PAR Technology Corp (PAR) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the first quarter 2008 Par Technology results conference call. My name is Jeremy, 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 toward the end of this conference. (OPERATOR INSTRUCTIONS).

At this time I would like to turn the presentation over to your host for today's call, Mr. Chris Byrnes, Director of Financial Relations, you may proceed.

Thank you Jeremy, and good morning everyone. I want to thank you for joining us today on our call. Just a couple of bookkeeping matters, this call is being recorded and will be available for playback. We are broadcasting the conference call via the world wide web as well. Please be advised that if you ask a question it will be included in both our live conference and any future use of the recording.

I also want to take this opportunity to tell you that this conference call includes forward-looking statements that reflect management's expectations based on currently available data. However, actual results are subject to future events and uncertainties. The information in this conference call related to projections or other forward-looking statements may be relied on subject to the safe harbor statement included in our earnings release this morning and may continue to be used while this call remains available for replay. I now would like to turn the call over to John Sammon, Par's Chairman and CEO, for his remarks.

Thanks Chris. Good morning. Today I'll be presenting the results of our first quarter ending March 31, 2008.

First quarter revenues were $52.1 million, an 8.9% increase over the $47.8 million reported for the same period a year ago. World wide hospitality revenue was up 3.3% for the quarter; domestic hospitality revenue was up 4.1%, while international hospitality revenue was flat for the quarter. Government revenue increased 20.5% for the quarter.

Net loss for the quarter was $744,000 compared to a net loss of $1.3 million reported last year. EPS for the periods were a loss of $0.05 per diluted share compared to a loss of $0.09 per diluted share reported last year.

Looking at the quarterly revenue break down, product revenue for the quarter was $16.9 million, a 1.1% increase over the first quarter of 2006 (sic). Product revenue for the quarter was depressed due to significantly lower sales to McDonald's, but offset by increased solution sales to a large Table Serve account, Legal Sea Foods and CKE, netting out to a small increase for the quarter.

McDonald's sales continue to be delayed this quarter, awaiting the release of new third party software. We are pleased to announce that this long awaited software was released for virtually all North American stores at the recently completed McDonald's International Convention. Additionally, contributing to the soft McDonald's sales this quarter were delayed decisions by operators awaiting the announcement of the convention's special offerings.

In addition to delayed McDonald's sales, quarterly product revenue also suffered from the slippage of a customized resort software solution to a major account. We now expect to go live with this solution by Q4 of this year.

Offsetting these delays were solution sales involving both hardware and software to both new and existing accounts. International product sales were flat due to the timing of some large shipments to McDonald's China and Canada last year, but were offset by sales to several new accounts, including Raitsa Food, Fujitsu Services and Red Rooster, which is a 600 store QSR chain located in Australia.

Service revenue for the quarter was $16.4 million, up 5.7% compared to Q1 of last year. Contract revenue was $18.8 million, up 20.5% for the quarter. This unusually high increase was caused by the timing of both the start of new contracts, and the purchase of certain billable materials and services under government contracts.

Now looking at margins, product margins for the quarter were 44.2% versus 38.3% last year. This increase of 590 basis points reflects software restaurant sales. Service margins were 24% versus 21.7% a year ago, and this increase of 230 basis points reflects improved installation and field service margins, contract margins, or in our case, pre-tax profits, were 5.1% compared to 6.7% last year. This lower than normal margin resulted from low margins associated with certain material purchases under government contracts.

Looking at expenses, SG&A expenses for the quarter were $9.1 million versus $8.7 million last year, an increase of $352,000. While SG&A expenses were slightly increased, as a percentage of revenue they were lower, 17.4% versus 18.2% last year. R&D expenses were $4.1 million versus $3.8 million last year, an increase of $307,000, due primarily to investments in software.

Summarizing, Q1 came in about as expected. We anticipated slow sales to McDonald's due to delayed third party software and the traditional softness prior to their international convention, held every two years. These delays, coupled with continuing investments in software, channel expansion in international, resulted in a $0.05 loss for the quarter.

As we look forward to the remainder of this year and into the next few years, the most important issues relate to the health of our markets, the improvement in our McDonald's business, and the success of our strategic plans. I'd like now to address each of these issues.

First the health of our markets, we have assumed that our markets will remain healthy throughout 2008 and for the foreseeable future. While there is some evidence of a slowdown in the general domestic market, we do not believe that the fast/casual or QSR sectors will be hurt. Virtually all of our customers have reflected confidence in their businesses, especially those with broad international presence. McDonald's, our largest account, leads the restaurant industry by consistently posting outstanding performance results. YUM! Brands and CKE are all performing well, while the entire international market continues to show real growth opportunity.

Thus far we have not detected any slowdown in our high end spa and resort markets. Market reports confirm this finding for high end resorts and hotels, while also reflecting a general slowing of the mid-level hotel market.

Our government business should not be impacted by recessionary threats, and has begun the year on track for high single-digit growth in 2008. With a large backlog of $136 million, this business looks secure for the foreseeable future.

Next our McDonald's future; although the timing of this business is somewhat complicated, our fundamental expectation is for robust business over the next few years. We have suffered over the past 18 months due to continuing delays in new software for the North American market. The software was finally released earlier this month at the McDonald's convention, along with the announcement that this software is the only version which is to be authorized for new and replacement sales. Since thousands of point of sales systems must be upgraded to run the new software, we therefore anticipate robust future sales.

This is indeed very good news, however, as we reported earlier, there could be some delay in the ramp up of point of sales sales if they are to compete for capital investments with McDonald's top priority beverage initiative. Here's where the timing complexity exists; the beverage initiative clearly has top priority, but the new software is indirectly tied to this initiative. A principal advantage of the new software is an increase in drive through speed of service, which in turn is fundamentally important to the success of the beverage initiative. McDonald's has published a report indicating a 20% increase in drive through speed of service. It is our belief that as this performance improvement is understood by the community, there will be little competition for capital, and that the adoption of the new software will progress hand in hand with the beverage program.

Adding to our optimism regarding our McDonald's business is the strong relationship we enjoy. We are very proud of the recent recognition bestowed by McDonald's, naming Par as their technology supplier of the year. This is the first time in McDonald's history that such an award has been given, making it particularly special to the recipient. This recognition and the goodwill underpinning it continued throughout the recent international convention, where we signed a record amount of business compared to the previous 14 conventions over the past 28 years.

Success within the McDonald's account is a fundamental platform for our financial success, but future growth and improving profitability will depend upon execution of our strategic plans involving software, expanding channels of distribution, and international growth.

So now looking at our strategic investment plans; restaurant software was up sharply in Q1 with sales of our new Table Serve product to both new and existing Table Serve accounts, and infusion into QSR markets. This is certainly good news, since over the past year we have reported internal software delays. While these internal delays are not completely behind us, as reported earlier, we are making good progress in clearing away any remaining issues and continue to believe that we are on track for a good second half.

In Q1 we experienced a double-digit growth in our channel business, which follows similar increases last year. While it is still early in our plan, we are encouraged by the increased sales of our bundled Pixel software, and lower cost hardware.

Although international sales for the quarter were flat, we feel that we are still on track for a good international expansion. Last year we enjoyed large shipments to China and Canada, which, due to timing, were not repeated this quarter. Completing offsetting this deficiency were sales to several new accounts mentioned earlier.

In Q1 we opened up our Delhi office to support our hospitality business, both hotels as well as our YUM! and McDonald's account. Our government business continues to perform well and is on track for high single-digit growth this year. We have a large backlog of signed contracts and a strong pipeline of potential additional business providing a degree of confidence in this business sector.

This ends my formal remarks, and I'd like now to turn it back to the operator since we're ready for questions.

Thank you sir. (OPERATOR INSTRUCTIONS). And your first question comes from the line of Sam Bergman with Bayberry Capital Management.

Good morning John, Ron, Chris, how are you?

Good, thank you.

A few questions; one, regarding the Hardee's franchise award, what's the timeframe for implementation of that particular contract?

I'm sorry Sam, what were you talking about?

The recent Hardee's win.

Okay. Greg, do you want to take that?

Yes. Sam that is being rolled out at the present time, and it should be rolled out this quarter and next quarter.

Do we have any amount of value of that particular contract?

We don't announce that Sam.

Can you tell us if it's within a certain range of $7 million to $12 million?

No, it's not that high.

Not that high, okay. The other question is regarding Seva and its software. How far, technology wise, is that ahead of the competition in terms of the product that's rolling out to Legal Sea Foods?

Well it's an advanced product, it's a next generation product and it's built on a J2EE platform. So I think it represents a product which is ahead of the general market space. I think all of our competitors are moving in the direction that we have moved in. I think we moved a little bit earlier than they have. I think it's inevitable that all the software that goes into the hospitality market will have to move toward a next generation type platform, and I think that we're well on our track to achieving that type of a product.

Sam also - this is Greg; I think the other thing that's interesting about Legal Sea Foods is the fact that they have successfully utilized all the pieces of the product. So therefore they're using handheld; they're also using pay at table, which I'm sure you've read about and they're seeing significant operation results from using all the pieces.

On the last conference call you did talk about the Legal implementation. To my knowledge it doesn't seem like all the restaurants have that particular product. Is there any delay on their part, or is there a delay on the software issue?

It's not really a delay on either side. Actually, it's sort of actually in line with their plan to roll them out to the stores over a certain particular schedule, and we are on schedule.

What type of pipeline activity is there on that particular product line, knowing that your implementation at Legal is going okay?

Again, we won't quantify it but, basically, we have about half of their stores installed right now.

What about pipeline activity in terms of other ...?

Oh other accounts, I'm sorry. Well we have one right now that we're in the - we've announced that we had the account from Seva which was the first quarter here. Part of it was sold during the first quarter, that to a chain of about 160 to 170 stores and we're rolling that at the present time. And that will be rolled out between now and probably the end of the third quarter.

And then, we are also looking at two other accounts with the Seva Software right now and we're in a good position in each of those, I think.

Sam, I might just add to that, when I was commenting about the health of our market space and particularly the restaurant portion of our market space, we don't see any slowdown in business in our QSR and fast/casual business. But in the Table Serve, we do see a slowdown. And the Seva product is aimed at the Table Serve market space.

So, as we're looking forward and anticipating increased software sales, we're focusing more on the QSR at this point in time than we are on the Table Serve. But as Greg mentioned, there are customers in that Table Serve market space that are talking about replacing their software or advancing their software. And we're certainly pursuing that, but, in general, I think, because of the economy, I think that sector of the restaurant market space is slowing down a bit.

And the last question, in terms of the R&D, probably part A and part B, QSR and Casual, what's the makeup of R&D in those two areas, I guess, at 100% of R&D?

I don't think we break out. I would say that a substantial portion of the R&D is focused towards QSR.

Now in 2007, part B; you spent about $5.3 million more in R&D. That's a significant amount. What products have come out of R&D or what products do you expect to come in R&D to have that top line increase over the next several years?

Well, there are several. Greg?

Well certainly a significant part of that is the software piece, the Seva piece and also our Pixel software and other software products we have. But also, in addition to that, we have expanded, I think, like Sam, we mentioned to you before, when we bought Pixel, Pixel being primarily a dealer channel product. At that time we did not have the hardware products to go into that dealer channel. And as a result, therefore, we made investment over the last couple of years in developing out additional hardware products that can compete well in that dealer channel. And we have been successful in doing so and we've released those products.

Yes, I would add to that also, we have a product, which tracks information relative to the health aspects of running a restaurant as a web based product that chains are very much interested in. It collects information at various points of operation of a restaurant and then sends that information up to a central site so that management can assure that they are following certain processes and procedures relative to health.

There's another product, a back office product advancement, moving forward with an advanced database for our back office software. There's a product called Inquire, which is a web based product, whereby we take information out of the restaurants and provide that information and alerts associated with that information to management that has access to the web. Then there is the advancement of the Table Serve product, an advance of the QSR product and, as Greg just mentioned, the Pixel product.

So, there are a number of software products in addition to the hardware products that have absorbed that increase of R&D expense.

Thank you very much.

You're welcome, Sam.

And your next question comes from the line of Vincent Coliccio, with Noble Financial.

Good morning, guys. On the contract margin, could you give us a little more color on why the margin was lower than expected? And should we expect it to increase to higher levels as the year progresses?

At a high level, the reason for it is simply the mix within the contract revenue. This quarter, we had a substantial number of material purchases under the contract. And typically, those material purchases carry a very small margin. So that's the reason for the abnormally low margin.

And the answer generally is yes, we can expect some improvement within the margin. We typically run around 6% within our government business.

Ron, would you like to add to that?

I think that covers it. Maybe just one other little part; we had a couple of very large startups, some new contracts that were awarded to us. And generally, the margins in the early years of those contracts tend to be a little bit lower and we improve efficiencies as the contracts go on. Our history says that we earn a higher margin in the later years of those jobs.

On the international side, John, you had said that you'd had strong shipments to China in the year-ago period and there were some timing issues in this period, if I heard correctly. Should we expect international to bounce back each quarter, as the year progresses, seeing growth on a year-over-year basis?

Yes. I expect that international will improve as we move through this year. We're fortunate enough to have these large accounts. In particular, the two that we were talking about in the formal remarks were China and Canada. And, when we get those awards, they produce an increase in revenue and when we don't get it, comparatively speaking, then the revenue goes down.

But, as a general statement, yes, I believe that we will see increases in the international market space. As you know, we're focused on international; we have a strong presence internationally and the hospitality market space is growing internationally. So, we would expect to grow with that market space.

You had said, John, that we're not seeing a slowing in the quick service restaurant or the fast/casual markets as of yet. How does this compare to previous economic slowdowns, in terms of what we're experiencing today?

I think it's quite similar in the QSR. What we've noted in the past, since we've been in this business a long time, is that, when the economy heads south, the customers that might have been frequenting other restaurants, maybe higher level restaurants, Table Serve restaurants, we see them moving to QSR. QXR seems to be a fundamental within peoples' lives, whereas, Table Serve is somewhat optional, especially at dinner time.

And so, when people are squeezed, they cut back on going out to dinner and Table Serve restaurants, particularly at dinner time. But QSR enjoys steady traffic from their regular customers and customers that might've gone to other restaurants, more upscale restaurants, frequent the QSR restaurants.

So, I'd say what's happening in the QSR is pretty typical of what we've seen over the years.

On the hotel side, you had said that, I believe you had said that at a mid level product, we're starting to see a slowdown. Is that correct? And how slow is it getting?

That's not our market place, Vincent. What I said is that in our experience, within our targeted market, which is the high end resort hotel and spa market place, that we haven't seen a slowdown as of yet. But, when we look at market reports, those market reports confirm that, at the high end, generally, across the market space, there is not an evidence of a slowdown. But in the mid hotel and lower end hotel market space, there is evidence, according to the industry reports, of a slowdown.

Okay. Thanks, guys.

You're welcome.

(OPERATOR INSTRUCTIONS).

And you have a question from the line of Brian Murphy, with Sidoti and Company. Go ahead.

Good morning; thanks for taking my question. Ron, could you just give us a breakdown of McDonald's and YUM! for the quarter?

Sure, Brian. For the quarter, McDonald's was 19% of total revenue and YUM! was 13%.

Great, thank you. John, could you just give us a little bit more color on the developments at McDonald's? I mean, how do we think about hardware upgrades now? I mean, you know, for the past 18 months or so, we've been thinking about this in terms of the software rollout being the dependency and now, it seems like we have another dependency here, with the coffee initiative.

Sort of, can you just drill down a little bit more in terms of maybe what has to happen first and, you know, mechanically how that might work?

Yes, I'll try, Brian. You're quite right that, for at least 12 months of the last 18 months, we have been talking about the slowdown pending the release of this software. Late last year, McDonald's started pushing forward on this beverage initiative. This is an initiative where McDonald's would like to compete with Starbucks or with gourmet drinks, selling them primarily through their drive through. And they very much want their licensees to jump on this program and make an investment to make changes to the restaurant in order to implement this particular beverage program.

And as that program became evident to us, we could see that there's a potential for competition for capital dollars. There are capital dollars that are required for the upgrade of a restaurant for the beverage program and capital is required to upgrade to the hardware in order to run the new software. So, that is an additional complication with our business with McDonald's. Now, that's the background.

So, our view of it is that over time, there is going to be little competition between the software upgrades and subsequently the hardware upgrades and the beverage program. We feel that they're going to go hand in hand.

The reason for that is - one of the principle advantages of the new software over the current software, is that it produces an increase in speed of service through the drive through. McDonald's has documented and published their findings in this regard and they have said that it increases the speed of service through the drive through.

Now the drive through speed of service is fundamental to the success of the beverage program. And since most of those gourmet drinks will be sold trough the drive through, it links the software with the beverage program. And as the market space starts to understand and perceive this increased speed of service, through the use of the software, we feel that there will be little competition between the two contending options for capital.

When we look at the age of the systems that are out there and their ability to run the new software, we see that there are thousands of systems that have to be upgraded and we have said consistently and have not changed on this that we feel that those systems will be upgraded over the next two to three years. And that two to three years is beginning now in the second quarter.

So what we expect, then, is a ramp up of our business, moving towards a robust improvement of our McDonald's business over the next two to three years.

Okay, great. Thank you.

Greg, did you want to add anything more to that?

No. I think you covered it pretty well. One other piece, though, that you'd mentioned earlier in the comments was the fact of the convention. John had indicated the fact, we had a record convention and we truly did. I mean, it was probably two to three times what we've ever done in the past, which is a good indication that, notwithstanding the beverage initiative, there is significant interest out there to upgrade their systems.

Okay. Just to clarify, Greg, two to three times; I guess you're talking about sales at the convention?

Yes, it's actually sales at the convention. Now, that will be then rolled out over the next six months or so, because, as part of this new [pause] software, the new software they have that requires a significant number of logistical things to be done before they put the software in.

So, as a result, in the past, we would sell software; we'd be able to just go directly into the store, arrange with the store to install it. Now, there's a certain number of checkmarks that have to be done; they call the six of six that has to be done by McDonald's prior to us putting the system in.

So now, we're in the process of managing that process, with the number of sales that we made during the convention.

Okay and, just again, drilling down on that two to three times number, that's two to three times the number you did at the 2006 convention?

Yes.

Okay, I see. And, John, just a little bit more; I think, in your initial remarks, you know, you said -- and I don't know exactly what you said but that you were confident that you could return to profitability this year?

That's correct.

Could you just help me out with sort of, you know, a range of if you did not return to profitability this year, sort of what are the assumptions or the underpinnings that would drive that? And, you know, if you are to return to profitability, sort of what needs to happen?

Well I think what needs to happen is we restore our McDonald's foundation business, which has been a significant contributor to the deficiency over the last year or more. And as we just reported, we think that that foundation has returned, and that we will start seeing a return to normal business, and then robust business after that. So I think that's a fundamental that has changed and therefore given us some confidence in the statement that we're going to be returning to profitability.

Additionally, we've made some big investments, continue to invest in those strategic areas that I've mentioned, and we have to have success in those strategic areas. I think the fact that our software sales were significantly up in the first quarter bodes well. I think that we need to clear some of the issues that have been slowing down our software deliveries over the last year that are, in fact, completed this quarter, so that we can move into the second half and enjoy some of the sales that have been delayed pending these internal software delays.

Beyond that, the channel expansion and the international, those are all things that we've invested in and we're looking forward to seeing some significant results from the investments that we've been making. So those are the things that underpin the statement that we're optimistic that we will return to profitability. To guess what could go wrong, I don't know how useful that would be. Right now I'm not looking at that. I think we've - I shouldn't say it quite that way; I look at it all the time, and think about it all the time, about what could go wrong.

But we do have our plans based upon known accounts, known products. So it would be guessing at things that are unknown that would take us off track and cause us to come back and say, "No, we were wrong, we're not going to be profitable this year." Right now we have confidence that we're going to be profitable.

Okay, great. And are you seeing more competition on the QSR side?

Greg, you want to take that?

Brian, I would say no; I would say it's the same competition we've had all along. So I would not see any additional competition on the QSR side. The same players are out there, the same players are competing against each other.

Got it. And Greg maybe one more for you; can you just give us an update on I guess where the testing stands with YUM! in China, and maybe just a general - can you give us an idea of how long that usually takes?

Yes, the testing has taken place in China, and we have satisfied the test, NCR has satisfied the test, and certainly IBM is the incumbent. They then asked for RFPs from each of us, pricing RFPs. We have submitted them; they have not been opened yet. However, the original statement they made to us was the fact that, although they wanted a second source that they expected, in order to provide business to that second source, that the second source would have to come in at a price lower than IBM. So assuming the fact that our bid is lower than IBM, which I believe it probably would be, we should have a certain amount of the business, unless IBM should surprise somebody.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS)

And at this time, with no further questions, I would like to turn the call back over to Mr. John Sammon.

Well if there are no other questions, thank you for listening in to the conference call. Goodbye.

Thank you for your participation in today's conference ladies and gentlemen, this does conclude the presentation, and you may now disconnect. Have a wonderful day.