PAR Technology Corp (PAR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 PAR Technology earnings conference call. My name is Channel, 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 call, Mr. Christopher Byrnes, Vice President, Business and Investor Relations. Please proceed.

Thank you, Channel. I would like to welcome everyone this morning on the call for our first quarter 2010 financial results review. At this time I'd like to take the opportunity right now to take certain care of 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'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.

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. Greg?

Good morning, everyone. After several successive quarters of struggling with the effects of reduced IT spending in the hospitality marketplace, I am pleased to inform you that we feel our business has stabilized and our restaurant segment is showing some very positive signs. We saw improvement in our pipeline at the end of the fourth quarter 2009 and continued into the first quarter 2010.

We are pleased to report that our first quarter revenues exceeded plan. The takeaway is that the long awaited technology upgrade initiative from McDonald's is finally in sight. In fact, we actually realized the initial positive effects of this in our first quarter as various McDonald's corporate stores accelerated orders prior to McDonald's biennial April worldwide convention.

We will commence the financial portion of this call by first providing an overview of revenue for the first quarter then move on to discussing our financial results, key operating metrics and a few comments on our balance sheet.

First quarter revenue was $58.1 million compared to $60.5 million in the first quarter of 2009. This decrease in revenue does not reflect our positive outlook for the year. Worldwide hospitality revenue was up 5% for the quarter. However, our government segment experienced a quarter versus quarter decline in revenue which was simply the result of the fact that in the first quarter of 2009, government contract revenue reflected a large low margin subcontract pass-through under one of its prime contracts. And in the first quarter of 2010, our prime contracts did not possess the same level of subcontract pass-throughs.

Net income was $582,000 compared to net income of $247,000 for the same period last year. This translated to earnings per diluted shares of $0.04 compared to $0.02 for the first quarter 2009. Operating cash flow for the first quarter was $6.2 million versus $738,000 a year ago. Our restaurant business collection cycle improved to 58 days from 64 days for the first quarter of 2009.

Now let's review the results for the first quarter in more detail. Product revenue was $21.3 million, a 5% increase over the first quarter of 2009. This increase was primarily the result of higher sales to McDonald's and a large sale of our newest, most advanced EverServe 6000 terminals to our dealer channel to a major theater chain.

Service revenue for the quarter was $19.2 million, down 3.7% compared to the first quarter of last year. This decrease was the result of McDonald's combined government initiative conducted in 2008/2009 that was completed during the first half of last year. This was partially offset by an increase in installation revenue related to the growth in product sales. Contract revenue was $17.6 million, down 12.9% for the quarter. This decrease was due to the reason previously stated. Our government business backlog was $170 million at the end of Q1.

Now moving onto margins. Product margins for the quarter were 32.3% versus 35.4% last year. This decrease was simply the result of product mix, higher hardware content, and a percentage of the overall product revenue. Service margins increased by 4.7%. Service margins were 32.2% this quarter versus 27.5% for the same period last year. This was the result of improved utilization rates across several service areas and cost reductions. Contact margins increased to 5.9% compared to 5% last year. This rate is consistent with our historical 5% to 6% range.

Now turning to expenses, SG&A expenses were basically flat at $9.5 million versus $9.6 million for the same period last year. R&D expenses were also basically flat at $3.4 million versus $3.3 million for the same period last year.

In summary, our first quarter came in above plan. This was primarily due to improved sales to our large restaurant customers. We are beginning to witness renewed consumer confidence and in turn are beginning to see a more positive outlook for each of our market segments. In particular with respect to our quick service restaurant business, our largest customers and their franchisees are continuing to perform well during this difficult economy and we see continuing opportunity for increased sales in this area throughout 2010 and accelerated into the future.

PAR's products, services, brand and infrastructure provide us with a very favorable position as these concepts continue to grow. Our efforts to insure that PAR is stronger and better positioned as the market improves are continuing as we invest in the development of next gen software offerings for both restaurants and hotels.

Regarding our McDonald's business, McDonald's continues to lead the restaurant industry by consistently posting outstanding results and this quarter was no exception as they continued to leverage their value and convenience offerings. In regards to their large technology upgrade program, we realized an initial ramp up of business through the first quarter as several corporate regions ordered in advance of their April convention. Final process testing for this vast initiative is taking place currently with the official kickoff of the rollout beginning in the third quarter of this year. As previously stated, this long-awaited program will increase our McDonald's business substantially in the second half of 2010 and throughout the next few years.

Our logistics management business continues to focus on growing their customer base through increased sales and marketing efforts, improved strategic alliances, and reference accounts. As an example, we are pleased to announce the competitive selection by Target of PAR's technology in support of their Fresh Food initiatives. PAR is well positioned to take a leading position in this emerging cold chain market as the market validates the value proposition of our technology for both asset management and perishable cargo quality assurance.

In conclusion, we are very pleased with the opportunities that we see ahead of us. Our McDonald's business continues to be and will be a significant contributor and strong business driver for PAR throughout 2010 and beyond. In addition, we are making real progress in each of our strategic initiatives. Our government business continues to be a positive contributor and our logistics management business should continue to build upon its recent commercial successes. PAR will continue to monitor and manage our costs across all areas and continue to implement new productivity and cost saving measures to do more with less.

This ends my formal remarks, and I now would like move on to Q&A.

(Operator Instructions). Sam Bergman, Bayberry Asset.

Hello. A few questions. I wanted to ask, what has been done in the first quarter in terms of finding ways of kicking out some added costs in the organization and what's the plan for the whole year 2010?

Good morning, Sam, it's Ron. How are you? Sam, as we've said in the past, we are continuing to look at the costs in our organization in all areas. As you know, we took, some cost reductions in the fourth quarter last year and we're continuing those efforts throughout 2010.

Can you give me any specifics at this time?

Well, we're planning on cost -- based on the efforts we started last year, we're looking at initiatives to lower the cost of our product, our hardware products. As you saw on the first quarter there was an increase in service margins, that's a result of ongoing cost reduction efforts and improved efficiencies in our service organizations. And you also saw a lower run rate in R&D in the first quarter. However, let me caution you that we will be continuing to invest in next gen products, particularly in the software arena, throughout the balance of the year. So that investment, that line will probably grow in terms of dollars throughout the balance of the year, although we will keep the percentage of revenue fairly constant as what we have reported in the past.

So in terms of the R&D growing going forward, do you feel the revenue will come first before the R&D increase so it doesn't affect the bottom line? Is that the way the year is planned out?

Yes, that's correct, Sam. You'll see, as Greg mentioned in the remarks, particularly with the ramp up of McDonald's in the second half of the year, that will provide the margin dollars to more than offset any growth we have in R&D expenses and therefore we should be growing the bottom line in the second half of the year compared to the first half.

How would you look at the actual margins of the McDonald's business going forward the next couple of years versus the ramp up that you guys had three, four years back? Are the margins typical, better, less? What can you tell me?

Well as some of the cost reductions to our product, our hardware product kick in, particularly in the second half of the year, we should see improvement across the board in all hardware margins. Margins with McDonald's are dependent on the mix and the store configurations. There's a lot of variables that go into that that could impact that one way or the other. In the past you're taking about three, four years ago, we've had different initiatives with McDonald's that have favorably and unfavorably impacted product and service margins over the years. So we hope to have more of those initiatives in the future. But in any case, whether they've been favorable or unfavorable, they've produced positive margin dollars to the bottom line.

Is this upcoming cycle any different or is it similar?

This upcoming cycle is for the most part, they are full systems upgrades to the stores. There are some stores that will be less than a full system and so it will be more your traditional margins. But as we reduce costs to the product though, we should see the hardware margins improve in the second half of the year.

In the past you had Panasonic working on this particular program in terms of competition. Was there also a competitor, SEI or SIE, working in this program and they're bowing out now? Or they don't have the hardware updates to work the program?

No we have never competed with SEI for the hardware, Sam. They haven't been a provider of hardware at McDonald's.

Okay.

Sam, this is John. McDonald's has declared there will be only two suppliers of hardware for this major technology upgrade and that would be PAR and Panasonic. And we do more than half of that business.

In the POS systems, can you give us some metrics if at all possible? I know Greg said that business seemed to have turned the corner in the fourth quarter and stayed somewhat robust in the first quarter. Are there -- is he saying that because there's more beta sites set up for new accounts? Or more RFPs out there? What's the basis on that, that he's going on?

Well, this is Greg. As far as RFPs, I don't necessarily think we're seeing significant input from RFPs. We have a couple of wins that we have yet to announce. One we announced or hinted to last year, the contract negotiations are continuing. The particular account had a recent convention and announced to everybody at the convention that we were the selection. However we have yet to be able to announce this or to start the rollout of that and that is, those are complete systems with software.

But we've had a significant increase this past quarter, I think it was 49% in our channel revenue, primarily in the hardware side again with very good acceptance and adoption of our newest terminals. They're very unique and capable and are being very attractive to most of the industry. We were able to pick up a very large order from a theater chain in that particular area.

And then also with respect to the overall QSR business at our major customers, they're all moving in the right direction. Between McDonald's, we've got continuing success with Subway, we recently signed agreements for three of their four international IPCs which would drive additional revenue internationally for Subway and we should be signing the fourth one very soon for the fourth IPC. Those are all the pieces and then there's certainly more as we go on.

And last question, then I'll let somebody else get on, if you look at the R&D invested, or the money invested in R&D the last couple of years, you look at the logistics business which has picked up and I guess has good software margins, when do you think PAR is going to hit their stride with the right mix of better software margins to have that POS area margins kick in and help the bottom line going forward? Are we looking at the third quarter, second quarter, or are we looking at 2011?

Sam, this is John. I think realistically we're looking at 2011 and beyond as far as the logistics management business. As you probably know, it's a recurring revenue business and it's a function of the amount of revenue and amount of profit that's derived from that business. We'll only comment as we're successful in putting in more units and the more units we put in, the more recurring revenue we have and the buildup therefore is over time. At least from that segment of the business it will take a year or two before anything significant will happen in that area. As far as software is concerned, we're working on the next generation products. We don't anticipate having revenues from those products in 2010, any significant amount. And so that will be a 2011 and 2012 occurrence as well.

Okay, thank you.

Brian Murphy, Sidoti & Company.

Hi, thanks for taking my questions. Ron, could you give us the percentage of business from McDonald's and Yum for the quarter?

Sure, Brian. McDonald's was 35% of total revenue for the quarter and Yum was 10%.

And what was cash flow from operations?

$6.2 million.

Okay. And did you guys talk at all about the rollout sort of timeframe that you're expecting for McDonald's, what your expectations are? And maybe how that compares to the last major upgrade cycle?

This is Greg, Brian. As we discussed I think in our comments here, the last rollout cycle I think was nowhere near at the level we're talking about here. As we've stated in the past, there's 14,000 -- every single store, all 14,000 stores, have to be upgraded. Now some have been upgraded, maybe 1,000 or so of those stores have been upgraded up to this point in time. Of that 14,000, a significant number, 8,000 to 9,000 stores will require complete systems, hardware, software. Others will require software upgrade and more minor upgrade in their hardware. They -- the McDonald's intention is to have this done in 18 months to two years maximum. So it's a much more accelerated program and as a result it's going to be a very significant, have a very significant impact upon our revenue over the next two years.

Again, as John had stated in the past, we and Panasonic are the only two approved terminal providers for this. And in general basically we're talking about terminals in just about every one of these stores that's going to have to be upgraded. So we see a significant input. We had some of this, we saw the initial portion of this in the first quarter with some corporate regions ordering ahead of the April convention. During this quarter currently they are going through their final stages of quality assessment of the processes for ordering and deployment of the systems. Because it is such a vast program, they want to make sure that everybody is onboard, all the players are onboard and ready to start moving with this thing, taking orders and deploying them with the least issues and problems. And then it should start up -- right now we're told it should start up in the second half of this year, second, third quarter. And the rollout will start at that point in time. We're talking about somewhere around 100 to 150 stores a quarter that will be implemented or more. Per week.

Okay, great. Thanks very much for that detail. So I know that the increase of business there last cycle did some nice things for the product gross margin. Given that this cycle will be, the rollout will be accelerated, I mean should we see anything greater sort of boost to the product gross margin there?

Yes, you will, Brian.

Okay, thank you.

Craig Hoagland, Anderson Hoagland and Company.

Good morning. Your press release mentioned it sounded like there were multiple customers who were getting into upgrade cycles. Is there someone besides McDonald's that's doing a large scale upgrade?

Yes, I think there are a few of them actually that are in the process. We should see -- one is another extension of McDonald's. It's an international piece of McDonald's that will be following along after the McDonald's US domestic markets get started. Probably six months, eight months, maybe nine months after McDonald's US starts, they will start. That's another opportunity for about 1,200 stores. In that case we are the exclusive provider, in that particular country we're the exclusive producer of hardware.

And then in one of our other major accounts, their next generation software should be taking off somewhere within the next year, year and a half at the most. It's already in a number of trial stores and if they go forward with this particular software, which they have invested in, then that will require an upgrade of approximately 4,500 stores, additional 4,500 stores, to brand new hardware because the other hardware that's in there right now just cannot handle the requirements for the new software.

And are you the exclusive hardware provider in that one?

At the present time we're the exclusive provider.

Okay. And could you say a bit about the table serve market and the hotel market?

Yes, the table service market is still struggling a little bit. Certainly from our standpoint we are somewhat new to the table service market with our Pixel product. And we sell that product primarily through dealers and some direct. We have a couple of accounts that have indicated that they want to purchase that product and install it this year. We're working with those clients right now to try to finalize those deals. But that market is still suffering a little bit. It's not coming back as quickly as certainly the QSR which has done pretty well throughout this economic downturn.

As far as the hotel business is concerned, as a reminder, we are in the luxury high end resort and spa market. The spa market seems to still be doing pretty well because the majority of our customers are very large and as a result we're exclusive with them. And as they open new hotels which they might have planned years ago, they have to put the spa modules in. But as far as the hotel pieces are concerned, the independent resorts, luxury resorts, they're still having a tough time. We're seeing some signs of improvement in some of the metrics, but it hasn't translated yet to significantly increased volume. [audio interruption]

Hello? You still there? You cut out on me just as you were talking about the hotels.

I'm sorry. In the hotel business, the luxury resort spa market, we're seeing some signs of improvement in that market. And if it continues we should see some improvement in our revenues. However, it's still a little early to tell and we'll see how that materializes over the rest of the year.

So really the cycle is unfolding as one might expect in terms of QSR being the most resilient and the other segments --

Yes. And especially when it comes to -- we've got some very good offerings. Notwithstanding the fact that we're working on next gen offerings, primarily in the beginning for QSR in restaurants, we have some very good offerings for the full service market. And if the market improves, we should see some significant improvements in that market because we have the products for that market.

(Operator Instructions). Vincent Collicio, Noble Financial.

Thanks, Operator. Just a couple of questions. Most of mine were asked. On the software side, did software revenue grow in the quarter sequentially? And also, what's the outlook for that? I know you talked about some clients upgrading over time, but what's the outlook for the balance of the year?

Software revenue did not grow in the quarter. As I think we mentioned a little while ago, we expect some software accounts to happen in the second half of the year that are currently in the pipeline going. And we expect some orders and we expect higher software revenue in the second half of the year.

And as far as the logistics business, have you seen -- what does the competitive landscape there look like? Have you seen any new competition there?

This is John. No we haven't seen new competition in this marketplace. As far as I know, we've won all the competitive -- well I know the ones that have gone down we have won. And as far as I'm aware, we are winning virtually all of that business. I think the business outlook is positive. We're pretty much on plan for this business. We do have one competitor, Elanco is the public company that we do compete with. But that's our major competitor. In every deal that we do that is competitive we'll see Elanco in the competition.

Thank you, John. And Ron, what was international revenue as a percentage of total?

International revenue was about 10% of the total.

Thanks, guys.

Sam Bergman.

A couple of follow up questions. Do you have any opportunities right now overseas that you can talk about?

Sam, this is John. Yes, there are opportunities that we're pursuing in the international marketplace. We can't talk about any detail, but yes, there are some that are ongoing. I also might mention in response to an earlier question about opportunities for the future, the Subway account continues to be a good account for us. As you know, they're very aggressive in their growth both domestically and internationally, especially internationally. And as Greg indicated earlier, that we are the approved supplier in three out of the four regions and we expect the fourth region to approve us as well. There will be some new software that's going to be delivered to the Subway system and there will be significant amount of hardware and services that will be required in order to run the software. And currently we're doing 85% of all the hardware business with Subway and so that would be another example of an opportunity that is international as well as domestic.

Added to that also is the fact that certainly as we mentioned before, we're the exclusive in China for McDonald's and we just recently won the Indonesian market also. And as they expand in both those regions, that also should push our revenues in those areas for McDonald's.

How many restaurants does McDonald's have in Indonesia?

I don't know that off the top of my head.

I don't know either, Sam.

Okay. And the last question, what's your plans for IAP for the remainder of the year? Or road shows or investment conferences?

I think, Sam, we'll be very visible this year and accept any invitations obviously that are offered to us as we'd like to be a good partner with our research team. And I think you'll see us on the road a pretty substantial amount of time this year.

Thank you very much.

(Operator Instructions). David Anderson, Anderson Hoagland and Company.

Hi, this is probably a question for Ron. The 150 a week installations ties to 7,800 a year or so. The 18 to 24 month installation cycle makes sense. What are the implications for your install and service teams? Do you -- can you handle that with the staff you have? Or do you have to go to temporary workers? Do you use subcontractors? How are you actually going to get this done from a labor point of view?

David, we do have several qualified third party partners that we use when we need them for our installation efforts and obviously we're going to have to make good use of them with this high anticipated volume.

So have you talked to -- do they have a heads up on this?

Oh, yes.

And just as you saw some of the regions sort of pre-buy and jump the gun before the April convention, do you expect that there will be some of that activity continuing here in the second quarter as well?

There will be some. It won't be quite as high as in the first quarter and then it will really kick in starting in the second half.

Okay.

And the primary reason for that, this is Greg, the primary reason for that is the fact that really McDonald's wants to insure that the processes that they put in place, that we've all put in place as a team for installation and deployment, are quality tested first. So they're going through that right now and as soon as those are approved, then we should see the significant kickoff. And those are progressing pretty fast right now, so therefore we should see them hitting the beginning of the second half that rollout will start.

So if you put yourself in the mind of the regions that did jump the gun in the first quarter, sort of what were they thinking? Were they thinking that they just didn't want to get caught in the backlog or were they thinking their systems were the furthest behind and needed the greatest degree of catch up? What's the motivations for some of those franchisees to jump?

In those cases, most of those were not franchisees. Most of those were corporate regions, corporate stores that wanted to assure that their systems were upgraded before the convention and also used as reference accounts to prove to the franchisees in the regions as to the improvements they're going to see by putting this new system in. And it worked because at the convention the excitement over what these franchisees have seen in the corporate stores and have been able to visualize as far as return on investment and the improvements in their speed of services, etc., etc., really enhanced their excitement about adopting this as quickly as possible. In fact to the point where McDonald's is concerned now that the excitement may be too great and they're going to have to slow people down some in order to be able to handle all these installations.

Excellent. That's great. Thanks very much.

Sam Bergman.

I forgot one question and perhaps you can help me on this. This is in regard to an unannounced contract that you mentioned in August for the rollout of I believe 1,200 restaurants stores for a certain chain with hardware and software. Can you give us any details of that particular rollout? Is it a rollout for 2010, or is it second half of 2010 or beyond that?

At the present time it's going to definitely be 2010 and it will be the second half of 2010. We've got some in now. I mean it's a small number now, probably 30 or 35 stores or so right now. And like I said, they mentioned it, they just recently had, about a month ago they had a convention and they mentioned it to all their people that we were the approved and selected, competitor selected provider. And we're just finishing up the last pieces of this. They want to also put together some unique processes here in order to order these things, for the franchisees to order. It's about 1,400 stores and we are putting those mechanisms in place for people to be able to more easily order, get the systems in and up and running.

So is that going to take place throughout 2010 or does it go beyond 2010?

It's pretty much I think it should be most would be in 2010, there might be some drag into the first quarter of next year.

And is it expected for all the stores to have your equipment, software and hardware?

Yes.

And is the final negotiations causing any reduction in the margins or are you just adding processes to these systems?

The latter.

Okay. Thank you.

There are no further questions. I would now like to turn the call back over to Mr. Christopher Byrnes.

Well we'd like to thank everyone for joining us this morning and we'll be available the entire day for any follow up questions you might have. Thank you.

Operator; Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.