PAR Technology Corp (PAR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2009 PAR Technology earnings conference call. My name is Anne, and I will be your coordinator for today's call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. (Operator Instructions).

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

I would like to welcome everyone this morning on the call for our fourth-quarter 2009 and year-end financial results. I would like to take this opportunity right now to take care of certain bookkeeping issues, if I can, in regards to the call today. We will be recording the call this morning and it will be available for playback. And also we are broadcasting the conference call via the World Wide 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.

I would 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.

I would 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 general Q&A.

Good morning. Today I will be presenting the results for our fourth-quarter and year-end ending December 31, 2009. I will be providing PAR's GAAP results, which include one-time charges associated with personnel reductions, the write-down of inventory related to discontinued product lines, and a valuation allowance related to certain deferred tax assets. I will also be providing financial information on a non-GAAP basis for Q4 and the entire year of 2009 that exclude these nonrecurring charges.

Fourth-quarter revenues were $58.2 million, an 11% decrease from the record $65.4 million reported for the same period in 2008. On a GAAP basis PAR had a net loss in Q4 of $4.9 million or $0.33 per diluted share. On a non-GAAP adjusted basis PAR had a net profit for the quarter of $601,000 or $0.04 positive per diluted share compared to $1.5 million or $0.10 positive per diluted share reported last year in the fourth quarter of 2008.

For the year 2009 we recorded revenues of $223 million or 4% decrease when compared to $233 million in 2008. The GAAP net loss in 2009 was $5.2 million or $0.36 loss per diluted share. Non-GAAP, PAR had a net profit for the year of $308,000 or $0.02 positive per diluted share compared to net income of $2.2 million or $0.15 earnings per diluted share reported for 2008.

In order to properly compare 2009 to 2008 all comparisons from this point forward will be on a non-GAAP adjusted basis. I am looking specifically at quarter four. Product revenue for the quarter was $19.9 million, down 14% compared to the same quarter of 2008. Contributing to this decrease was the continued softness in the hospitality segment of our business, and the completion of rollouts to several restaurant customers which took place in 2008. Partially offsetting this decrease in product revenues from our existing customer base was the addition of business from our new customer, Subway.

Service revenue for the quarter was $18 million, down 18.7% compared to quarter four of last year. This decrease is due to the corresponding reduction in installation revenue associated with the decline in product revenue. Also, contributing to the decrease was the completion earlier in 2009 of the large service program PAR rolled out for McDonald's related to their combined beverage initiatives.

Contract revenue was up 1% to $20.3 million for the quarter, resulting from additional government INR outsourcing contracts. Product margins for the quarter were 32.6% versus 33.7% for the same period last year. The primary contributing factor for this decrease was lower software sales in our hotel, resort and spa business.

Service margins declined in the quarter to 32.5% versus 34.1% in the fourth quarter 2008. This decrease was due again to completion of the combined beverage initiatives for McDonald's, which in 2008 had a favorable impact upon our service margin. Contact margins were basically on plan at 5.6% compared to 5.7% last year.

Now turning to expenses for the quarter. SG&A for the quarter was down $1 million to $8.8 million as compared to $9.8 million last year. This decrease is directly attributable to continued cost reduction efforts in our hospitality business. R&D expenses were $3.5 million, down $204,000 due to various cost reduction efforts and alternative development initiatives.

Now looking at the year, product revenue was down 11.3% to $72.5 million, due primarily to reduced sales to most of our hospitality accounts resulting from the economic downturn. Partially offsetting this decline were increased sales to Subway and revenue growth in our logistics management business. Service revenue was down 1.8% to $74 million, primarily due to reduced installations and the completion of the McDonald's combined beverage initiative.

Government contract revenue was up 1.3% to $76.4 million. And we exited the year with a contract record backlog of $190 million.

Product margins were 33.8%, down from the 39.5% reported in 2008 due to reduced software sales. Service margins rose by 200 basis points to 29.9%. This increase was due to more favorable pricing, utilization rates and cost reductions. Contact margins were unchanged at 5.5%.

SG&A decreased by $1.1 million to $35.7 million, reflecting various cost reductions in our business. R&D expense decreased $1.6 million to $13.6 million due primarily to the employment of lower-cost alternatives and other cost containment initiatives.

2009 was a difficult period for most of our markets, as the global financial downturn continued to impact our business. While we are seeing improvement in our markets as we enter 2010, we have nevertheless taken significant and decisive actions within our hospitality business to better position our Company for success. These actions include organizational changes, personnel actions, adoption of cost reduction initiatives, and reduction in inventories.

In addition the Company has recorded a valuation allowance, which is a reserve associated with certain tax-deferred assets. The personnel actions and other cost reduction initiatives were executed as part of the Company's global strategies to improve efficiencies while preparing for anticipated future growth.

The inventory charge, a non-cash charge, is largely associated with service inventory used to support older model point-of-sale equipment. During the fourth quarter of fiscal year 2009 certain major customers announced accelerated plans related to upgrading their POS systems. As a result of this acceleration, the Company reduced the expected remaining useful life of the service inventory in support of the POS systems currently in use. The Company believes that these accelerated upgrade plans will result in a favorable impact to its future operating results through an increase in system revenue.

The tax valuation allowance or reserve was recorded due to the potential continuation of the economic slowdown, which has affected our worldwide hospitality business.

Even though last year presented significant challenges, we accomplished a great deal. We installed a new senior management team in both our restaurant and hotel businesses. We released a new hardware platform, the EverServ Series terminal line. We won the Subway account, which is the fastest global grower. We renewed our sole source vendor agreement with McDonald's China.

Our logistics management business added several new accounts, including Golden State, KLLM, Hapag-Lloyd, C.R. England, expanded sales to Ryder, and others.

Our government business achieved a record backlog of $190 million. [Howard] Springer-Miller won and deployed 15 new host systems, 70 new SpaSoft sites. Also SpaSoft continued to maintain its position as the number one product worldwide in its category. And PAR's operating cash flow for the year improved to $7.2 million.

We are acutely aware of the current global recession. Its impact and its duration will vary for each of our market segments. For restaurants we continue to believe the QSR market will remain strong, and as the recession ebbs, there will be an improving environment for these restaurants to make technology investment in their businesses that have previously been impacted by the uncertain economy. However, we do believe that the current economy will continue to impact to some degree both the chain and independent table service and casual dining restaurants.

Our McDonald's business will improve in 2010. We continue to work closely with McDonald's on the deployment process for their new point-of-sale software. Our current understanding is the rollout will accelerate in the beginning in the second half of this year, and last at the very minimum through 2012.

In all, there are currently 12,000 McDonald's restaurants that are scheduled as part of this initiative for either a full technology system replacement or a POS upgrade. Taking into account that a normal business cycle for PAR in a given year is to install 700 to 800 domestic McDonald's restaurants, this current forecast predicts the largest technology initiative in McDonald's history, and one in which PAR will have a significant role.

McDonald's, as our largest customer, continues to be strategic to our future success. This initiative will help drive our revenue growth for the next three years.

We are very well aware that PAR needs to reduce its dependency on our large accounts, and thus we are focusing several of our strategic initiatives on expanding its customer base through various worldwide distribution channels and strategic relationships.

In our international restaurant business sales were down year-over-year, as well as quarter-over-quarter, as this recession is global in nature. However, we will continue to invest in the expansion of our international presence and capabilities with the knowledge that the international hospitality market will be a significant area of new store growth.

Software sales were lower in all segments of our hospitality business due to the poor economy. In these challenging times software upgrades are generally delayed. We anticipate this situation to improve gradually over the next couple of years.

We will continue to invest in the completion and release of next gen software offerings for both restaurant and hotel businesses in anticipation of significant opportunities as the economic conditions improve.

As for our hotel, resort and spa business the recession has had an impact upon this segment, with overall revenues down for the quarter and year. However, our management team has performed well during this difficult period, and despite lower revenues this business has remained profitable.

Notwithstanding the current economic climate and various government cost-cutting measures, to date our government business has remained healthy. Our expertise in efficiently and economically operating government facilities has resulted in a record contract backlog. And we will continue to offer a value stream for federal agencies wishing to outsource their facility operations.

In closing, I want to directly comment on our business and opportunities in 2010. Our restaurant technology business will improve significantly over the next few years driven by the following factors. POS upgrades in both McDonald's and Yum!. Increased channel business as a result of an aggressive channel plan under new and experienced sales management. International business growth as result of strengthening relationships with new and existing major accounts. Increased software sales as a result of the completion and release of our next gen restaurant software. Organizational changes, personnel actions and cost reduction initiatives.

LMS will continue to grow as the adoption rate of our cold chain technology accelerates. Government revenues will go grow slowly, yielding consistent margins and serve as a platform for the expansion of our commercial businesses.

We are confident that our Company is making steady and real progress. In measuring all of our business opportunities we believe 2010 will be a new period of growth for PAR. With that said, we anticipate revenue growth next year to be in the high single digit range, with possible upside, depending on the rate of acceleration in 2010 of the McDonald's technology initiative. Product and service margins should improve to the mid-30% range from current levels.

This now ends my formal remarks, and would like to open the call for Q&A.

(Operator Instructions). Sam Bergman, Bayberry Asset Management.

A couple of questions. Can you tell us how many McDonald's restaurants were done in the fourth quarter, and the amount of business percentagewise, McDonald's did in the fourth quarter?

Without getting specific as to the quantity in the fourth quarter, we had a solid quarter with McDonald's business, and the worldwide McDonald's revenue in the quarter represented 24% of the total corporate revenue for the quarter. And as a percent of our hospitality business, it rose to 38%.

Just to extend that for the year, we are at 25% for the year with McDonald's and almost 40% for the year as it relates to our hospitality business.

You can't give me any actual numbers on the amount of stores?

It is probably -- 200 to 300 per is a range. It is hard because there is some full system upgrades, there are some partial upgrades, so it gets a little confusing. So I would rather not be specific in that area.

So would you say your percentage of McDonald's business is in the 50% range and Panasonic does the rest, or is it greater than that?

We believe is a little north of 50% of the McDonald's business.

And the amount of upgrades for the next couple of years, is it your feeling that you'll have at least that ratio going forward?

Absolutely.

The second question I wanted to ask, regarding the hardware business or the the POS systems, has there been any more efforts by management to look for outsourcing these products? Has anything begun there, or do you plan on keeping that in-house?

This is John. We have programs currently underway to lower all the costs of our operations, manufacturing and service, and it does involve some outsourcing in certain areas. We have a facility in China, as you probably know, which has done some manufacturing for us. And the expansion of manufacturing in China is certainly a strategic notion for us.

Can you give me an idea of what percentage is being done in China at this point, or in the fourth quarter, for outsourcing versus what is done in the US facility?

I don't have exactly the statistics, but I can tell you that it is moving in that direction throughout 2010. It is significant. I might also mention that in the reduction of cost it is not only the manufacturing and the service, but it is also the development area.

We have very strong development activities that have been growing in 2009 and will continue to grow in 2010 in our software development area. So it is a direction that the Company has embarked upon as part of our strategic thrust into 2009, and the benefits of that will be realized in 2010.

On the inventory reduction, or I should say the discontinuance of certain inventory write-downs, any of it from the SIVA division?

No.

Nothing there?

No.

Thank you. I will let somebody else get on.

Rebecca Croniser, Utica Observer-Dispatch.

I wondering what your personnel actions were that you took this year. I assume that means some layoffs?

We adjusted our work force in accord with our strategic direction of lowering all of our costs, so there have been some reductions. We had a significant number of temporary workers and we have cut back in that area. So, yes, there has been some reductions.

I believe you started the year at the New Hartford plant with about 350 employees. Is that right, and what would that number be now?

I'd rather not get into that discussion. This call is primarily for our financial investors.

All right. That is all I had.

(Operator Instructions). Brian Murphy, Sidoti & Company.

Greg, could you just give us some color on the Subway rollout, and maybe just give us an idea of what inning we are in there? Anything would be helpful.

This is John. The Subway program that we have is that we had been selected by the division of Subway which looks after their franchisees. As you know, the franchise organization is virtually 100% of the stores. We have been selected as a supplier of hardware and services. And our service business is growing with Subway as well.

So what is happening is that with this approval of our product and selection of us as the vendor, our business has been growing over 2009. And now we have a similar relationship throughout the world with this franchise organization. They are geographically disparate, and they have different organizations in different geographic regions, and we have covered the entire globe with our relationships.

So we would expect that we would continue the business at approximately the same rate domestically as old equipment is coming out of the store. And our business will grow on the international side as the expansion of Subway is successful going forward.

Just on the product gross margin, that is the lowest number that I have seen in quite a while. I think, Greg, you mentioned that some of the weakness there was software sales. Then I think that you said that Springer-Miller, or your sort of hotel part of the business was profitable on an operating basis. Is that right?

Yes.

Okay.

But that is also the place where, especially for the fourth quarter, where the majority of the software reduction was over last year's fourth quarter.

Right. Okay, I am just kind of scratching my head, because firmwide you have a pretty slim operating margin here, so you would think that -- I'm just surprised that the hotel business is profitable in this environment. Maybe could you give us a little bit more color on the outlook for the hotel side of the business? We seem to have some pretty positive commentary coming out of the hotel industry recently.

I don't know where that is. We haven't seen that. Right now they are running, and projected to run, most hotels, at least the area that we are involved in, which is primarily the high-end resorts at around a 55% occupancy rate. The RevPAR is continuing to go down. The ADR is continuing to be reduced.

But we see 2010 being pretty flat as far as our revenue is concerned. We are still being profitable. The management team there is a very experienced, well-versed management team that has done an excellent job of controlling cost and finding ways to increase sales, or at least keep sales at a flat anyway, without significant decreases, and yet at the same time make a profit.

The government business is -- backlog there is sort of still near record levels?

Yes, it is at a record level.

Ron, what was the operating cash flow for the quarter?

For the quarter it was about $1 million, and for the year, $7.2 million.

Great. Just one last one. What was Yum! as a percentage of sales?

For the quarter Yum! is 14%. 22% of the hospitality business, 14% of the total. And for the year it is 13% of the total corporate revenue and almost 20% of the hospitality business for the year.

Got it. Thank you very much guys.

Will Lauber, Sterling Capital Management.

I saw just the other day that MICROS won the contract with Five Guys. Can you guys comment on that at all?

This is Greg. All we can say is the fact that MICROS, I think won that a number of years ago actually. They were announcing it basically again. I don't think there was a significant RFP of any sort that went out or any real competition. They were located -- actually they got started right there in Virginia, very close to MICROS' facilities, and were part of the MICROS organization earlier on when they first started the organization.

I can take from that that you guys were not bidding on that or are not involved in that?

No, we did not bid on that.

(Operator Instructions). Carl Dorf, Dorf Asset Management.

Can you give us an idea of how much revenue you generated in the logistics business in the fourth quarter? And when do you think that business may be big enough that you will break it out separately?

We don't report on it. We don't break it out separately at this point in time. It is still a small business, but our view of it is that it has a lot of potential going forward. And it has grown quite nicely in 2009, and we expect it to grow significantly in 2010. Should it continue on that path, I would think that we would be breaking out in 2011.

The primary thing there is the fact that basically we are focused on the cold chain in particular, although we also have systems for the dry vans. And the cold chain, based upon food safety, new food safety rules and attention and focus on food safety, it is certainly helping us from the standpoint of the fact that the adoption rate within that segment is accelerating.

Any rough idea -- you indicated it is small, how small in terms of revenue in the quarter?

It is under $10 million.

Ladies and gentlemen, with no further questions, this concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Chris Byrnes for closing remarks.

I want to thank everyone for joining us. If you have any follow-up questions, we will be here today. Just give us a call. Thank you and have a good day.

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