PAR Technology Corp (PAR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2008 PAR Technology earnings conference call. My name is Francine and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Chris Byrnes, Vice President for Business and Investor Relations. Please proceed, sir.

Thank you, Francine, and I would like to welcome everyone on the call this afternoon for our fourth quarter and year-end earnings call. I would like to take this opportunity to take care of certain bookkeeping issues in regards to the call. As Francine previously mentioned, we will be recording the call this afternoon 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; Ron Casciano, the Company's Chief Financial Officer; and Greg Cortese, Executive Vice President of the Office of the Chairman.

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 PAR Chairman and CEO, John Sammon.

Thanks, Chris. Good afternoon, everyone. Because this is the first financial conference call since our recent reorganization, I thought I would start by bringing you up to date relative to our organizational structure. In December, with the hiring of Ed Soladay as President of our Restaurant division, we formed the Office of the Chairman of PTC. The purpose behind the formation of the Office of the Chairman is to provide top management focus on the most important aspects of our growth strategy.

Our four operating divisions; namely Restaurants, Hotels and Spas, Government and Logistics Management, report into the Office of the Chairman. There are four officers in the Office of the Chairman. I remain CEO and Chairman of PTC and continue to be responsible for the overall performance of PAR. Ron Casciano remains CFO. Charlie Constantino is Executive Vice President of PTC, overseeing our Government business and additionally takes on special assignments in support of our Hospitality business.

Greg Cortese is the fourth member of our Executive Group in the Office of the Chairman. Greg was promoted to the Executive Vice President position of PTC and has several responsibilities relative to the execution of our growth strategy. Additionally, Greg joins Chris Byrnes to lead our financial relations activities. It is in this capacity that I will now turn the meeting over to Greg to present a summary of Q4 and 2008 results.

Good afternoon, everyone and thank you for coming to our meeting. Today I'll be presenting the results for our fourth quarter and year-end ending December 31, 2008. Fourth quarter revenues from operations were $65.4 million, an 8.6% increase from the $60.2 million reported for the same period in 2007, establishing a new quarterly record.

Worldwide Hospitality revenue was up 6% for the quarter, primarily due to sales to domestic McDonald's and Yum Brands. Government contract revenue increased 15% for the quarter due to the initiation of new contracts. Net income for the quarter was $1.5 million or $0.10 per diluted share compared to $483,000 or $0.03 per diluted share reported last year.

Product revenue for the quarter was $23.2 million, down 3.4% compared to the fourth quarter of 2007. Contributing to this decrease were a stronger dollar, lower sales to international McDonald's due to the timing of large system-wide requirements in certain regions in Q4 of 2007, also contributing to the decline is a softening of the table service segment in Hospitality due to the current economic environment. Partially offsetting this decline were increased sales to domestic McDonald's and Yum Brands. Taking out the negative impact of the strengthening U.S. dollar, product revenues year-over-year were essentially flat.

Service revenue for the quarter was $22.1 million, up 18.1% compared to quarter four of last year. This increase is due to a large service initiative with McDonald's related to their combined coffee beverage program. Also contributing were increases in professional services and software maintenance fees.

Turning to our contract revenue. Contract revenue was up 15% to $20 million for the quarter as a result of increases in our IT outsourcing business and applied technology contracts. Our Logistics Management business also contributed to this growth in this segment.

Product margins for the quarter were 33.7% versus 41.9% last year. The primary contributing factors for this decrease were the McDonald's coffee beverage initiative, a stronger dollar and product mix. Also impacting margins in the quarter was a slowdown in solution sales through our indirect distribution channel to this table service segment where the current economic environment is having a negative impact upon buying decisions within this market.

Service margins rose in the quarter to 34.1% versus 26.4% a year ago. This improvement is due to McDonald's service initiatives, along with increased revenue from professional services and software maintenance. In addition, improvements in the utilization and other cost reductions also influenced this increase. Note that the McDonald's coffee beverage program which had a negative impact upon our product margins, favorably impacted our service margins.

Contract margins were 5.7% compared to 6% last year. This slightly lower margin rate was due to startup costs on newly signed contracts.

Now turning to expenses for the quarter. SG&A for the quarter was down $1.2 million to $9.8 million as compared to $11 million last year. This decrease is primarily attributable to cost reduction efforts in our Hospitality business. R&D expenses were $3.7 million, down $668,000 or 15%, primarily due to outsourcing through strategic relationships.

Now looking at the year. For the year ended December 31, 2008 revenues were up 11.1% with record revenues of $232.7 million compared to $209.4 million reported one year ago. Hospitality revenues were up 8.8% for the year. Drivers for this growth included Yum Brands, Catalina Restaurant Group, CKE Restaurants and McDonald's. Net income for the year was $2.2 million or $0.15 per diluted share compared to a net loss of $2.7 million or a loss of $0.19 per diluted share reported for 2007.

Product revenue for the year rose 6% to $81.8 million, due primarily to sales to our large Restaurant accounts. Service revenue was up 12% to $75.4 million and Government contract revenues were up 6.1% to $75.5 million.

Product margins for the year declined 130 basis points to 39.5% due to the ongoing McDonald's coffee/beverage program, product mix and a stronger dollar. This is partially offset by a 57% increase in Restaurant software sales. Service margins rose by 370 basis points to 27.9%. This increase is due primarily to increases in Restaurant related software services. Additionally McDonald's coffee/beverage program utilization rates and cost reductions also contributed.

Contract margins were 5.5%, down 90 basis points compared to 2007, due to startup costs and new contracts.

SG&A expenses decreased by $727,000 to $38.6 million, reflecting cost reductions in our business and a lower bad debt expense. Partially offsetting this decrease is the continued strategic investment into expanding our distribution channels. R&D expense decreased $1.9 million or 10.8% to $15.2 million, due primarily to outsourcing through strategic relationships.

As we exited the year, the Government backlog continued to be quite healthy standing at $120 million.

In summary, 2008 was a year of improvement for PAR, with record revenues driven by stronger sales to our QSR restaurant accounts. Our Government revenues were higher due to new wins in IT outsourcing and the Logistics systems business sector. This included wins in Carrier, Ryder, Hapag-Lloyd and C.R. England. We continue to closely monitor the health of our markets and customers, the availability of affordable financing and the progress of our strategic initiatives.

First, on the health of our markets. We are all well aware of the current global recession and its impact will vary in each of our market segments. For Restaurants we believe our quick service customers will continue to perform well in this uncertain economic environment and also will continue to invest in their businesses with technology upgrades to maximize efficiencies in their operations. However, sales in table service and casual dining restaurants are soft due to the impact of the current economy.

Our Restaurant customers normally finance the purchase of our products. While available financing is improving and we have not been impacted by the lack of financing, this issue bears watching as to continued availability and the pricing of such financing.

As for our Hotel resort and Spa business, currently the recession has had a modest impact upon this segment. Our targeted market continues to be the five-star high-end destination resorts and the upscale chain space. We are expecting some impact from the recession on this part of our business as the year progresses and are monitoring it daily.

To date our Government business is unaffected by the current economic cycle as well as spending cuts in the Defense budget. We continue to offer a value stream for federal agencies wishing to outsource facility operations. Plainly put, we could operate a government facility more efficiently and economically than government agencies. As long as we can offer expertise and value to our federal government customers, our business should continue to grow.

In summary, our main concerns relative to our business and the current economic cycle are the same as they have been for the past two quarters; the current slowdown in our table service business -- that's the channel business; the potential slowdown of our high-end Hotel and Spa business; and the continuing availability of affordable financing for our Restaurant technology customers.

Next we'd like to talk a little bit about our McDonald's future. Our McDonald's business continues to improve. The third-party software has been released and we are working closely with McDonald's Corporate on the deployment process, with the understanding that the rate of stores we can deploy our products and service to along with our software will continue to accelerate to 2009, with the expectation that all the scheduling restrictions will be diminished for the second half of 2009 and moving forward. We are still confident in our view that this opportunity will be a driver for our business, as several thousand stores will be upgrading their in-store POS systems over the next three to four years.

There currently is competition among initiatives however, within McDonald's, as their coffee/beverage program continues to be rolled out and there is a significant capital requirement for stores to install all the necessary components for this program. This high-priority program is currently scheduled to be completed by the end of the second quarter of this year. We expect our McDonald's installation of store systems to grow modestly in the first half of this year, with gradual acceleration after the coffee/beverage initiative is completed and the deployment restrictions for the new software are removed.

McDonald's continues to be strategic to our future success and will help drive our revenue growth for the next three to four years. We are well aware of the fact that we also need to reduce our dependency on our large accounts, expand into other segments of Hospitality through various distribution channels and strategic relationships and continue to increase software as it pertains to our revenue mix.

To summarize, we feel confident that our company is making progress in our growth and continues to head in the right direction. We believe that the health of our major markets, QSR and Government are very good, that our McDonald's business has stabilized and is poised to be a business driver for PAR over the next three to four years, and also we would sustain our program of investing in strategic areas of our business, namely in software, channel expansion in international markets, but will do so prudently in light of the current economic situation.

This ends our formal remarks and we'd like to move on to the Q&A. Thank you.

(OPERATOR INSTRUCTIONS) Your first question is from Brian Murphy of Sidoti & Company.

Greg, I think you mentioned that software sales to Restaurants were up 57% for the year. I'm just wondering how that trended in the fourth quarter?

Brian, the software revenue for the fourth quarter as a total company was up as well, and Restaurants was down slightly for the fourth quarter, when you just look at the Restaurant part. But overall we're up about 5% total software for the fourth quarter, with Restaurants being down slightly and Hotels and Spas being up.

Okay. And again, just sticking with that sort of 57% number for the year, which I believe Greg said was for software sales to Restaurants, how did that break out between quick-serve and table-serve.

Well, as you know Brian, the majority of our business is in quick-serve and that's where the majority of the software revenue came from and the growth.

Got it. Can you give us some idea of what kind of exposure you guys have to table-serve restaurants at this point? Is it less than 10% of your Restaurants business?

Yes, it is less than 10% of our Restaurants business.

Okay, great. And just judging by some of your press releases, it looks like your Logistics Management business is getting some considerable traction there. Can you give us some idea of what that's contributing?

We don't break that out at this time. It's a relatively small portion of our business in 2008. It's a growing business. We've positioned ourselves quite well, we think for a growing market space in the tracking and reporting of refers; these are refrigerated containers and refrigerated trucks.

We've had some very nice wins with Ryder Corporation, which is the largest transportation company in the U.S. We've had a very nice win with a company called Hapag-Lloyd, which is in the top five of the transportation shipping companies. And we've had another recent win with C.R. England, which is one of the top five owners of refrigerated trucks. And we're in the process of rolling out to those customers at this time. We have a very nice strategic relationship with Carrier Corporation, which has about 50% of the refrigeration marketplace globally. So this business has picked up and we are beginning to enjoy some commercial revenue, which is growing significantly in 2009.

Great. And John, just sticking with the Government business, I see the contract gross margin is starting to tick up. Is the Logistics Management business sort of contributing to that or is that just a matter of some of your larger Government contracts sort of moving along?

Well Brian, our traditional margins in our Government business have over the years run in the 6 to 7% range. When we start up new contracts the margin decreases as it did in 2008. As these contracts mature, the margins start to increase. Now we have had a trend going up in 2008, and we hope that this trend will continue into the future, but we have some new large competes going on in 2009, and we expect then some startup cost being involved, so the margins I think will be staying in the 5 to 6% range.

We have broken out our Logistics business for 2009 going forward and it will be incorporated in our commercial revenues as we move forward.

Got it. And just one last one on the Government business; did the backlog decline from the number you put out last quarter?

Yes, it did.

(OPERATOR INSTRUCTIONS) Your next question is from Matt Burg from CJS Securities.

What was responsible for the lower tax rate in the quarter?

Matt, one of the main drivers there was the Government reinstituting the research and experimental tax credit in the fourth quarter. Through September, that was not officially in effect and we were not able to record the benefit of that credit in the first nine months of the year.

Okay. And should we expect that benefit to carry through to 2009?

Yes. The law as it stands now, that credit's in effect through all of 2009.

(OPERATOR INSTRUCTIONS) Your next question is from Craig Hoagland of Anderson, Hoagland & Company.

Could you just comment on the growth in your receivables?

Sure, Craig. As Greg mentioned in the remarks, the fourth quarter was a record quarter for us, over $65 million in revenue and that was over $7 million higher than the revenue from the third quarter. So, sequentially we're up substantially in revenue and that was the main driver for the growth in accounts receivable.

You have no further questions in the queue. Oh, a couple more just popped in. Your next question is from Brian Murphy of Sidoti & Company.

Ron, what percentage of revenue was McDonald's and Yum for the quarter?

For the quarter McDonald's was 26% of the total company revenue and Yum Brands was 18%. And for the year, McDonald's come out at 24%, with Yum it's 16%.

Got it. And it looks like you guys have just been steadily improving profitability. I know that the March quarter is usually a light quarter for you guys. It also seems like your visibility is getting a little better. Would you say that given that March is a light quarter and we're in a pretty tough environment here, could we expect you to put up negative -- an operating loss next quarter?

Brian, you're right, Q1 is almost always our slowest quarter; 2009 will be no exception to that. Certainly our plan is to make money every quarter going forward.

Certainly from the business standpoint, certainly our QSR accounts will continue to be strong, especially McDonald's and Yum in the first quarter, and all of our other brands that we're approved into, both domestic and international. I think as we stated, the only concern we have is the potential for softening in our table service and more particularly in our Hotel business.

Okay, got it. So can we just sort of expect typical seasonality from quarter to quarter here?

Yes.

I think your summary, that is correct, and as Ron said, the first quarter is a difficult quarter, but it's our intent to be profitable every quarter going forward. Also as the year passes by, the second half always has been the better half for us, and with the events at McDonald's, we expect that the second half will continue to be our stronger half.

I guess another point also is the fact that as CBB dies off, which should be ending in the first half of the year, our margins will also improve and therefore improving the overall benefit to the company.

Your next question is from Dan Miner of Utica Observer-Dispatch.

Can I get a sense of how many employees you have now and if it's more or less than you had at the beginning of the year and if you expect any employment trends within the company to continue into next year?

Dan, we have somewhere around 1,700 employees worldwide through all our divisions. It's been fairly constant with last year and we project to probably stay constant in the immediate future.

Okay. Could you talk maybe more specifically about the facility in New Hartford and if that's changed over the last year and like do you expect it to stay constant as you do across the company?

Yes, the New Hartford facility is relative unchanged from the prior year and again, like the rest of the company going forward, it will be about the same.

Do you know about how many people you have in New Hartford?

350 right at our main headquarters here.

Your next question is from Carl Dorf of Dorf Management.

I know you mentioned that you don't break out the revenues for the Logistics business, but could you tell me at this point, is the business profitable?

Yes, the business is -- well, there's some startup costs in 2008 which would not make the business profitable, but as we look into 2009 with the roll of contracts we had, that we expect it to be profitable.

Any significant profit or just marginally profitable?

I would say modestly profitable. Let me clarify that. As a contributor to the overall profits of the corporation, I think it will be a small contribution. As a percentage of revenue it's a very interesting business model. It's much like a cellular phone model, in the sense that we sell the hardware and make good margin on the hardware, but it's a recurring revenue business with relatively high margins on the reports that we provide on a monthly basis, so it's a subscription fee basis business. So as we build up the base, we'll have a margin contribution from the hardware that we sell, which is a modest margin, and then as time goes on and build up the installed base, the recurring revenue continues to build and the margins on that revenue stream are quite good.

If I understand this correctly, you'll have like one portion will be a growing revenue base without necessarily, how do I put it, operating leverage on it and the other portion will be a function of how many new customers you're selling and whether that exceeds what you put on the books last year?

I think that's right, yes.

Your next question is from Will Lauber of Sterling Capital Management.

I'm sorry if I missed it if you addressed it earlier, but could you comment on the QSR business in Asia and your opportunities there and whether anything's changed?

Our QSR business in Asia is still very, very strong and we have a very positive outlook going forward. Certainly you've probably seen a number of the different news releases that have been put out by many of our customers. China being the major area of growth for a lot of these people and they're looking at China and they're starting to open up in China.

We are still the exclusive provider for McDonald's in China, and next year they expect to open 175 stores in China. Also we're the exclusive in Thailand. We're also exclusive in all the Pacific Islands. And then we share most of the other Asian countries with our competitors. But right now it looks very, very good. In addition, CKE recently announced that we have become their exclusive approved vendor for both hardware and software in China as they grow out.

I'm trying to get your opinion, as China's exports drop and that's definitely going to be hurting their economy, how does that affect the QSR business there?

We don't see any effect. We see everybody basically -- the majority of our clients which is the large QSR customers, pretty much have saturated most of the U.S. market and therefore are really pushing internationally, and Asia and China in particular is the primary area they're going into.

Your next question is from Vincent Collicio of Noble Financial Group.

I have a question on your QSR software, I know you put a lot of resources and effort into that business. Where do we stand today; are you starting to -- are your win rates improving and are we at the point where we'll start seeing your QSR software revenue grow on a year-over-year basis as we move through 2009?

Vince, yes, we do expect that our QSR software will continue to do quite well. As we rollout the software, from quarter to quarter it does always stay constant growth every quarter, some quarters will be bigger than others, but generally the trend is in the right direction as was indicated in the preliminary remarks. 2008 was up 57% over 2007, and we're expecting in our plan this year that software will continue to improve.

You know, also added to that is the fact that -- you asked about QSR, but also we have our table service software and although the market may be soft, in the wins that we are achieving, they are competitive wins and we are winning against the competition in those markets.

Okay. And a question for Ron, and I apologize if I missed this; cash from operations in the quarter?

Cash flow from operations was a positive $2.7 million in the fourth quarter.

Okay, thanks. Nice quarter, guys.

Your next question is from Craig Hoagland of Anderson, Hoagland & Company.

Could you give any commentary on what you expect SG&A and R&D expenses be going forward, either relative to 2008 or to the fourth quarter run-rate?

Sure, Craig. Going forward, while we do expect a modest increase in dollar expenditures in both SG&A and R&D, as a percentage of revenue they'll be trending flat to down. So it's a pretty modest trend going forward. There won't be any huge spikes.

Your next question is from Brian Murphy of Sidoti & Company.

Just one more. Greg, just in terms of maybe your pipeline or what you're seeing out there in the marketplace, it seems like you guys are getting pretty good traction with Burger King. Are there any other opportunities with major chains out there that you're seeing?

Yes, there are. And we are competing in the ones that we do see. Actually, it certainly slowed down from a few years ago, but there are a couple of decent size chains or good size chains out there that are in the process of seeking either new hardware and software or just new hardware, and we are in competition for those accounts at the present time and should be having some decisions made within probably the next three or four months.

And specifically could you give us any color on what you might be seeing at Subway?

In Subway there is a competition -- there was a competition. We are definitely in the competition and definitely in the finals, and I would say it's probably something that we will see a decision probably within the next few weeks on that.

And could you give us just sort of a sense for how big that opportunity is?

Well, there's basically 32,000 stores worldwide and they're looking for a hardware vendor for all of those stores. You've probably already seen they made a decision, at least at this time, from the software side, to do a source code license with another company, Torex, whereby basically they've taken their source code and they're going to try to develop it out themselves.

And in terms of who's in the finals, is it sort of the usual suspects there?

Yes.

(OPERATOR INSTRUCTIONS) Your next question is from Carl Dorf of Dorf Management.

Just one more, guys. You were talking in the past about the potential of having your business be interfered with by McDonald's setting up the new coffee operation. What kind of an impact, if any, has that had?

Well, it's had a definite impact, not from a top-line revenue standpoint, but certainly from a margin standpoint, because the coffee initiative is something that we have currently rolled out or installed on 3,708 of these; we have another 1,750 or so to do, and they come in at much lower margins than normal product margins, and as a result you saw that difference in our quarter-over-quarter from this year versus last year.

It's still also competitive. It's a competitive initiative within their organization for us in a sense, because their people are spending somewhere between $100,000 to $150,000 put in a coffee initiative and that's capital money that they could be using for a brand new POS. And as the rollout of that ends by the second quarter, then we should see them now turning their capital dollars toward the new POS software and hardware. And there's a significant pent-up demand that we estimate somewhere around 10,000 systems basically, that are going to have to be upgraded at some level, over the next so many years.

So if I understand you, then your POS business has been down or was slow and you haven't seen much of it, it's just been coffee business in this quarter?

No, it's not just coffee business in this quarter, but it definitely slowed -- total system sales have definitely slowed because of the coffee initiative.

You have no further questions.

Thank you very much; appreciate your interest in PAR.

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