PAR Technology Corp (PAR) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2007 PAR Technology earnings conference call. My name is Akia, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (OPERATOR INSTRUCTIONS)

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

Thank you Akia. Good morning to everyone. I would like to welcome you to our fiscal year 2007 fourth quarter results conference call. I hope by now everyone has received a copy of our Q4 and year-end results. Here on the call today to discuss those results are John Sammon, PAR's Chairman and CEO, Ron Casciano, PAR's Chief Financial Officer, 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 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 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 morning. Today I will be presenting the results of our fourth quarter and year ending December 31st, 2007. Fourth quarter revenues from operations were $60.2 million, an 11.1% increase from the $54.2 million reported for the same period in 2006, establishing a new quarterly report. World-wide hospitality revenue was up 13% for the quarter. Domestic hospitality revenue was up 11%, primarily due to sales to McDonald's and increases in channel sales. International hospitality revenue was up 23% for the quarter, and Government sales increased 6.3% for the quarter with the initiation of some new contracts.

Net income for the quarter was $483,000, or $0.03 per diluted share, compared to $820,000, or $0.06 per diluted share, reported last year. Product revenue for the quarter was $24 million, up 23% compared to the fourth quarter of 2006. Contributing to this increase were improved sales to McDonald's, increased international hospitality sales, and a significant increase in our POS channel business. Service revenue for the quarter was $18.7 million, up 2.6% compared to Q4 of last year.

Contract revenue was up 6.3% to $17.4 million for the quarter, as a result of increases in our IT outsourcing business. Product margins for the quarter were 41.9%, versus 40.2% last year. This increase reflects higher software content in the product mix. Service margins were essentially unchanged at 26.4%, versus 26.6% a year ago. Contract margins were 6% compared to 8.3% last year last, year's margins were higher than the traditional 6% pretax profit range, due to higher profit on uncertain fixed price contracts.

Turning to expense for the quarter, SG&A for the quarter was up $2.1 million, to $11 million, as compared to $8.9 million last year. This increase is attributable to investments in trying to start up, growth of our channel business, and expansion of our sales force. R&D expenses were $4.4 million, up $938,000 due primarily to investments in software.

Looking at the year, for the year ended December 31st, 2007, revenues were up only slightly at 0.4%, but enough to established record revenues of $209.4 million, compared to 208.7 million a year ago. Hospitality revenue was down 0.5% for the year, with domestic revenue down 3.1%. International revenue was up 11%.

Domestic hospitality revenue suffered last year due to two factors, which impacted performance all year, namely delays in McDonald's third party software, as well as internal delays in completing InFusion Software. International revenue was up due to sales to McDonald's, as well as broad-based sales to hotels and spas.

For the year, net loss was $2.7 million, or $0.19 per diluted share, compared to net income of $5.7 million, or $0.39 per diluted share compared to 2006. Cash flow from operations was $8.3 million for the year. Product revenue for the year was down 7.4% to $77.1 million, due primarily to software delays just mentioned. Partially offsetting the decrease was an increase in channel sales both internationally and domestically. Service revenue was up 8.7% to $67.4 million, while Government contract revenue was up 2.4%, to 65 million.

Product margins for the year declined 160 basis points to 40.8%, due to lower software content in the product mix, service margins declined by 100 basis points to 24.2%, this decrease resulted from a one-time charge related to the end of life of our POS2 product line.

Contract margins were 6.4%, down 80 basis points compared to 2006, but within our normal range of 6%. SG&A for the year increased by $4.1 million to $37.5 million, reflecting significant investments associated in expansion of our third party distribution channels, and in growing our China infrastructure. R&D expenses increased $5.4 million to $17.2 million, due to investments related to enterprise software development. As we exited the year, the government backlog continued to be quite healthy standing at $152 million.

In summary 2007 was not a good year. We suffered all year with delayed sales due to software slippages, while at the same time pursuing our investment strategy focusing on software, channel expansion, and China. The result was three quarters of diminishing losses, ending with a small profit in Q4. The promise associated with the software delays for the most part are still remaining.

At this time, it is our best understanding that the long anticipated McDonald's third party software will be released at their world-wide convention this April. While this certainly is good news, we have become aware of potential competition for capital investments. McDonald's has launched a program, known as Combined Beverage Initiative, or CBI for short, to offer a broad selection of gourmet coffee drinks.

This program will be partially subsidized by the corporation, and yet there still remains a significant capital investment from it's licensees. Thus the upgrade of aging POS systems with the release of new software, may compete for finite capital investment dollars.

On a positive note, one key features of the new software is the improvement in drive-thru speed of service, which in turn is a fundamentally important issue in maximizing the revenue potential of the CBI. While we are not certain how the CBI will effect the timing system upgrades, we remain very confident that thousands of POS systems will be upgraded over the next two to three years. After the delay of our internal software, we continue to make good progress as we navigate the classic major chain acceptance process of lab tests, pilot tests getting to roll out.

We are not in a position to predict exact dates for success, but believe we have a solid product, and barring any further external issues, we are on the path to delivery of a desired solution by the second half of this year. We did achieve our profitability goal in Q4 in spite of the software delays. The principle reason for this improvement, were due to improved sales to McDonald's domestically, and a very nice improvement in our channel sales, and a broad-based international sales, including McDonald in Canada and China.

The improved sales to domestic McDonald's was encouraging since these revenues were derived from system upgrades using legacy software. This was clear evidence that at some point old systems must be replaced, with or without new software. It is notable that these investments were made in full consideration of the competitions with capital investment dollars.

In early 2007 we began to see some improvement in our channel sales, especially in Europe. By Q4 we additionally saw a significant improvement in our North America channels, which corresponded with the release of a bundled hardware/software offering. International sales were up 11% for the year with some acceleration in Q4, when sales were up 23%. Both for the year and the quarter benefited by increased sales to McDonald's in Canada and China, as well as increased hotel and spa sales distributed broadly around the world.

In 2007 our Government business grew at a 2.4% rate, ending a 7-year double-digit growth spurt. The slowing of growth is caused by the timing of several contractual events. A large contract was completed, and although we won the follow-on, it was awarded at reduced scope. Additionally, the start up of the large Navy contract was slower than originally anticipated, again contributing to lower than average internal growth. In Q4, the Navy contract picked up, increasing revenues by 6.3% quarter-over-quarter.

2007 produced some additional good news, we are very pleased that last week McDonald's awarded it's first-ever Technology Supplier of the Year Award to PAR, reflecting their confidence and satisfaction, and our support of their technology program. In 2007, we added 26 new hospitality customers to our growing list of outstanding customers, including the Hotel [Holder Group], a chain of 500 sandwich shops in France, McDonald's Thailand, Sea Island Resort, our first installation in Russia at the Ritz Carlton, and The Four Seasons in Egypt, and many others. We are announcing today that at the very end of 2007, we realized our first major new account win, based upon our SIVA Table Serve product.

We have signed contracts with a family dining chain of 180 restaurants for our software, hardware, and professional services, to be rolled out beginning in Q2 of this year. Finally we ended the year with an $8.3 million operating cash flow, and a new record Government backlog of $152 million.

Turning to 2008, our focus will continue on expanding our hospitality business by increasing software content in the product mix,. Broadening our channel business, and growing our international business, particularly in China and India. Our investments in these strategic initiatives will be moderated in 2008 particularly in R&D expenditures. SG&A will decrease as a percentage of on-plan revenue, but nevertheless will reflect required investments in channel and international expansion.

We have assumed that our markets will remain healthy throughout 2008. While there is some evidence of slowdown in the general domestic restaurant market, we do not believe that the fast/casual or QSR sector will be hurt. Virtually all of our customers have reflected confidence in their businesses, especially those with broad international contribution.

Thus far we have not detected any slowdown in the high end spa and resort markets, and thus have reflected this fact in our planning. Our Government should not be impacted by recessionary threats, and has begun the year on-track for high-single digit growth. With a large backlog of $152 million, this business looks secure for the foreseeable future.

We are are optimistic relative to 2008 performance yet this is a McDonald's world-wide convention year, and our experience is that sales in the quarter prior to the convention are generally soft, awaiting the announcement of convention special offerings. Thus Q1 may be impacted by this predictable phenomenon. By Q2 we will have a better idea of how the McDonald's upgrade program will fair, relative to competing capital investment issues. Additionally in Q2 we should have our internal software delays behind us clearing the way for improvements for the remainder of the year.

This ends my formal remarks, and I would now like to move on to Q&A.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Mr. Brian Murphy. Please proceed, sir.

Good morning. Thanks for taking my question. Ron, maybe one for you, could you just give us a quick breakdown of McDonald's for the quarter?

Sure, Brian. Good morning, how are you.

Good, thanks.

For the quarter, McDonald's was 26% of total corporate revenue, 36% of the hospitality revenue, and YUM! Brands was about 15% of total corporate revenue, and about 24.5% of hospitality revenue.

Okay. Great. Thank you. And John, could you just us some more color on the infrastructure build out in China, and maybe give us an update on how things are rolling out with McDonald's there? I am assuming that much of the strength in product revenue for the quarter came from that part of the world. Also are you, maybe this one is for Greg, any progress in getting business with YUM! in that part of the world?

Brian, as a goal, we would like to build a functional capability within China over a five year period of time, that is similar to that which we have in North America. We are very fortunate to have a sole source position with McDonald's, which is a foundation piece of business, which gives us an opportunity to expand throughout the growing Chinese market space. We have an assembly operation fully up and running at this point in time within China. We have staffed up to do support services, doing integration services and help desk support services as well.

So, we feel that we are well on our way to accomplishing our objectives. We have of course much more to do in that regard. As far as the YUM! opportunities, we are in test with YUM! in China, and we expect to be going into some store tests after Chinese New Year.

Okay. Thanks. And maybe another one for you, Ron. So it looks like R&D expenditure stepped down a little bit or moderated during the quarter. Is that a good run rate to use for '08, that fourth quarter number?

Brian, it could drop even a little bit more next year. Without getting too specific, we plan to as John said in his remarks, we plan to scale back that area a little bit as, so it will come down, both dollar-wise and as a percent of revenue.

Okay. And so you guys returned to profitability this quarter. It sounds like we could possibly see a loss in Q1 next year. Beyond Q1, do you think profitability is sustainable throughout the remainder of '08?

We do.

Okay. Great. I will hop off.

As far as Q1 is concerned, it is our goal to be profitable within Q1, but because of the uncertainties relative to the convention, it is not a slam dunk by any means.

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

Thank you.

Your next question comes from the line of Vincent Colicchio of Noble Financial. Please proceed.

Morning, guys. Nice quarter. John, this is a question for you. On the InFusion product side, what gives you comfort that your problems will be behind you in the near-term here?

Well, it has been a long road putting in the features and functions that are required by a particular account. We have been working extremely closely with that account. It is a very important account for us to close on. We have developed the features and functions.

As for the requirements, we have gone through exhaustive internal tests, delivered the software to the lab of that particular corporation, and once again again went through exhaustive tests. Now it is in store tests. So based upon the accomplishments to-date, we are confident that the software is quite solid, and that we will be moving through expanded store tests, and that by the second quarter we should be moving forward with that account.

And a question on PixelPoint, seeing good progress on the channel side, does that mean, does that relate to PixelPoint?

It is our entire channel, which includes hardware through VARs, and Pixel, but I think the driving force is really the Pixel software. We had a particularly nice fourth quarter, when we released a new product with bundled software, and that drove sales quite well in Q4. Earlier in the year, we had a nice pick up in the Pixel business particularly in Europe. So we expect the momentum that we have created, the investments that we have made in the channels to continue on through 2007.

Okay. Thank you.

You are welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from Brian Murphy of Sidoti. Please proceed.

Just to follow up on McDonald's, was most of that strength driven by international sales, or are you starting to see a pick-up in domestic sales there as well? I am backing into numbers here, but it looks like that quarterly revenue for McDonald's may have been one of your best in about two years. Are you guys turning a corner there?

Well, I think it is both international as well as domestic, because we had, I think a significant order domestically, and it was what I was referring to in my summary remarks.

It was a large sale to a large franchisee, we took legacy software in lieu of waiting for the new software, which will be released at the convention in April, and I think there was some evidence that it was, definitely some evidence, that when systems get old they have to be replaced in spite of what the availability of the software is. I thought it was also significant in the fact that there is some competition for investment dollars, capital investment for this Consolidated Beverage Initiative, and in spite of that pressure for investment in the CBI program, the licensee went ahead with the order.

So, it was both domestic and international.

How do we think about priorities, you know, it was my understanding that this new Point Of Sales software was supposed to be rolled out nationwide, and this has been something that has been in process for years. So I mean, how would that stack up versus the CBI initiative, in terms of investment priorities?

I think the CBI will have a priority. I think there is a considerable amount of interest within the corporation to roll out the CBI program across all of the restaurants in North America, and as a consequence, I would think that would have a higher priority, than would the new software.

But an important part of the software is the contributions to service. As a fundamental to the success, or fully maximizing of profits from the CBI program, speed of service is an essential ingredient, and one of the fundamental attributes of the new software. There is evidence, there is considerable evidence that there is an increase, a considerable increase, in the speed of service through the drive-thru.

So as the CBI program is highlighted at the convention, it is going to be highlighted in conjunction with the software, which will demonstrate the speed of service. There is some optimism that both the CBI and the software will go hand-in-hand, and contribute to the objective of speeding up the service associated with that new CBI program.

Just to add a little bit, this is Greg. The CBI program, as John stated, is certainly a different ROI than just putting in the new software, however, the CBI program is also primarily significantly based upon drive-thru revenue, and therefore in order to insure the fact that the drive-thru times do not slow down, which could be of significant impact, the new software is really very beneficial to keeping those drive-thru times at optimal as possible.

That is very helpful. Thanks for that color.

There is even some statistical evidence that perhaps they can serve 13 more vehicles per hour through the drive-thru based upon the new software.

Okay. Great. And just one question relating to the deal that you signed with this software initiative that is based on the SIVA product. Do you have anything else in the pipeline, and what kind of impact should we expect to have for this to have on the business in the back half of '08? Should we expect to see an increase in gross margins?

Well, I would say it has a very positive impact. This is our first major customer for this software. We do have opportunities for additional accounts going forward in 2008, and I think generally speaking, the release of our InFusion products, and with the SIVA products, we expect that our business will be driven by software in 2008.

Okay. That is all for me. Thank you.

You are welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Vincent Staunton, Wedbush. Please proceed.

Hi, guys. Can you provide some color on what progress you are making in the Table Serve market, besides the recent contract you just mentioned?

This is Greg. As John stated, basically, other than PixelPoint, PixelPoint you also remember is a Table Serve product.

From a channel standpoint, we are making some significant progress there in pushing that product. It is a very competitive product from a feature focus standpoint, a capability standpoint, and a price standpoint, competing against, very successfully competing against the Alohas and the Micros Sys, in the mom-and-pop and smaller type accounts through the distribution channel.

In addition to that, on the SIVA side, certainly the account up to this point in time, has had most press, and it is doing the best, it is primarily our Legal Sea Foods account, which we continue to roll-out to all of their stores, and that is really a testimony to this particular version of software that we have out there right now, as far as stability, and its capabilities across the board, because the size of the restaurants and everything else, of Legal Sea Foods, they have taken on all of the pieces.

They not only have the Point of Sale, they have our Intelligent kitchen video system, they have our handhelds, and they also have our pay at tables, which improves service across the board, not only speed of service, table turns, increased monies or tips for the wait staff, et cetera.

And that same type of concept is what we are moving now into this new account we just announced, and we are also talking to a number of other accounts of similar type situation, where we go in primarily with a POS, and the intelligent KVS, and then adding also the handhelds, and the pay at tables as part of that overall solution.

Okay. And also, did I hear correctly that both, you expect both SG&A and R&D revenues to drop, or at least drop as a percentage of revenue from the fourth quarter run rate?

You did, yes.

Okay. All right. Thanks, guys. Great quarter.

At this time, there are no more questions. I would like to turn the call back over to Mr. John Sammon for closing remarks.

Thank you for calling in and your interest in PAR. Good-bye.

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