PAR Technology Corp (PAR) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Par Technology Earnings Conference Call. My name is Fab and I'll be your coordinator for today. (OPERATOR INSTRUCTIONS.) I would now like to turn the presentation over to your host for today's call, Mr. Chris Byrnes, Director of Financial Relations. Please proceed.

Thank you, and I'd like to welcome everyone on our call this morning. I just want to get a couple of bookkeeping issues here out of the way. As the operator previously said, we will be recording the call this morning and it 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.

Joining me on the call today is Par Chairman and CEO, John Sammon, and Ron Casciano, the Company's Chief Financial Officer. 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 and 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'd now like to turn the call over to John Sammon, Par's Chairman and CEO, for his formal remarks.

Thanks, Chris. Good morning. Today I'll be presenting the results of our second quarter ending June 30, 2008. Second quarter revenues reached a record 57.2 million, a 14.8% increase from the 49.9 million reported for the same period a year ago. Net income for the quarter was 674,000, compared to a net loss of $1 million reported last year. The earnings per share for the period were $0.05 per share compared to a loss of $0.07 reported last year. Looking at the quarterly revenue breakdown, product revenue for the quarter was 20.8 million, up 13.3% compared to the second quarter of 2007. This increase derived primarily from increased domestic sales to McDonald's, CKE, KFC, and Catalina.

Service revenue for the quarter was 17.7 million, up 10.1% compared to Q2 of last year. Contributing to this increase were both field services and installations. Contract revenue was 18.8 million, up 21.4% for the quarter. This increase derives from two new long-term Navy contracts initiated last year. One involves a $9 million R&D contract to develop and deploy advanced sensor technology to detect enemy mines and IEDs. The other is a multi-year $33 million contract to operate a satellite communications network for the Navy.

Looking at margins, product margins for the quarter were 39.2% versus 41.6% last year. This decrease resulted from lower margins on a special project for McDonald's, offset by significant increases in higher margin software sales.

Service margins were 27.4% versus 26.2% a year ago. This increase resulted primarily from improved margins on field services and installations. Contract margins were on plan at 5.6%, compared to 5.2% last year.

Looking at expenses, SG&A for the quarter were 8.7 million versus 9.2 million last year, a decrease of 500,000. This decrease resulted from several factors, including stock option expense, reduced benefit costs and recovery of previously reserved bad debts. R&D expenses were 3.9 million versus 4.4 million last year, a decrease of 500K associated with planned reductions in R&D as we near completion of several development projects that were initiated last year.

In summary, Q2 was a turnaround quarter with record revenues. Hospitality revenues were up significantly due to a number of positive events, including the following. In Q2, we competed against numerous companies for the KFC domestic business and were again selected as their preferred vendor for the next several years. This important win contributed to Q2's revenue increase. In Q2, our domestic sales to McDonald's began a long awaited rebound with the release of new third party software. Domestic sales were up significantly, which we believe to be a very good indicator for the future. Sales of our InFusion QSR solution, consisting of POS hardware, software, and services to Hardee's and Carl's, Jr., contributed to Q2's record revenue.

Finally, sales of our new table serve products, the Catalina, including point of sale hardware, software, wireless order entry, and pay at table contributed to the domestic revenue growth. International hospitality revenues were down 12% for the quarter and 7% year-to-date. This decrease reflected larger than normal shipments to McDonald's International in 2007 and poor economic conditions this year in some regions of Latin America. We feel that in spite of the slow start that our international business will recover in the second half.

Hospitality margins were off for the quarter due to a large margin special project conducted for McDonald's which masks the significant improvement in software content in the product mix. It is our intention to continue to increase software content and gradually improve product margins to the low 40% level.

Government revenues for the quarter were 20--up 21.4% and for the year-to-date up 20.9%. As explained earlier, these increases derived essentially from new Navy contracts initiated in the second half of 2007. With this excellent start we feel that we are well on our way to achieving and possibly exceeding this year's plan. While contract margins for the quarter were below the normal range of 6 to 7%, they were nevertheless on plan. We traditionally run lower profits at the start of new fixed price contracts, which gradually improve over the course of the job. Since we are early in a multi-year contract with the Navy, our margin is temporarily depressed. We anticipate continuing success in our government business, considering our pipeline visibility and the current backlog of 142 million, which is up $6 million from Q1.

During our last conference call at the end of Q1, I stated that the most important issues related to our future success will be determined by the health of the markets, the improvement of our McDonald's business, and the success of our strategic plans. I'd like to spend a few minutes to update you on our view of these issues.

First, the health of our markets. We continue to assume that our markets will remain healthy throughout 2008 and for the foreseeable future. There are reports of business softening in the table serve sector of the restaurant market, yet virtually all of our QSR customers have reflected confidence in their business, especially those who have brought 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 opportunities.

Thus far, we have detected a very slight slowdown in our high-end spa and resort markets as sales cycles lengthen a bit. Market reports generally indicate that the high-end resorts and hotels remain strong while the midlevel hotel market is slowing. As for our government business, we do not believe that we will be impacted by recessionary threats.

Now looking at our McDonald's future, our domestic McDonald's business has begun to improve. With the release of the long awaited domestic software and our firsthand experience with the performance of our integrated product, we are optimistic that several thousand stores will be upgrading their POS system over the next three years. We further expect this replacement business to ramp up gradually as we work with McDonald's on new deployment processes that are required for this complex software.

Another factor influencing the timing of the ramp-up relates to the potential competition for capital between POS upgrades and McDonald's high priority beverage program. While we do not yet fully understand how this will play out, we are--we were nevertheless faced with this potential issue this quarter and we're pleased to see this quarter's substantial increase in sales.

Success within the McDonald's account is a fundamental platform for our financial success since it will contribute to growth over the next three years. However, reduced dependency and improving profitability in the short-term will depend upon the execution of our strategic plans involving increasing software, expanding channels of distribution, and international growth. So while looking at our strategic investments in our plants, restaurant software was up sharply again in Q2 with sales of our new table serve product to both new and existing table serve accounts, and InFusion sales to the QSR market.

Now this is certainly good news since over the past year we have been reporting internal software delays. We have made good progress in expanding software sales and continue to believe that we're on track for a good second half.

In Q2, we experienced continuing strong growth in our dealer channel business driven by increased sales of our bundled hardware and software, which includes the pixel software and our POS hardware. While this sector of our business is relatively small, we are pleased with the progress to date and feel that our investment in this area is beginning to demonstrate real success. International sales for the quarter were down coming off a larger than normal McDonald's sales in Q2 of 2007 and the fragile economy in certain sectors of the--of Latin America.

Last year, we enjoyed larger than normal shipments to China, Canada, and Thailand, which were not repeated this year. We have invested substantially in the expansion of our international presence and capabilities with the knowledge that the international hospitality market will continue to provide the greatest opportunity for growth. In spite of the slow start this year, as I said earlier, we feel that we are still on track for good international growth in the second half and beyond.

To summarize, we feel that our company has made the turn and is heading in the right direction. We believe that the health of our markets is generally good, that our McDonald's business is beginning to pick up, and that our investments are showing definite signs of progress.

This ends my formal remarks, and now I'd like to turn it over to Q&A.

(OPERATOR INSTRUCTIONS.) And your first question will come from the line of [Demenda DeSilva] from [Prescott Group]. Please proceed.

Hi, guys. Great quarter.

Thank you.

A couple of questions for you on McDonald's. It sounds like they're ramping up. And on the expense side, as they start to increase their orders are you going to have to see some (inaudible) expenditures as well?

No, I don't think the expenditures are going to go up as they start ramping up. I think that we have the capacity within our organization to deliver the product and deploy the product as the ramp up begins. So there'll be some proportional increase in expenditures, especially in the deployment area, but I don't think that's going to impact negatively the financials.

And so far, how many McDonald's restaurants have started the program versus what's left in the opportunity for them to deploy wider?

Only a very small amount. I would say probably in the range of 300 stores maybe to 500 at most I think in the domestic U.S. Internationally, a significant number have installed the third party software. But the U.S. has been lagging and has been behind in causing us delayed sales for the last 18 months. But we've put in several hundreds of stores with the new software and based upon the experience that we've had, it's working quite well. The only difficulties that we're having is really the deployment. The software is quite complex. It does quite a lot of new things for the store and it takes effort to deploy the software and the hardware.

So we're delivering an integrated solution, which is much more complex than the solution that we were previously delivering. And that's--that has an impact in terms of our ability to ramp up quickly. So as far as we're concerned, we've turned the corner. The good news is that it's the only software that's available for the licensees of McDonald's and corporate stores for McDonald's. The old product has ended life. And we have been installing it and it's working well.

John, I mean, there's a value proposition that's pretty strong for the individual restaurants. Are they--are you getting pretty good feedback? I mean, are you--if I recall correctly, they could take several more cars through the drive-thru that could be more efficient than the restaurant.

Yes. I think there is a value of proposition, but that is to be discovered, I believe. It's--the strategic initiative that McDonald's has, which is their top priority, is to roll out their beverage program. And the beverage program, as you may have been aware of in the press, has some mixed reviews right now. But there's different levels of the beverage program. The basic coffee program is the lowest level and that's the one that is receiving the press where some licensees are pushing back. But the more advanced program sells upscale drinks like Smoothies, for example, which has only been released to a couple of regions within McDonald's and those sales are doing extraordinarily well and driving profits.

Now, speed of service through the drive-thru is essential for the beverage program. And speed of service is one of the attributes of the new software, which is a compelling story then for the adoption of the new software in conjunction with the more advanced beverage program. But all of this has to be discovered. I mean, it's one thing for McDonald's to publish the speed of service increase, which you were just referring to, and showing that the new software does in fact statistically prove that they can put more cars through the drive-thru. But it's another thing for the licensees to adopt both the software and the advanced beverage program. But it's our belief that as that information becomes solidified throughout the McDonald's community that there will be a strong value proposition for putting in both the software in conjunction with the advanced beverage program and therefore not have competition for capital.

My final question is we haven't heard yet talk about China and India. And I mean, I think that's a huge opportunity out there. Could you comment a little bit on India and then kind of the size of the KFC opportunity?

Well, in--we have opened up an office in India. McDonald's has only a handful of properties in India, but they have expansion plans to grow there. We are the provider with it for McDonald's in India currently. KFC has a bigger presence in India and we expect that we will be participating more fully in their business. As far as China is concerned, our principal account remains McDonald's and we're doing quite well with the McDonald's account. We are the sole source provider, and so as McDonald's expands in China, so does our business.

As we reported in the last quarterly report, we were in competition for the KFC account in China. They have declared they would like to have a second source. The primary source is IBM. A number of companies competed for the second source position, including IBM. And at this time it's my best understanding that IBM has the lowest price. Nevertheless, they are still talking to us about us becoming a potential second source for them. But right now, IBM is the sole supplier to KFC in China. So we're still in the game, but right now we're not the lowest priced supplier to KFC China.

What about YUM! Brands?

Well, YUM! Brands is of course--has--in China has both the KFC and the Pizza Huts. Pizza Hut is not one of our major targeted areas. YUM! has its own software for the Pizza Hut chains and with that they have also a hardware product, which is a customized product that they have put into their stores. So Pizza Hut has not been one of our targeted concepts. Within YUM!, KFC and Taco Bell are our targeted concepts.

Thanks, guys. Keep up the good work.

Thank you.

Your next question will come from the line of Brian Murphy from Sidoti and Company.

Good morning. Thanks for taking my question. John, could you give us a little bit more color on the special project that you're doing for McDonalds? And is this sort of a one-time thing, or can we expect these projects to continue in the second half?

I think you can expect these projects to continue. Basically what it involves is doing some IT work around the requirement for upgrading stores for the beverage program. There's--there is some adjustment of the point of sale system within the environment as they make physical changes to accommodate the beverage program, and that's the special project that I refer to. It is a lower margin product--project, and it has negative impact on our margins, but of course, it is contributing to the overall profitability. We expect that it will continue and it will be continuing as long as the beverage program is active, which we would expect will continue on through 2009.

But I nevertheless feel that with the increasing business with McDonald's, the impact of that depression of our product margin will be mitigated by and offset by higher margins, both within McDonald's' account as we upgrade stores and as--and also as we increase the software content of our product mix.

And I think you touched on the service gross margin in your comments, but I think I missed it. That's--I think that's the highest service gross margin that I've seen from you guys. What's driving the strength there?

Well, primarily it's the installation and the field services. They are both carrying higher margins than normal. Ron, do you have any additional thoughts?

Well, a lot of it Brian is the additional volume of revenue in those areas that are absorbing some of the fixed costs in those areas. And it's an example of how we can leverage the infrastructure once the business picks up. So that's the main reason why you're seeing improvement there.

Okay. And the contract revenue--I mean, I think what we were expecting for the year was something in the sort of high single digit range and the first half it's running at over 20% now. I mean, should we be modeling contract revenue down sequentially in the second half?

Well, I think you'll see some leveling off in the second half, Brian. We mentioned in the first quarter that we had a lot of pass through work, material buys, et cetera, on some of these new contracts that will taper off somewhat in the second half of the year. But as John said in his remarks, in spite of that tapering off we still have a good shot at beating our plan for the year. And the plan was the high single digits.

Great. And just with operating expenses, they seem to be sort of trending down toward historical levels here. What can we expect in the second half? Is this second quarter level sort of a good run rate for the rest of the year?

I think you'll--SG&A is probably a good run rate. That might pick up a little bit in the second half of the year as hopefully sales commission grow, et cetera. R&D though will go the other way. That should taper off even a little bit more than we're--what we've been running.

Great. Thanks very much.

You're welcome.

You're welcome, Brian.

Your next question will come from the line of Vincent Coliccio from Noble Financial.

Ron, I guess this is for you. What was the McDonald's and YUM! contribution as a percentage of revenue?

For the six months, McDonald's was 21% of the total revenue and YUM! Brands was 14%.

Okay. And it sounds like you obviously have a lot more comfort with your McDonald's business, John. Is there--could you give us a sense for what kind of growth we could be expecting in the second half from overall McDonald's business?

Well, as I said in the remarks, I think we're in a discovery phase in terms of the ramp up in our business. I think gradual is the way I see it. There's just too many uncertainties for me to predict when things are going to rapidly change. And you can see that in the press relative to this beverage program. We're still in the state of discovery of what the best procedures are for the deployment of the complex software. But I would say that things are heading in the right direction. The good news is that in spite of these issues about competition for capital, the quarter was quite good. And that competition existed in the quarter. And if we use that as a measure, I would say that we're right on--we're on a good track for increasing our business. But it will be a gradual buildup through the end of this year and into 2009. As the field discovers the values that we had talked to a moment ago about the value proposition of the software and its relationship to the beverage program, we really feel that there's going to be a ramp in the--in business with McDonald's because there are clearly thousands of stores that need to upgrade.

If I heard you correctly, John, in your prepared remarks you said the Hyatt Hotel demand remained strong and mid-level hotels are seeing some weakness. And your hotel product is a--your Springer-Miller is a high-end product. So does that mean that we should see a decent second half versus the year ago period?

I think it's going to be okay. I don't there's going to be any ramp-up in that business. I did indicate in my formal remarks that we're seeing a lengthening of the sales cycle. It's light. It's not anything major. But we're not looking for any significant growth in that business in the second half. So I think the--what I was trying to convey is that the health of this high-end market remains good, that there is a slight extension of the sales cycle. But we don't see any particular rapid growth within that business in the second half.

Okay. And back to the international side a little bit. What encourages you about the international side of the business for the second half of the year? I know you mentioned KFC, but besides that?

Well, I think looking at the pipeline that we have and the opportunities before us and some of the targeted areas in Latin America that I spoke to about weakness, there are accounts in that area that have indicated that they expect their business to be bouncing back and that they expect to do business in the fourth quarter. So it's a combination of the business that we see in Europe and Asia and improvement in Latin America that lead us to believe that we'll have a pretty good second half in our international business.

Okay. And two for you, Ron. What was the cash from operations and DSOs in the quarter?

Cash flow for the quarter--operating cash flow was about a negative $2.5 million and DSOs are running on the commercial side about 68 days and on the government side about 66 days.

Actually, capital spending, also. Do you have that one?

Sure. Capital spending for the quarter was about $500,000 and depreciation and amortization was about 1 million.

Thanks, guys. Nice quarter. Thanks for answering my questions.

Thank you, Vincent.

You're welcome.

Your next question will come from the line of Tony Brenner from Roth Capital Partners. Please proceed.

Thank you. Help me understand one thing. As the McDonald's domestic business ramps up as you replace equipment in an increasing number of McDonald's units, does that have a beneficial effect on product profit margins or a negative effect?

Tony, what--the McDonald's business because there is no software in it--as you know, they buy their software from a third party--carry a lower margin than our normal sales, which obviously most include software. So if everything else is equal and the percent of McDonald's revenue compared to the rest of the business increases, that will drag the margins down a little bit on an overall basis. But the plan for the second half of the year is we hope to see some increasing software business over the first half that will help mitigate, if not offset, the margin impact of the growing McDonald's business.

Well, that's always the hope.

But of course, we're very happy to have the growing McDonald's business.

I understand. Second, you indicated that the--most of the R&D program that has inflated that figure is behind. As I recall, much of that work had to do with upgrading your web-based software and adapting it to QSR. I wonder if you could just elaborate a little bit on what kind of success you're having in placing some of the software, both QSR and table serve, to new accounts?

Well, the R&D that I was referring to is all of the R&D across the corporation. A large portion, as you indicate, Tony, is going towards software. But there's also hardware components. And the completion of some of the projects I think I'm referring to more on the hardware side. We continue to have investments towards next generation software. As far as success is concerned, I think you looked at the Catalina account where we're in a rollout currently. And that is the advanced software. It is a table serve implementation and it involves all of the products and it's not only the hardware, but it's also the software, it's pay at table, it's wireless order entry, and it's configuration management above a collection of a couple hundred restaurants. And so, it's a very good example of some success that we're having with our next generation platform.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS.) And your next question will come from the line of Sam Bergman from Bayberry Capital.

Good morning, John, Ron, and Chris. How are you?

Good, Sam.

Good morning, Sam.

Very, very nice quarter. A couple questions--probably three or four actually. Could you tell me how much McDonald's business was this quarter in dollar terms versus last year '07 second quarter? I know you gave the six months, but I'm wondering what the figures were for the second quarter.

Yes, Sam. I'll give you the--we just disclose the percentages. For the percentages, McDonald's was 23% of the business in the quarter. Now, as you know, that's worldwide product and service sales to McDonald's.

Right.

And the [similar] number for YUM! Brands was 16%.

So what was McDonald's business in '07 second quarter percentage-wise?

It was 27% and YUM! was 14%. It's global. That's domestic and international.

And remember, as John said in his remarks, the McDonald's international business was down this year versus last year.

Correct.

But the domestic business is up.

Can you also talk about the recent purchase of Orderman by Radiant? Does that put SIVA technology at any disadvantage?

No, I don't think it puts SIVA's product at any particular disadvantage. Orderman is a very strong product in Europe. To the best of my knowledge it hasn't entered this country at all. It's very, very European. And so, I don't--and since we haven't taken SIVA to the international marketplace at this point in time, they are really addressing two different market space.

If you did take SIVA overseas, can they go head to head with Orderman and not--?

Well, yes, I think so. I mean, Orderman is a particular product that has gained some momentum in Europe as an order taker--remote order taker. But it's not an exceptional product and there's a lot of competitors that have products that are similar to the Orderman product. I think they were probably one of the first in Europe to bring out that product, which has gained them a nice collection of customers. But I think as far as the technology is concerned, I don't think there's anything particularly remarkable about that product.

Is SIVA's product line or revenue for the quarter broken out at all in the Q?

No, it's not, Sam.

It's not? Can you give us any figures on that?

No, we can't.

No, we can't. Okay. The next question is can you tell us the opportunities you guys will have with KFC in the second half? Can you talk about some of the opportunities internationally and in the U.S.?

Well, we have opportunities both in the U.S. as a consequence of this recent competition that we went through and we would expect we would have a continuation of business as a consequence--a continuation of the second quarter of business as a consequence of that decision that KFC has made to have us as their primary supplier going forward. As far as international is concerned, we do have some European opportunities where we have integrated our InTouch product with an ASP back office product of a third party company. And that has successfully been tested in some regions in Europe and we would expect business to develop as a consequence of that as well.

Is there any extra work that you guys will get from KFC this--the second half of the year from that exclusive contract that you won, or is that just timed over several years?

It's not an exclusive contract, Sam. It's very similar to a competition that was--that we went through a couple years ago where everybody that has products and services to offer to--that's hardware products and services--to offer to KFC has been invited to bid. And we have gone through a second round after winning it a couple years ago and becoming the primary supplier. We've just recently, in this last quarter, gone through that same competition and have reestablished our position as the primary supplier to KFC. And with that decision there was an increase in KFC business in the second quarter, which I would expect to be a baseline for going forward over the next couple years.

And the last question is regarding the opportunities in China. Can you talk about--I know you spent money last year and ongoing you're spending money. Can you talk about opportunities in China this quarter that presented itself to you guys versus prior quarters or versus last year?

No, that's a long-term effort on our part. As you know, China has a very dynamic economy. We have a strong position with McDonald's and we're using that position in order to take on new business, win more business, and we have strategic plans that I'm not at Liberty to talk about at this point in time. So there's nothing specific, Sam, that I could point to that happened within this last quarter. I think we are continually optimistic about the possibilities in China, but there's nothing to announce at this point in time.

So in other words, the strategic plans that you kind of talk about, when do you think that will come to fruition? Will it be the second half of '08 or '09?

I think of strategy as being something that happens over three to five years. So the direction that we've been talking about are directions that will improve our business, our profitability. We'll win new accounts. We'll reduce dependency on our major accounts as the strategy unfolds and we have success. And that's why I've been trying to focus on the strategy and some of the results of that strategy in the last two quarters to indicate that we're generally satisfied that we're making progress. But you shouldn't expect that all of a sudden there's going to be some big increase in business. I look at it as a long term gradual improvement of the business.

Could you tell me then if the strategic options or what's happening in China include or does not include outsourcing your hardware to China?

Well, we actually have our own assembly manufacturing of--operation in China. That was something that the McDonald's account wanted. And as--in order to keep our promises to McDonald's, we have established a manufacturing capability within the country, which we expect to then exploit because there are lower costs in that part of the world. And so, we're not--we're actually not following an outsourcing. We're actually doing our assembly work in China in our own facility.

Is it your expectation to bring more of that business to China from other accounts that you have, or is it just the McDonald's account that you--?

--Right now, it's just the McDonald's account. But I think as we understand the costs in China and see the advantages in that part of the world, I think it would be quite logical to do our manufacturing assembly in Asia itself, especially for the Asian market.

Can you give us any idea what the savings are on the hardware end--manufacturing overseas?

No, I really can't, Sam.

Okay. Thank you very much. Have a great second half.

Yes, thank you.

That does conclude the question and answer session of today's conference. I'd like to turn it back over to Mr. Sammon for closing remarks.

John Sammon; Well, thank you for listening in to our call, and have a great day. Goodbye.

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