is only buying hardware and services from approved vendors. And neither us nor our other competitor within that account are doing significant business at this point in time. Being delayed, awaiting for the software release.

And so, those potential customers are not going and buying from anybody else. And so, that's why we say that there's going to be pent up demand. And we're quite confident of that.

Has your other major customer had a similar software problem; your major competitor?

Yes, exactly. The software actually is being developed for the corporation itself. And so, it's one software suite that goes throughout the entire chain. And so, both suppliers of hardware and service are suffering the same delay because the software has not been ready to be installed and will not be ready to be installed as a general release product until April of next year.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). And the next question comes from the line of Ross Berner with Weintraub Capital. Please proceed.

Hey, John. How are you?

Good, thank you.

Hey, just a kind of - can you talk a little bit about maybe some of the differences going on between your business and MICROS'? You know, they continue to grow in the high, you know, mid-to-high teens, on a year-over-year revenue basis and, obviously, things are kind of struggling right now, PAR. And you maintain that you're still not losing sales, so, could you, maybe, elaborate a little bit on where there's overlap and where you're seeing improvement, you know; or a lack of not losing? Where are you not losing product sales, I guess, is my question.

As an earlier question indicated, a large percentage of our revenue comes from a couple of large accounts. And, within those large accounts that we have, we are not losing business to competitors.

As far as MICROS' business, they are doing quite well. I think it has a lot to do with the channels of distribution that they've successfully built up over time. And so, they have a very wide distribution. And I don't want to analyze the MICROS business because I'm not capable of doing that precisely. But, it's my perception is that they have grown their business through a dealer organization, which has given them a very, very broad distribution channel. And then, they have acquired their dealers over time.

But they have in place, then, the resultant network, which has given them great access and penetration to the independent restaurant market. PAR's market is primarily the chain market and within the chain market is primarily, to date, has been the QSR, the fast food chains where we are dominant. With the acquisition of SIVA now, we have products for the table serve marketplace. But again, it's more chain-oriented.

But MICROS now has sort of avowed to get into the QSR market, correct?

That is my understanding, yes.

So, how are they doing that? And what does that mean for you at this pint, going forward?

Well, I would think that that would be another competitor for us. Traditionally, they haven't been competing in the QSR market space and they have vowed to go after that market. I think there are characteristics about that market that the cost of entry is somewhat high, or at least the difficulty of entry is somewhat difficult because of the infrastructure a company has to have in order to support these very large global QSR chains. And that is the expertise that PAR has built up over the years. And we feel rather secure, relative to our relationships with the largest QSR chains in the world.

So, I think it had a lot to do with the infrastructure. The infrastructure is the ability to create the products that these companies need, to their specifications, working tightly with them. And, they have very large development staffs of their own and we've been working with them for years. And then, after the product and the solution are put together, then there's the whole area of deployment.

Additionally, these chains are very heavily franchised. About 85% to 90% of the restaurants in these chains are owned by individuals who are franchisees. And therefore, you have to have relationships with those franchisees. And the corporation wants the approved vendors to sell to all the franchisees. And so, you have to have a network that is specifically designed to go and deliver the product to the franchisees of the major chains.

All of this creates an infrastructure, which we've built up over the last 20-some years, which is working quite well. And we have extremely good relationships with our accounts. So, while we may have some more competition, going forward, we feel rather secure in the market space that we've worked so actively in over the last 20-some years.

And, if you're a McDonalds franchisee - we'll just use McDonald's as an example - and you have immediate needs for upgrading your system or equipment, you're not going to wait until April of '08 to replace your POS equipment? I mean, you're going to go do it now, even though, theoretically, there's a better product that generates higher return on investment that is going to come out in April. I mean, you have no choice, right? I mean they're businessmen, so they have to do it now.

So, I mean, maybe you're not losing sales to other people, but you're losing sales that - you're not getting business, you know, that people are having to do something now, that they won't be doing in April. I mean, I guess, your comfort level on why you're going to see this giant snap-back is kind of - is my question.

Let me see if I can answer that. We are doing some business with the McDonald's account, with the franchisees, because, as you suggest, some of the systems are just so old that they just need to be replaced.

But, as we replace them, the software that would be run on the replaced system would be old software. Now, when the new software becomes available next April and they are going to be moving to that software because there are functions and features in that software that are beneficial to their interest, they have to pay another fee for us to come out and upgrade a store with that software.

And so, there's a natural tendency to hang onto the old hardware as long as they can, waiting for the new software so that they would only have to pay one fee. But some people, as you suggest, can't wait. And they are - in fact, we still have some business; the business has not gone to zero. We have some business in the category of the franchisee that you hypothesized.

Okay.

Now, as far as this confidence that we have in the pent up demand, we're talking about 5,000 to 6,000 restaurants that are in the category of needing to upgrade their hardware over the next couple of years. And within that group are a lot of these stores that have been holding back, waiting for the software. So, we're quite confident that those 5,000 or 6,000 stores will need to upgrade.

Now, there're 13,000 stores all told. So that leaves 7,000 or 8,000 stores that have equipment that will be getting old in 2009 and 2010. So, that's sort of like the baseline business. So, we have an increment to the baseline business coming along through the upgrading of 5,000 to 6,000 stores. So, as a consequence of that, there is this pent up demand I speak of and it is not going to any other competitor.

Hey John, how many trials are you run--how many locations are you running the trial software now?

I believe it's in four restaurants that we have. And our competitor I'm not sure how many they have. I suspect that it's about the same number. Now, just to give you some little more color on it, there's over 10,000 stores around the world that are running this software, a version of this software. And, they're running it successfully.

It's the U.S. market and the Canadian market that we're talking about that needed to have additional features and functions for this particular North American market. And it was because of these additional features that the software needed to be upgraded from the version that's running in 10,000 other locations.

So, in the test that we're doing right now, we're testing the North American version. The reports, so far, are quite good. In fact, we will be moving to a second phase of the testing soon and that phase has to do with testing our ability to deploy the software.

So, the first phase is to test the software to assure stability of the software. We're moving through that phase quite nicely. The second phase is just to test that we're ready to deploy in a mass roll-out kind of a (inaudible).

Okay, but you haven't expanded that trial on four stores? It's going to stay at four or five stores, or wherever?

No, I don't believe that's true. I believe that there's interest in expanding that up to as many as 100 stores.

Okay, but you had - since your second quarter, you haven't increased that number? That number stayed roughly the same?

Well, I'm not sure what number we're talking about. But it's - we're on plan. Let me say it this way. We're definitely on plan. The plan has been laid out leading up to general availability next April. We are on plan and every intent is that the software is available at the convention next year.

Okay and two last quick questions, John. I appreciate your time on this. How many stores did Yum Brands open in China in the quarter, and also McDonald's?

Chris, do you know the answer to that one?

I don't know that offhand. Ross, I can get you that information.

Okay and - I mean, so - I mean - it seems like you said revenue was up 1% year-over-year in China, due to a large order last year, but I mean - it seems like the base of business should be growing a little bit more significantly than - there, than even - you know, despite that fact. I mean, are you disappointed in what...-?

No. I don't think we are disappointed at all in our investments in China to date. We've opened up our office. We're expanding our support activities there, we're moving towards assembly within China.

We have a sole source position with McDonalds. So everything they buy, they're buying through us. That is our single account in China at this time, which has given us a baseline of business. But we are in contact and talking to many other chains in China. So, it's our entry into the China market and we feel rather good about it.

Okay. Thanks for your time guys.

You're welcome.

And the next question comes from the line of Sam Bergman, with Bayberry Capital Management. Please proceed.

Good afternoon John, Ron, Chris. How are you?

Good.

Good afternoon.

A couple questions; first of all, again, let's go back to the China office that's there and the McDonald's account. Should we expect there'll be some other business than McDonald's in 2008 to open in China? (Inaudible) pipeline.

Yes. We're certainly in contact with several customers in China and we feel that our presence there is - and opening up the office and having the McDonald's account is going to help us as we move forward. So, we're looking forward to expanding our business beyond McDonald's.

Are there any beta sites in China, other than the McDonald's business?

Greg?

I didn't hear that question.

Are there any beta sites with actual products and software and any other accounts in China right now?

That are ours?

Are there?

Currently, we're in a few Burger Kings but Burger King's small. We're exclusive to Burger King and we're trying - we're in the process of - we have test sites in with Yum in China for the hardware business. But other than that, we're also in the Mandarin Orientals with our hardware.

We're going into some casinos in China, with [Agilasys] with our hardware. But, other than that, from a chain standpoint, no, not right now.

On your service contracts, the maintenance, on a quarterly or yearly basis, is that renewed on a yearly basis? And, when was there an increase in that particular product (technical difficulty) back to the customer?

Well we do have contracts, service contracts, and we have a variety of services that we offer under contract. The contracts are nominally one year and they're automatically refreshed every year.

They renew at all different times during the year, based on the customer, Sam.

Correct.

There's no annual renewal with an increase?

No, it would be subject to an annual increase, but it happens throughout the -- the renewal date is different for different customers, so it doesn't all happen on January 1 for example.

And it also would depend upon, in some cases we have a longer term than one year.

Okay, going to the contract side of the backlog of contracts, I know you said the government contracts have hit a new high. Do you have any dollar amount for backlog on the POS systems?

Backlog, typically, in our hospitality business Sam, runs pretty low. As you know, for example, we don't have long term contracts -- we don't have contracts with McDonalds, our major customer. So it's pretty low, it's running around $10 million in the hospitality business at the end of September.

Sam as you probably remember, it's primarily a book and ship business.

Okay, so it's around $10 million currently. The last question, can you give me an idea if there's some kind of run up with SIVA going forward?

I'm sorry; I didn't pick up the question Sam. Would you repeat it please?

On the last acquisition is there an earn out with them?

Yes there is a small earn out under our agreement.

And when is that to be paid?

It's paid, I believe, over a three year period of time. But it's quite a small item.

And on the third party software that you said should rollout in April, is any of it rolling out in the first quarter, or it's all going to begin in the second quarter?

Sam right now we're planning, as John said earlier, the general release will be in April for the McDonalds software, so that's when it will begin.

There's certainly ramping up between now and then, it won't be enormous numbers, but they have to ramp up some this quarter a little bit, and then more in the first quarter in order to provide both us and our other approved vendor with the ability to learn and develop some more expertise in being able to roll that software out. So therefore they are providing more and more sites on a monthly basis, but they're not large numbers. But they will increase.

So in other words are you going to, let's say 50 units in McDonalds in the fourth quarter to 100, then to 500? Or do you have any idea of the rollout?

Right now I would say it's more like 20 probably this quarter, going to probably more like 50 at the most in the first quarter and then once it's general released then it's open to us to go after. Right now they're limiting the stores that are allowed to move to the next generation software.

So what would necessarily be pent up demand after that release? Because you're going to have to go after these stores, so it could be third or fourth quarter when a majority of them start rolling that out, correct?

No, there's quite a few number of stores right now that want to move, but the corporation won't allow them to move, or they're discouraged from moving unless their hardware systems are so poor that they're breaking down all the time, in which case if they're going to then put in new hardware they might as well put in the new software.

So do you have any idea of a number between this October and next October, once that's released? What's expected?

Well I can just tell you what this account is trying to do; they're trying to roll out all their stores with this new software within a three year period, starting in April.

Okay. And how many POS systems, on the average are per store? Eight?

In this account that we're talking about, more like six.

Okay, thank you very much.

We have a follow up from the line of Brian Murphy with Sidoti and Company, please proceed.

Hi, I'm just looking at revenue from Yum, and by my numbers anyway, it looks like Yum is up about 15% year to date. Can you help me understand why there's so much strength in that account?

Brian this is Ron. I think your calculations are high on the year to date number for Yum.

Okay. Was that account up double digits this quarter?

It was double digits this quarter, but year to date it's high single digits.

Okay great, thanks.

That's worldwide product and service.

Okay, thanks.

Currently no other questions in queue.

All right, well thank you very much everyone. We'll be here if you have any further additional questions. Thank you.

Ladies and gentlemen this concludes the presentation. You may now disconnect. Thank you very much and have a good afternoon.