PAR Technology Corp (PAR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter PAR Technology earnings conference call. My name is Ann and I will be your coordinator for today's call. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session at the end of the presentation.

I would now like to turn the presentation over to Mr. Chris Byrnes, VP of Business and Investor Relations.

Thank you, Ann, and I would like to welcome everyone on the call this morning for our third-quarter earnings call this morning.

I would like to take this opportunity to take care of certain bookkeeping issues in regards to the call. As Ann 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'd like 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 upon 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 would 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 will be presenting the results of our third quarter ending September 30, 2008. The third-quarter revenues reached a record $58 million, a 12.4% increase from the $51.6 million reported for the same period a year ago. Net income for the quarter was $828,000 compared to a net loss of $862,000 reported last year. The diluted earnings per share for the period were $0.06 compared to a loss of $0.06 reported last year.

For the nine months year-to-date, revenues reached a record $167.3 million, up 12.1% increase when compared to the $149.3 million reported one year ago. Net income for the nine months year-to-date were $757,000 versus a net loss of $3.2 million for the first nine months of 2007. Diluted earnings per share for the first nine months year-to-date were $0.05 compared to a loss of $0.22 per share reported for the same period in 2007.

In looking at the quarterly revenue breakdown, product revenue for the quarter was $20.9 million, up 15.8% compared to the third quarter of 2007. This increase derived from strong QSR sales to McDonald's, KFC, Burger King, Carl's Jr., and Hardee's.

Service revenues for the quarter were $19.2 million, up 12.6% compared to Q3 of last year. Contributing to this increase were increases in professional services associated with the deployment of software and the support of McDonald's beverage program.

Contract revenue was $17.9 million, up 8.4% for the quarter. This increase derives from several new long-term contracts. Looking at margins for the quarter, product margins for the quarter were 42.6% versus 40.9%, up 1.7% from last year. This increase resulted from higher software content in the product mix.

Service margins were 24.5% versus 22.2%, up 2.3% from a year ago, and this increase resulted primarily from improved margins on field service. Contract margins were on plan at 5.4% compared to 7.6% last year. Contract margins typically build over the life of a contract, and lower margins this quarter reflects the startup of some new IT outsourcing jobs.

Now turning to expenses, SG&A expenses for the quarter were $9.1 million versus $8.6 million last year, an increase of $500,000. This increase resulted from increased sales expenses associated with our investment strategy involving software, channel expansion, and China. R&D expenses were $3.6 million versus $4.6 million last year, a decrease of $1 million, and they were associated with the planned reduction in R&D as we near completion of several development projects.

Year-to-date, product revenues were up 10.3%. Margins improved by 160 basis points due to increased software in the products mix. Service revenues were up 9.6% and margins improved 200 basis points. Contract revenues were up 16.6% and margins decreased by 120 basis points. SG&A increased 1.7%, reflecting investments in channel expansion in international, and R&D decreased 9.3%.

Okay. Now moving to a summary, we feel that Q3 was a good quarter, with record revenues driven by strong sales to our QSR restaurant accounts worldwide. Hotel and spa sales were up worldwide in spite of weakness internationally. Our Government revenues were up due to new wins in the IT outsourcing sector.

Gross margins for the quarter were up 1.1% to 25.1%. This increase resulted from increased software content in the product mix and a higher content of professional services, but was offset by lower than average contract margins associated with the early phases of new government contracts.

While contract margins for the quarter were below our normal range of 6% to 7%, they were nevertheless on plan. And as I mentioned earlier, 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 in the early stages of multiyear contracts, our margin is temporarily depressed.

We anticipate continuing success in our government business considering our pipeline visibility and the current backlog of $137 million.

During our last two conference calls, at the end of Q1 and Q2, I stated that the most important issues related to our future success will be determined by the health of our markets, the improvement in our McDonald's business, and the success of our strategic plans. I'd like to spend a few minutes to update you on the view of these issues.

First, the health of our markets. We all know that we are currently in a global recession and its impact will vary in each of our market segments. For restaurants, it is our belief the QSR market will remain strong through the recession, while sales to table-serve accounts will slow. This reflects the squeeze on discretionary spending resulting in people moving downscale to QSR restaurants and some avoiding eating out at table-serve restaurants at dinner time. I believe that Jim Skinner, CEO of McDonald's, spoke for most of the QSR industry when he recently said that McDonald's is recession-resistant.

However, our restaurant customers normally finance the purchase of our products, and thus the availability of portable financing is fundamental to our business. While available financing is improving and while we have not yet been impacted by the lack of financing, this issue bears watching.

As for our hotel, resort, and spa business, we feel that the recession will have a modest impact. We sell to five-star high-end facilities around the globe whose customers' lifestyles are not generally altered by normal economic cycles. However, this cycle is not normal, as reflected in a recent industry report showing a 16% drop in luxury segment revenue.

These hotels are holding their rates in anticipation of a recovery by the second half of next year. This strategy is an attempt to avoid the mistake made after 9/11, where hotels dropped rates and later spent years to recuperate the pre-9/11 rates after the recovery. We are planning for a modest growth in this sector of our business, but are watching for any signs which would dictate the need for immediate corrective actions.

It has been our experience that our government business is unaffected by economic cycles, as well as being somewhat impervious to cuts in the defense budget. This is because our ITL sourcing business focuses on cost-effective operations of computer and communications facilities, which must function independently of the conflicts around the world. Additionally, it is our evidence that our sector of government R&D spending has only fluctuated modestly during times of military cutback.

So in summary, our main concerns relative to the health of our markets are primarily related to three issues -- the evident slowdown in our table-serve business; the potential slowdown of high-end hotel and spa business; and finally, the continuing availability of affordable financing for our POS customers.

Currently, table serve is a small part of our business, and for now, we are planning for modest growth in the hotel sector, which makes our biggest concern the continuance of availability of affordable financing.

Next, turning to the McDonald's business. Our domestic McDonald's business is improving. With the release of the long-awaited third-party software and our experience with the performance of our integrated product, we are optimistic that several thousand stores will be upgrading their POS systems over the next three to four years. While this opportunity provides a strong foundation to our future business, it is nevertheless ramping up slowly due to two issues.

The first issue relates to the deployment process associated with this complex software. We are working closely with McDonald's to gradually increase the deployment rate and now expect to achieve full capacity by Q2 of next year.

The second issue affecting the ramp-up of POS sales relates to the competition for capital between POS purchases and McDonald's store upgrade projects, such as their high-priority beverage program. We are currently participating in the nationwide rollout of the beverage program, which is scheduled for completion by the end of Q2 of next year. Based upon our best estimates, we are anticipating slow growth in McDonald's sales through the first half of 2009, with acceleration thereafter.

Success within the McDonald's account is a fundamental platform for our financial success, since it will contribute to growth over the next three to four years. However, reduced dependency and improved profitability in the long-term will depend upon the execution of our strategic plans involving increasing software, expanding channels of distribution, and international growth.

Now, turning to the subject of our strategic investments in those areas of software channel expansion and then international. First, software. Restaurant software was up sharply again in Q3, driven by infusion sales to the QSR market. In addition to this success, we have seen a corresponding sharp increase in higher-margin professional service sales associated with the deployment of this software.

In the channel expansion area, in Q3, in spite of the general slowdown in the table-serve market, we continue to experience growth in our dealer channel which targets independent table-serve restaurants. This business was driven by increased sales of our bundled hardware and software product, which includes our Pixel software with our POS hardware. While this sector of our business is still relatively small, we are pleased with the progress today and feel that our investments in this area are beginning to demonstrate real progress in spite of the poor economy affecting the sector.

We do not intend to cut back on our investments in building out our dealer channels, but have factored down our growth plans to reflect the impact of the recession.

Finally, turning to international, in our international restaurant segment, where we have been investing, sales were up significantly, driven by strong QSR sales, with sharp increases in Europe, Asia Pacific, and South America. This business reflects the strength of the global QSR market. We are invested substantially in expansion of our international presence and capabilities with the knowledge that the international hospitality market will continue to provide the greatest opportunity for future growth.

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 major markets, QSR and government, are very good, that our McDonald's business is slowly ramping up, and that our investments are showing definite signs of progress. Barring unexpected problems related to a dysfunctional credit market preventing our customers from obtaining affordable financing, we look forward to continuing improvements in our business.

This ends my formal remarks. I'd like to move to questions that you may have.

(Operator Instructions) Tony Brenner, Roth Capital Partners.

Thank you. I have two questions. First of all, John, you were talking about slower deployment when you were speaking about the McDonald's business and a slower ramp-up in capacity. Would you explain exactly what you mean?

Yes, Tony, good morning. The software itself is fairly complex, and to get into restaurants it takes quite an extensive process to get it in. The process is a joint process between some McDonald's activities and our activities.

In order to assure that the software goes in smoothly, which it has been, McDonald's has a defined number of restaurants that we can install per month. And through joint efforts with McDonald's, we have defined a number of systems that we can install each month, ramping up through next -- I believe next April.

And the idea then is that we have an expansion planned and that we are all on board and will do a professional job to get the software deployed. So on the basis of that plan that we have put together with McDonald's, we expect that we will be at full capacity and any orders we take in we can then fill from that point on, without any restrictions relative to the number that we -- that McDonald's would like us to install each month.

You are installing the software that is being provided by a third party. Is that --?

That's correct. It's third-party software. We take that software and we stage the software with our hardware. Then we deploy it to the marketplace and do the training on that software and on our system.

And it will take the next three quarters or so before that software is fully system-wide installed? Is that correct?

No. The ramp-up will get us to full capacity by the second quarter of next year. And from that point on, it will be sort of business as usual. We will be able to book quarters and ship without any restrictions on the number of systems that we can deploy in any quarter.

That number is ramping up rather quickly.

So in the third quarter, in other words, there were few if any POS systems sold to those McDonald's franchisees?

No, that's not correct. We are currently taking orders and we are filling those orders. And we are filling them in conjunction with the mutually-agreed-upon schedule of how many installs that we can do per month.

If you'd like a little more detail on it, our capacity is quite good. But there's some work that McDonald's has to do in order to get the stores ready. They have their own regional people involved with the installation. And they are doing this because they want this installation to go very, very smoothly, and it is going smoothly as a consequence of their activities plus our activities.

As far as capacity is concerned, we have the capacity. The long pole on the tent is the professional work that McDonald's personnel are doing in preparation for our installation.

Okay, second topic. What portion of your sales are financed by [PAR Credit] and what financing constrictions does PAR Credit have?

Ron, do you want to take that?

Sure. Tony, I would say overall a small percentage of our sales are financed by PAR Credit, who is our third-party leasing partner. We have been talking to them and their funding sources are still available. The price has gone up, of course, but they are still doing deals.

But there's probably, I'm sure, a lot of other sources that we are unaware of that our customers go to to finance deals. We don't see those financing sources, but we know that they are out there. But again, as John said in his remarks, they haven't impacted us yet, but we have to keep an eye on it.

Okay. In referring to this issue, are you seeing McDonald's franchisees unable to obtain financing?

No, we have not seen that at all. In fact, since we have a close relationship with PAR Finance, we check on this subject daily. And I think the cautionary remarks that I made are more commonsense remarks on my part, rather than any evidence in the marketplace. We haven't seen any evidence at this point in time of a lack of available funding.

The bar for funding has gone up, which has not affected our customers, and our customers are paying a bit more for financing. But it has been available and we haven't seen any impact at this point in time.

Okay. Thank you.

Vincent Colicchio, Noble Financial.

Good morning, guys. John, are we still talking about your software on the restaurant side as InFusion and iSIVA as separate products?

Yes, Vince. Good morning, by the way. Yes, they are separate products. InFusion is targeted at the QSR market space for restaurateurs that have many, many restaurants and are focused on fast food. Whereas the iSIVA product is targeted at table-serve restaurants, multi-facility enterprises as well.

Our Pixel software is targeted towards the dealer marketplace, much simpler software for dealers to sell and sell. And that product, the Pixel product, is targeted at table-serve restaurants, usually an independent restaurateur having made maybe one or a couple of restaurants.

Thanks for the clarification. So InFusion and iSIVA, how would you say their growth outlook looks going into the December quarter versus what type of growth you saw in the September and June quarters, respectively?

Well, QSR is strong, so our InFusion product is doing quite well. And that's the reason for the increase in software in our product mix. iSIVA is targeted at the table serve, and as a consequence that is slow at this present time. Pixel being targeted for the dealer marketplace potentially can slow down, but we have not seen any evidence of that. In fact, we have increases in Q3 in our dealer channel with our Pixel product.

Are the increases on the dealer side due to adding more dealers or existing dealer partners seeing growth?

It's both. Our investment that I talk about in building out the dealer channel involves staffing up our sales force to go out and work with dealers, to recruit new dealers and to make our current dealers much more productive. And there's a whole process that has been put together in our strategic planning for doing this function.

So the answer to your question -- the simple answer to the question is that it's both -- that we have signed up new dealers, and to sign up additional new dealers -- that is a focus of ours -- but we are also doing a lot to strengthen the current dealers, inclusive of giving them staged software on appropriately priced hardware. So it's a bundled product which is very easy to install.

Also, we are leveraging our service organization, which is a national service organization, to support dealers with things like 24/7 call center and other supportive activities.

Ron, one for you. What was McDonald's and Yum! as a percentage of revenue in the quarter?

For the quarter, McDonald's was 25% of total revenue and Yum! was 16%.

Okay. I'll get back in the queue. Thanks.

(Operator Instructions) Brian Murphy, Sidoti & Company.

Thanks for taking my question. Good morning. John, in your remarks, you referenced Burger King as one of the areas of strength. I'm wondering if you are getting some new traction with that account.

Good morning, Brian. The answer is yes. One of the focus areas that we've had is in the area of branded sales. We are very strong in QSR. And our basic strategy is that we take our InFusion product and we customize it in the sense of bundled reports that are specific for the particular brand. And then we have instituted quite a lot of professional services around the deployment of that product. And we have targeted several brands, and BK is one of those brands. And the answer to your question is, yes, we have had increased sales and it's an expanding portion of our market.

Maybe, Ron, a couple for you. Could you just speak to the uptick in accounts receivable?

Well, Brian, as John mentioned, it was a record third quarter for us, and a lot of that revenue went out in September. And therefore, the uptick was expected in AR.

Okay. Could you give us cash flow from operations for the quarter?

Cash flow from operations for the quarter was a positive $1 million, Brian. And that makes year-to-date negative 5.7, so we are trending in the right direction.

Okay, great. It sounds like maybe we should expect sort of modest top-line growth over the next few quarters, given that it's going to take some time for McDonald's to kind of ramp up to full capacity. But it sounds like you are also not going to hold back on continued channel expansion. I mean, should we expect to see an uptick in SG&A as a percentage of sales?

Well, as far as the growth going forward, I think your description is correct. But please take note that we have some seasonality in Q1 every single year. So with that said, I would say your characterization is correct. The question about SG&A --.

Yes, Brian, SG&A may trend up slightly in the next couple quarters, but not by a significant amount -- as a percent of total revenue. The dollars amount, of course, will go up, but as a percent of total revenue, it will only go up slightly.

Okay. Thanks very much.

[Sam Bergman], [Bayberry] Capital Management.

Good morning, John, Ron, and Chris. A couple questions. On -- the top line was a pretty nice number. I'm just wondering on the bottom line, with software sales increasing, why weren't the margins better on the bottom line? I'm not -- seeing that you did decrease R&D about $1 million.

Do you want to take a shot? I can take that.

Well, Sam, like I said, we had 12% growth in the quarter on the top line and the margins did improve. We are actually a lot better positioned this quarter than we were a year ago, and we've got things trending in the right direction. As revenues grow next year, we will produce a bigger operating margin. But right now, we are satisfied with where we are at based on the current economic conditions.

I'd to it, too, is that the government margins are down for the quarter and down for the year as a consequence of starting up with some new jobs. But we feel that that will improve as we move forward into these long-term multiyear contracts. So that's depressing our margins a bit.

What of the proposal -- the proposal outlook for the government side right now, how does that look?

I think the pipeline looks good. I think we are on track for this year and we have a good plan for next year as well. Our LMS business, Logistics Management business, which is reported within our government sector this year and will not be reported in that sector in next year, is doing quite well. And so as far as this year is concerned, I would say the government business is doing very well and it's on track.

And looking forward, as we separate out the Logistics Management business as a commercially focused business, our government business will take a slight hit in revenue. But the core business itself that the government has been providing will continue to grow. It's got a $137 million backlog and the pipeline looks good.

In terms of the SIVA software, can you give us an idea right now if there's been any other contracts awarded in the past quarter to the software side of the SIVA business or not?

There's probably some very small restaurants that have taken the software, but nothing big. That sector of our business has slowed down, as I reported in my formal remarks, and we have had revenue from the SIVA product, but most of it has come from existing customers.

I see. And the last question's in terms of the cash balance. Is there any need at all in the next 12 months to go to the equity markets for more dollars or not?

We don't plan to have that need.

Sam, we have a committed $20 million line of credit and about $12.5 million of it is still available at the end of September. So we feel confident that we have enough liquidity going forward.

When is that credit renewable?

It was renewed for three years in June of this year, so it will be up in June of '11.

Very good. Thank you very much.

(Operator Instructions) Vince Colicchio, Noble Financial.

Just a couple housekeeping, Ron. Capital spending, what was that in the quarter and what was depreciation and amortization?

Sure, capital spending was about $200,000 for the quarter, bringing the nine months totaled to $900,000. And depreciation and amortization was $1.1 million for the quarter, bringing the year to $3.1 million.

And a question for you, John. Is there anything -- in terms of China and India as big international opportunities, are there any investments that you made in the quarter there and should we expect to see you to continue to invest in some of these mega market opportunities?

We are not planning on cutting back on our investments. We are particularly focused on China. And we haven't made any new investments in China in the quarter, but in our plans going forward, we will no doubt be increasing our investment in that particular area.

And when you say increasing investment, does that mean local sales offices? What are you doing?

We have a sales office now. We have a manufacturing facility in Shanghai, in China. What I mean by that is we are going to be expanding our -- I anticipate expanding our personnel that we have in all areas of our business as business comes in. We are not investing ahead of the business, but we are not cutting back on our investment that we have. And as we -- we are anticipating that we are going to have new business in 2009 in China, and as that business comes in, we will be investing behind that new business.

What was the international revenue as a percentage of revenue in the quarter and how does that compare to the year-ago period?

International revenue for the quarter, Vince, was 12.1% of total revenue.

Okay. And the year-ago period?

Year ago was a little bit higher. I'll get it for you in a second.

The international is comprised of both the restaurant and the hotels. And the restaurant side was up quite sharply, being driven by QSR in the international. And in the hotel space, that was down year to year.

It was 13.8% for the third quarter of last year, Vince. But as John said, the hotel and resort business was down this quarter, but our restaurant business was up.

Okay. Thanks, guys.

And there are no further questions at this time.

Thank you for calling in to the call, and I hope this has been a bright spot in an otherwise gloomy environment. Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.