PAR Technology Corp (PAR) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2009 PAR Technology results conference call. I will be your coordinator for today. At this time, all PARticipants are in a listen only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). At this time, I would like the turn the call over to your host for today's conference, Mr. Chris Byrnes, Vice President of Business and Investor Relations. Please proceed, sir.

Thank you, Latrice. I'd like to welcome everyone on the call this afternoon for our third quarter financial results call. I'd like to take this opportunity to take care of certain bookkeeping issues if I can, in regards to the call today. We will be recording the call this afternoon and it will be available for playback, and we are broadcasting the conference call via the worldwide web as well, so 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 and Member 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 afternoon, and may continue to be used while this call remains available for replay. I'd now like to turn the call over to Greg Cortese, PAR's Executive Vice President, for the formal remarks portion of our call, which will be followed by a general Q&A. Greg?

Good afternoon everyone. Today I will be presenting the results for our third quarter, ending September 30, 2009. Third quarter revenues were $49.9 million, a 13.9% decrease from the $58 million reported for the same period a year ago. Net loss for the quarter was $778,000, comPARed to a net income of $828,000 reported last year. The diluted loss per share for the period was $0.05 comPARed to a diluted earnings per share $0.06 reported last year.

For the nine months, year to date revenues were $164.8 million, a 1.5% decrease when comPARed to the $167.3 million reported one year ago. Net loss for the nine months year to date was $293,000, versus net income of $757,000 for the first nine months of 2008. Diluted loss per share for the first nine months of 2009 was $0.02, comPARed to diluted earnings per share of $0.05 per share reported for the same period in 2008.

Looking at the quarterly revenue breakdown, product revenue. Product revenue for the quarter was $15.2 million, down 27.2% comPARed to third quarter 2008. This decrease resulted from weaker sales in hospitality solutions across all industry segments. Service revenue for the quarter was $17 million, down 11.2% comPARed to quarter three of last year. This decrease was due to the completion of Professional Services programs associated with the deployment of PAR software, and the support of the McDonald's beverage program.

Contract revenue was $17.7 million, down 1.2% for the quarter. This slight decrease resulted from the time lapse associated with the closure of certain contracts, and the startup of new contracts.

Now moving on to margins. Product margins for the quarter 34.1% versus 42.6% for the same period last year. This decrease is a direct result of lower software sales as a percentage of content in the product mix, as restaurant and hotel operators delayed technology purchases, due to economic conditions and lower absorption. However, the 34.1% is 100 basis points greater than Q2 results.

Service margins were 30.1% versus 24.5%, up nearly 23% from a year ago. This increase resulted primarily from cost reductions and improved efficiencies in our service operations. Contract margins were on plan at 6.1%, comPARed to 5.4% last year. Contract margins typically run in the 5% to 6% range.

Now turning to expenses. SG&A expenses for the quarter were $8.5 million, versus $9.1 million last year, a decrease of $600,000, or 6%. This decrease resulted from the lower sales expenses associated with the lower sales revenue, and also reflected our initial cost cutting efforts to adjust our business model with the deepening recession.

R&D expenses were $3.7 million, versus $3.5 million last year, an increase of $211,000 associated with planned increases in R&D. Year to date, product revenues were down 10.1%, and margins were 34.3% versus 41.9% due to lower PAR software in the product mix in the lower margins associated with the McDonald's Coffee Beverage program. Service revenues were up 5.2%, and margins improved by almost 400 basis points, due to improved efficiencies, along the utilization and services associated with the McDonald's Coffee Beverage Initiative

Contract revenues were up 1.3%, and margins were on plan at 5.5%. SG&A decreased by $100,000. R&D decreased $1.4 million and/or 12.4%, as we look to better utilize our investments while maintaining new product programs with saving dollars through use of reduced cost development initiatives.

Q3 was a difficult quarter within our hospitality sector. PAR Springer-Miller revenues continued to be impacted by the current recession, and we have also experienced a slowdown in our restaurant technology sales, as restaurants across all segments have scaled back their capital purchases as the confidence level in their business has weakened in this economic environment. This includes our McDonald's business that experienced a slowdown in Q3, as their restaurants process the large capital investments made in the new Coffee Beverage Initiative. Our government revenues were basically flat, due to timing issues with contract wins and the ending of our other I.T. outsourcing deals.

Gross margins for the quarter were 22.8% versus 25.1% a year ago. This decrease continues to be the result of the lower software content in the product mix, and lower revenues in our Hotel, Resort and Spa business. We still anticipate continued success in our government business, considering our pipeline visibility and the growing current backlog of $125 million.

For restaurants, the QSR market continues to be strong for the large international companies. However, we are seeing a significant impact for the regional QSR organizations, whose business is slowing because of higher unemployment and lack of consumer confidence in specific domestic regions. These smaller businesses are also struggling to access affordable capital in the tight credit markets.

As for our Hotel, Resort and Spa business, the continuing recession is having a dramatic impact. We primarily sell to the Five Star high-end luxury facilities around the globe, whose business relies upon corporate outings for the majority of the revenues. That business line, in PARticular, has slowed significantly for our target customers, and the capital buying prospect in this segment remains slow.

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 I.T. outsourcing business focuses on cost effective operations of computer and communication facilities. Additionally, it is our experience that our sector of government R&D spending has only fluctuated modestly during times of military cutbacks. We have also been very successful of late in securing re-compete contracts in our government I.T. business, that further proves our ability to provide leading services in our expertise in this area.

In conclusion, despite the continuing difficult economic environment, we remain bullish on our prospects and recovery. We have installed a seasoned and experienced management team for our restaurant business, with a new President and Senior Vice President, Worldwide Sales, to navigate our business and to accelerate our return to increasing sales and profitability. Our largest customer is planning on a very aggressive upgrade program domestically, which will require that 14,000 stores upgrade their in-store technology.

Success within this account is a fundamental platform for our financial success. This will greatly contribute to our growth over the next three years. However, reduced dependency and improving profitability in the long term will depend upon successful execution of our strategic plans involving increasing software sales, expanding channels of distribution, and international growth.

Our pipeline of business is significantly improving. As an example, we have recently been notified by a large domestic concept, that PAR has been selected to provide the complete restaurant management solution, including the in-store systems and the enterprise software applications for all their stores. We are also working diligently to securing other deals in our hospitality business that will make a positive contribution to our future.

We are looking to enhance our business with our new customer Subway, as they continue their aggressive growth plan of new stores both domestically and across the globe. We have implemented certain cost cutting measures since January of this year; however, our Q3 results clearly indicate that the measures taken to date were not sufficient to offset the overall effects of the recession on our business.

We originally had information from customers, based upon their actual performance, that the QSR segment was insulated from the economic downturn, and their operations would not be impacted. Additionally, two of our largest accounts had scheduled substantial upgrades to their in-store technology. Both of these programs have since been delayed.

These changes explain our decision to retain infrastructure's capabilities and forego aggressive expense reductions earlier in 2009. That being said, we are making the difficult decisions and taking the necessary action to reduce our operating costs, as is required, to best position PAR for both the difficult times we are confronting today and the challenging environment that we expect ahead of us. We believe these recent actions and other key decisions we have made and will make as we end the year and begin 2010, will help PAR to continue to compete effectively in this tough economy.

We're confident that our healthy balance sheets, strong brand recognition, excellent people, and committed long term customers will enable our Company to remain strong and competitive in the years to come. Our government business exited the quarter with a backlog of $125 million, and we are confident that this business will continue the prosper, even during this difficult period.

Our logistics management business continues to make substantial progress, as we realize new contract wins, with the nation's largest food production company, along with Alliance Shipping and continuing business with Ryder Trucks, KLLM, and J.B. Hunt, and others, as the industry as a whole adopts this technology as a real value stream in their go-forward business models. Revenues for this business grew 69% in the third quarter over the same period last year, and over 240% year to date. We are experiencing real traction in the market from our technology.

We are well aware that our Company needs to do better short term on growing our business and returning to profitability. However, our enthusiasm is high and future prospects are quite bright. We are confident that our QSR market will improve as economic indicators in this segment continue to point towards recovery, and that our McDonald's business is poised to grow substantially over the next several years. Our government will continue to perform as reflected by its growing backlog of $125 million, and our logistics management system business will grow at an accelerated pace as the market adoption rate increases, and that its success will continue for the foreseeable future. This ends my formal remarks, and I would now like to move on to questions and answer.

(Operator Instructions). Our first question comes from the line of Tony Brenner Roth Capital Partners. Please proceed.

Thank you. I think you had mentioned that this is with McDonald's slow down in Q3? I'm just curious. This business was delayed for three years. How could it slow down?

I think what we meant there, Tony, was the fact that their same store sales started to slow versus what we'd seen earlier. And that the primary reason though, is the slowdown in the software again. We agree that it's been something that's been promised for quite a while.

We had anticipated that it would start in the third quarter; however, if you remember, we did talk about a lull in the third quarter, as people had recently invested $150,000 per store in their CVB program. And as those dropped off, and as we stopped putting in CVB, our revenues would drop based upon the CVB the revenue we were seeing. And also there was this delay that we would see before they would start installing the new [PAR] software.

That software is still intended to be installed. It will be slow, it will be starting in the fourth quarter, and then slow into the first quarter, and then accelerating in the second quarter with their biannual convention.

How many stores have installed that so far?

Only about 2,000 stores have installed it as of this time; however, - -

That's not all your customers, that's total, is that right?

That's total, yes, not our customers, that's total. Of that though, those are the older versions of the software, and they have new version coming out, what they call 6.3, and then another new version coming out next year, 6.5, so therefore, people are somewhat reluctant to spend the money to at this time, as they wait for the new versions to come out, because they require additional visits to the store and therefore additional costs.

However, on the other side, from a positive standpoint, we did receive notice from McDonald's that there would be more stores than we originally anticipated that would have to be upgraded from a hardware standpoint, and then all of them would have to be upgraded from a software standpoint. But from a hardware standpoint, it's everything but our most recent ViGo systems, which were the ones we put out in the last three to four years, and Panasonic's newest systems that they put out in the last three or four years. So therefore, we're looking at something close to 7,800 to 8,000 stores that actually would need new hardware and software, not just software upgrades.

if I recall, there were 5,000 or so McDonald's units that couldn't effectively or efficiently serve the Coffee Beverage service with the old software and hardware, is that right?

No, from the standpoint of the Coffee Beverage Initiative, it was about 5,000 stores we said originally, that would not be as efficient without the new software. That number now, based upon what we're hearing from the McDonald's, with the new software they're coming out with, is now 8,000 stores.

Apparently, they're willing to be inefficient for an extended period of time, it sounds like.

I think the issue comes down again, to money. It's a capital expenditure. They spent a great deal of money on these buildouts of this new Coffee Initiative, and they're waiting to realize that return on investment before they now invest additional monies in a POS with new hardware.

And an upgraded software version you said would be available in 2010. What does that mean exactly, January 1 or December 1?

Well, there's one version, what they call 6.3, is supposed to be ready this quarter, sometime around probably the end of November, and some stores will be upgrading with that. The final version, allegedly the final version, or somewhat final version, will be 6.5, which they expect in June of next year, but we'll probably be taking orders probably at the convention, which is in April.

Why wouldn't anyone wait for the final version?

In some cases, we have a number of different customers that are out there that, from a hardware standpoint, they can't wait. Their hardware is old enough and breaking enough, such that they're paying too much in service costs, and as a result they will upgrade their hardware anyway, because they have to, in order to reduce down the overall costs, their service costs, and also to ensure their operations, because the last thing they want to do is have one or two terminals failing because they're so old, either in a drive through or on the counter.

Okay. Another topic, could you quantify what the revenues are in the logistics management product?

Hi, Tony, it's Ron. They're still running low figures, low seven digits, and the interest is still very high. We're getting new customers all the time.

Is that annually or quarterly, Ron?

It's quarterly.

So one or two million per quarter?

Yes. But we look in that business as we see the order pattern and how nicely that technology is being accepted in the marketplace, we expect next year to have a substantial acceleration in that business.

Okay.

Tony, right now we expect to have somewhere around 11,000 to 12,000 units installed, assets installed, by the end of the year.

I'm sorry. Say that again, Greg.

By the end of the year, we expect in that business to have around 12,000 assets installed on trucks. Our technology installed by the end of the year. Last year we finished somewhere around 5,000 units.

One other question. You're suggesting that this business will turn up sharply starting in 2010. I may be wrong, but as I recall over the past three years, I've not seen a single insider purchase of PAR stock. Would such a trend beginning be a good indication of when management thinks the business will turn up, in fact?

I'll answer that question. I think you'll see that, in some cases. At the same time, we can talk off line relative to my own personal situation if that's necessary.

No, no. I wasn't talking about you in particular. There are a lot of people working at PAR, and none of them so far, as I recall, have purchased stock in the open market. I'm just curious why that's so, if the outlook is really good and the stock is depressed.

This is John. I might answer that in the opposite side of it is, you haven't seen the large stockholders selling stock either. And I believe there has been some Board purchase, one of the Board members I believe has purchased some stock. That's an individual decision, as you know Tony, that people have to make, and the facts are correct as you said, that their making that individual decision. So all I can offer is that on the other side of the coin, the major stockholders are not selling their stock. Greg is in a special situation that his options are coming to an end, and so there's pressure on his situation. But that's an anomaly.

Last point, can you quantify some of the cost reduction efforts that you will be making?

As Greg said in his remarks, Tony, we have done some starting in the second quarter, actually, of this year. We're currently looking at additional cost reductions. We're not prepared to quantify them at this time, but obviously, we're looking at the total head count of the Company to see what makes sense as far as reduction goes.

But most importantly, we're looking at an optimistic outlook for next year and beyond. And we will not do anything that will jeopardize our ability to perform in the future, but we are taking a look at additional head count reductions in the fourth quarter.

Thank you.

You're welcome.

And our next question comes from the line of Sam Bergman with Bayberry Asset Management. Please proceed.

It's Sam Bergman, good afternoon gentlemen. A couple of questions. Even though it seems, it seems like your competitors' Radiant and MICROS have done a far better job at execution. Is there some issue with your software applications, or at this time are you losing market share to these people, because they seem to have been executing far better.

I guess I'll take that. This is Greg. I think it's the market segment that we are in. I mean we are admittedly, very dependent upon McDonald's, and as a result, we will see a significant increase once McDonald's starts replacing this hardware with their new software.

As far as market segments are concerned, I don't think we're losing market share, I know we're not losing market share, to our competitors when it comes to the QSR market. And we just started into their part of the market, which is the full service, table service market, about two years or three years ago, basically, when we bought Pixel, and tried to develop out and working on developing out the distribution channel there, and then also with our SIVA acquisition, and we're making progress in those areas.

However, again, that's a fairly slow market and it's a tedious exercise on our part to grow out the distribution channel against formidable competitors like that; however, we are seeing successes in that area also. So we're not losing market share to them; we're just in totally different markets.

Sam, this is Chris. And the proof in the pudding obviously will be our results moving forward, but our win of Subway earlier this year, the other one that Greg mentioned in his remarks that we're not really prepared to release publicly yet, but we've been selected by a national chain for the in-store technology, and that's a complete solution of hardware and software and services. I think it gives us a pretty good sense that we are not losing market share.

It's not always apples to apples comparison with Radiant and MICROS. They both have fairly substantial retail operations outside of restaurants, that lets their revenue be a little more horizontal than vertically as we are. But I think we're not, as Greg said and I'll reiterate, I don't think we're losing market share in restaurants right now.

A good point, Chris, is the fact that as we look at Subway and this other account that we were selected for, in both those cases we were up against, in one case MICROS, and in the other one against MICROS and Radiant, and we won both of them, and those are QSR accounts, though.

And this is John. I think your question was probing, in terms of the execution of our competitors against us as it relates to software. As Greg said in his remarks, software is very soft in the quarter, and that certainly hunts both margin, and it hurts hardware sales as well, because virtually every time we sell software, we also sell hardware and services along with it, and software was down.

Now the reason that software was down so far is specifically related to two accounts, which we call branded accounts. These are major corporations in the QSR industry, and we tailored our software solutions for these branded accounts. In two specific cases at the beginning of the year, there was a mandate that all the franchisees upgrade their restaurants, their point of sale systems by the end of the year. In June, both of those organizations rescinded that mandate. That really set us back, because we had planned sales going out into the second half, and it caught all of us by surprise, and that explains in large what happened in our third quarter.

So as far as execution, I agree. We did not execute in terms of cost cutting as our competitors have done, but I think it was because of the information that we had and built our plan upon. And the fact that software was not sold in the third quarter at the expected rate certainly took our product margins down significantly. And for every time we don't sell a software license, we don't sell hardware along with it as well. That causes absorption in the factory to be improper, which really hurts the quarter.

Looking at the inventory, the inventory is around $40 million. Do you feel it's time this year or next year to start OEM-ing the hardware, or outsourcing the hardware so the margins could get greater?

We have plans. Greg was eluding to those plans in his remarks. We have done some cost cutting; we have more cost cutting coming along. We have new management as Greg had mentioned. That management is bringing along new ways of doing business, looking for ways of reducing inventory among other things.

We brought on a new President of the organization, he comes from a software background; he also comes from a hardware services background, a solutions company in fact. And we brought in a new Senior Vice President of sales, who comes along with extensive experiences in the channel markets, where we have, one of our strategic components is to grow our business. So with the new management and new thinking, there is a focus on how to do things better, more efficiently and inventory is certainly one of those areas.

Would you consider this quarter the low point of the cycle, in terms of sales and revenue and bottom line numbers?

I think, looking to the short term, I think Q1 could be a challenge for us, but certainly Q4 is going to be a challenge again. But I think this is the low point, yes.

And on the positive side, back to Tony Brenner's comments. There's a lot of skepticism, I think, appropriate skepticism, about this McDonald's business that we've been talking about for some time. But there's every reason to be optimistic about it. We have received official paperwork from McDonald's, indicating specifically how many stores in each category of upgrades need to be done, and they've very aggressively pushing it. The President of McDonald's has come out and said that 2010 the focus is now on technology upgrade, whereas, in the last couple of years, the focus has been on the coffee program. So I think there's reasons to be quite optimistic. That there's light at the end of this long tunnel. I think we're all frustrated that things have been stepping to the right on that program.

I think there's a lot of optimism in terms of the logistics management business. It's getting to be a business that's contributing. Although small, as Ron indicated, the business model is a terrific one. It drives very large margins in terms of recurring revenue as the more systems we get installed, the more recurring revenue we have, and it's a model that is an excellent model for building bottom line.

So, I think there's some very good reasons to be optimistic about our business going forward. And I think, Sam, I think the third quarter is the low point.

Okay. And just one last question in wrapping up it. In terms of the restructuring, what are the plans for fourth quarter and 2010? If you hit the low point in this quarter, is there still plans to [eek] out some cost savings fourth quarter and also in 2010, or just the fourth quarter?

I think it's an ongoing program. I think it has long term implications for us. This is not just a simple reduction in force to recover some numbers; this is a change in process. A lot of it is just fundamental change in process the way we do things.

How many people were let go in the third quarter?

Sam, we're not going to disclose that?

Can you tell us what the employment is at the Company at this time?

Worldwide total company is probably around 1,700 people.

Okay. And last question can you tell me about the Yums business, and give us an update on that?

I'm sorry. I didn't hear the question.

Can you give us an update on the Yum restaurant business. What was their percentage for the quarter in sales?

Sure, Sam. For the quarter Yum was 14% of total revenue for the corporation.

Thank you very much.

(Operator Instructions). And our next question comes from the line of Brian Murphy from Sidoti & Company. Please proceed.

Thanks for taking my question. Ron, you gave us Yum as a percentage of sales; how much was McDonald's?

McDonald's was 22%, Brian.

Okay. And Greg, I'm just curious, you seem to call all weakness in regional QSR. What percentage of your restaurant business is regional QSR?

Ron do you want to answer that?

Well, as you can see, we said 22% and 14% were our two major customers of the total business. If you break that down to the hospitality, for the quarter McDonald's is 35% of hospitality, and Yum is 22%. And the rest is obviously distributed between smaller accounts or channel business, et cetera.

Right, I'm just assuming that CKE is not included in that category, and that's got to be a low single digit number, and I'm assuming the hotel business is about 10%, so I'm just trying to get to ballpark figure on that. I mean, it is in the 10% range would you say?

There are no other customers that hit the 10% mark there, Brian.

The international, the large multi-national companies we were talking about were essentially Yum and McDonald's. And everybody else would be in the other category.

Okay, got it. Alright, thank you.

There are no further questions in queue at this time.

Thank you for joining the call everyone today. Please feel free to contact us for additional conversation and questions. Thank you, and have a good day.

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