PAR Technology Corp (PAR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2010 PAR Technology's earnings conference call. My name is Adam and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today, Mr. Chris Byrnes, Vice President for Business and Investor Relations. Please proceed, sir.

Thank you, Adam. I would like to welcome everyone this morning on the conference call for our second-quarter 2010 financial results review. At this time, I would like to take the opportunity to take care of certain bookkeeping issues, if I can, in regards to the call today.

We will be recording the call this morning. It will be available for play back and we are also broadcasting the conference call via the World Wide Web. So please be advised that if you ask a question, it will be included on both our live conference and any future use of the recording.

Joining me on the call today is PAR Chairman and CEO, John Salmon; Ron Casciano, the Company's Chief Financial Officer; and Greg Cortese, Executive Vice President for PAR Technology Corporation.

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 are earnings release this morning.

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.

Good morning, everyone. Thank you for joining us this morning. Today I will be presenting the results of our second quarter ended June 30, 2010. To begin with, I am extremely pleased to report that the long-awaited McDonald's technology upgrade initiative has begun and we now anticipate this pipeline of business will enhance our growth into 2012. In addition, we are working on several new business opportunities and developments which will add to that growth.

Now to the results. Second-quarter revenues were $56.2 million, a 3.2% increase from the $54.4 million reported for the same period in 2009. Net income in Q2 was $849,000 or $0.06 earnings per share compared to $238,000 or $0.02 per diluted share recorded last year in the second quarter of 2009. For the first six months in 2010, we recorded revenues of $114.3 million compared to $114.9 million during the same period in 2009.

Net income year-to-date was $1.4 million or $0.10 per diluted share compared to a net income of $485,000 or earnings of $0.03 per diluted share recorded for the first six months of 2009. In the second quarter, PAR's worldwide hospitality revenue grew 11% from the second quarter of 2009. Government contract revenues decreased 11% for the quarter versus the same period last year.

In our logistics management business, we continued to grow our installed base, add new customers, and see encouraging signs for this business.

Product revenue. Product revenue for the quarter was $23.1 million, a 34.4% increase when compared to the second quarter of 2009. This $23.1 million in product revenue was also an increase of nearly 9% sequentially for the first quarter this year. Contributing to this increase was the higher-than-expected sales to our major restaurant customers including McDonald's and Subway and increased sales to new customers outside the restaurant industry through our channel partners. International product revenue rose 8.2% in the quarter.

Service revenue. Service revenue for the quarter was $16.9 million, down 11.6% compared to Q2 of last year. A major component of this decrease was the completion of last year's service initiative with McDonald's related to their combined coffee beverage program.

Contract revenue. Contract revenue was down 11% to $16.7 million for the quarter. This decrease is associated with the passthrough of low-margin revenue that was present in the 2009 contract year but absent in 2010. Contributing to the decrease were contractual cutbacks in certain areas where the company was a subcontractor and the completion of certain contracts.

Now turning to margins, product margins for the quarter improved from 33.1% to 35%. This increase in margins was primarily the result of various cost-cutting and productivity measures which we have successfully implemented in our hospitality businesses. Service margins increased to 35.4% versus 29.8% a year ago. This increase is due to better utilization rates and efficiency measures which we have put in place. Contract margins increased to 6.5% from the 5.9% reported in the second quarter of 2009 and these are higher than our normal range of 5% to 6%.

Now turning to expenses for the quarter. SG&A for the quarter increased $1.1 million to $9.8 million as compared to $8.6 billion last year. This increase is attributable to investments in sales and marketing initiatives associated with our commercial businesses.

R&D expenses were $4.3 million, an increase of $1.3 million over quarter two of '09. This increase is associated with our next-gen and new product initiatives in our hospitality, technology and logistics management segments.

Looking at the first six months of 2010, product revenue for the year to date increased 18.5% to $44.3 million due primarily to increased sales to McDonald's and major sales made to non-restaurant accounts through our channel partners. Service revenue, however, was down 7.5% to $36.1 million due to McDonald's combined beverage initiative, which provided us with significant revenue during the first six months of 2009 and was completed in 2009. For comparison purposes without the McDonald's beverage program service revenues in the first half of 2009, our service revenue for the first six months of 2010 would have increased 3% over the same period of 2009.

Overall hospitality revenue for the first six months of this year increased 7.7% to $77.9 million. Contract revenue was down 11.9% to 33.9% -- to $33.9 million due to the previously mentioned reasons. Product margins were 33.7%, down slightly from the 34.4% reported in the first six months of 2009.

Service margins rose by over 500 basis points to 33.7% for the reasons previously stated. Contract margins were 6.1%, an increase from the 5.2% reported over the same period in 2009.

SG&A increased by $1.9 million to $19.3 million, reflecting as previously stated various sales and marketing initiatives which have been implanted in our hospitality and LMS business segments. R&D expenses increased $1.4 million to $7.8 million due primarily to the new product investments previously mentioned.

As we exited the first half of the year, the government backlog is a healthy $165 million.

In conclusion, the McDonald's technology upgrade initiative has begun. This past quarter we witnessed the start of this very large deployment and we are confident this will establish a strong platform for our future growth. This unprecedented initiative combined with the future deployment of our next-gen products in our hospitality business segments, and increased sales of our cold chain logistics technology into this new emerging market will improve our financial results and long-term shareholder value.

With respect to our restaurant business, we are encouraged by the progress our restaurant business is making as we are witnessing renewed business confidence with all of our major QSR restaurant customers. In addition to McDonald's, our QSR customers are continuing to perform well and we see continuing opportunity for increased sales in this area throughout the rest of this year and accelerating into the future both domestically and internationally. In fact, we have already started to capture Subway sales outside North America in the Middle East, Asia, and Europe and have now been selected as a sole preferred vendor by the franchise procurement groups in all of the Subway's international regions.

With respect to our hotel, resort and spa business, the global luxury hotel and resort industry remains under considerable pressure worldwide. While we have seen some improvement in occupancy levels in certain cities within the US, parts of Europe and several countries within Asia, the RevPAR in the segment we address has not improved. Thus we are impacted by the resultant hesitancy of customers in this segment to spend capital on new IT and by the credit market which has constrained luxury resort property development, a traditional source of new sales for the company. Notwithstanding this difficult business environment, our hotel, resort and spa business is performing very well.

Our efforts to make PAR stronger and better positioned as the economy in our markets improve are well under way. We are diligently pursuing next-gen software offerings for both restaurants and hotels and continue new product developments for our logistics business. In fact, our next-gen restaurant software was successfully deployed in two separate concepts in live field tests during this past quarter.

These investments are intended to increase long-term shareholder value as the result in new product offerings would significantly expand our addressable markets and drive new customer wins while at the same time securing our current customer base.

Our government business is down year-over-year due to the passthrough revenues we realized in 2009 that were not duplicated this year, certain funding cutbacks and the completion of certain contracts. However, analyzing our pipeline, we do not anticipate any further reductions this year and currently foresee a return to growth in 2011.

Our logistics business is focused on adding new customers and value through increased sales and marketing efforts, new product offerings, strategic alliances, and securing major reference accounts. We are very well positioned and are taking a lead position in this emerging cold chain market.

In closing, given reasonably improved macroeconomic trends, we have positioned ourselves to grow revenues, profits, and shareholder value into the future. The enhanced opportunity provided by the McDonald's initiative over the next couple of years combined with the potential growth opportunities provided by our investments in our next gen hospitality software and in our logistics business shall become the building blocks for our growth.

This ends our formal remarks. We would now like to open the call for Q&A.

(Operator Instructions) Eric Holmes, Fifth Third Asset Management.

Good morning. What was the cash flow and CapEx in the quarter?

Eric, good morning. This is Ron Casciano. Cash flow for the quarter was down $1.9 million. That is cash flow from operations. CapEx was $600,000 for the quarter. For the year to date, we have a positive cash flow from operations of $4.3 million and $2.7 million of CapEx.

And the negative cash flow in the quarter, is that due to ramping up for the McDonald's and other sales --?

Exactly. If you looked at the balance sheet, you'll see the ramp up in some inventory and in anticipation of the ever-increasing demand for McDonald's product.

Okay, great. Well, it's really nice to see this finally start to ramp up and I look forward to the next two years. Thank you, guys.

Brian Murphy, Sidoti & Company.

Thanks for taking my questions. Greg, just looking at the service gross margin, that's the highest service gross margin that I think I have ever seen. Is there anything one-time there? You mentioned some sort of initiatives that you've put into place. Is that a sort of sustainable level going forward?

I will let Ron answer that.

Good morning. We think it is sustainable going forward. We have been talking about some cost reductions. Obviously service was one of the areas that we looked at and we are starting to realize some of the benefits of some of the cost reductions and other things we did in this area.

Also I should mention that even though we are not growing the sales of new host software for our hotel and resort business at a great level, we still are seeing an increase in some software maintenance revenue which also contributes to the improved margin in this area.

Okay, great. I don't know whether this is for you, Ron, or for Greg. But, Greg, in your comments you mentioned obviously that the product revenue is pretty strong here this quarter. I think it's the first time I have heard you make some positive comments about the channel in a while. Can you just give us some color on what's happening there?

Yes, Brian, in the channel business, the channel part of our business consists of basically three areas. One is what we call a two-step distribution. We recently signed a deal with ScanSource to sell our product through their channel into new dealerships, both retail and hospitality and other areas that they may see a need for our particular terminals and hardware. As you are aware, they are very flexible devices and can be used for many different areas.

We have also putting through that channel a bundled solution or will be putting through that channel a bundled solution of pixel, our pixel software combined -- bundled with our hardware sort of a POS out-of-the-box. And that should start the end of next quarter.

The other segment, another segment of our channel business is our -- what we call our business partner group and that consists primarily of independent service -- independent software vendors who we approach with our hardware and our services and help them leverage what we have to offer our infrastructure to help them build out their business.

In this particular case, we had a great quarter because we had two very large sales, one to Agilysis for the Royal Caribbean Cruise line and another one for a major theater chain. And that wasn't through Agilysis. That was through another one of our channel partners. So both of those major sales came through during the quarter.

And the last part of our channel is our dealer, our pixel dealer network. We are growing our dealer network. However, there is some -- we are growing the number of dealers. The amount of business actually going through there is increasing over the prior years but it's not increasing at the level we would like it to primarily because of the fact that unlike our QSR customers, the mom and pops that the dealers primarily deal with are suffering through this economy right now. And as a result, they are not spending on IT -- new system ITs at this time.

Okay, thanks for all the detail there. Greg, I think you referenced that sort of business circumstances were still sort of tough on the hotel and spa side, but you mentioned that Springer Miller was doing well. Did that business grow during the quarter?

Over last year?

Yes.

Actually we did have some growth in topline revenue in that business quarter-over-quarter, Brian.

Great, and so the R&D is ticking up here and you guys mentioned that you're going to be making some investments in sort of next-generation technology both on the hospitality side and LMS. Could you give us any sort of detail as to the split, the incremental growth there? Are you focusing more on the LMS side or more on the hospitality side?

Well, actually I don't have that data that would give me that kind of split. However on the hospitality side, I can tell you this. The product that we're developing there, our next-generation product that we're developing there is being developed in a partnership with a company on the West Coast called Neudesic, who is one of the top developers for Microsoft. The product is on schedule, on budget. And in addition to being a next gen to replace our current product, the benefit of it is the fact that it will expand our market considerably and put it into new markets that we currently do not address with our current host product.

Okay, Greg, you also mentioned that you have some next-generation products that it seems like are getting traction in the marketplace right now. Are these products that have -- sort of is this the result of the big ramp-up in R&D that we saw in 2007?

Yes, well, it's actually the result of all of our the past year's efforts in coming -- in working on a next-gen product and we finally have and put in field trial into two separate concepts, one a coffee chain and one a burger chain. Our new point-of-sale product for the restaurant industry that was primarily targeted at the present time for the QSR market, it is the most recent technology and it should do very, very well. It's doing very well in these two concepts so far.

Okay, thanks very much.

Vincent Collicio, Noble Financial.

Good morning, guys, just a couple of questions. So the government business you mentioned funding cutbacks. So to be clear, is that the primary driver there or are you losing share with some of the contractors you worked with in the past?

Vince, a couple reasons. One, last year we had some low-margin passthroughs on certain contracts with -- involving subcontractors and a little bit of materials. That level of business did not recur this year. But in addition to that, we did incur some funding cutbacks on a few jobs. We expect through the second half of the year, we expect the government revenue to increase over what we reported in the second quarter. We have some real growth in some of the existing contracts and also there may be some passthroughs late in the year as well that will help the topline growth in that business compared to the second quarter.

Vince, this is John. I might add to what Ron said -- that we have had a flattening of our government revenue, in fact down in the first half. But we expect that going forward, as Ron said in the second half, we expect that it will probably be flat to 2009. But we are expecting looking at our pipeline to resume growth going forward in 2011.

So we think that we have had a plateau in the first half of this year, a little dip in fact, and we expect to see some growth beginning next.

Okay, a question on the table serve restaurant market. You know, it has been sort of stabilizing in recent quarters and it seems like you've got better traction in the channel. But I am just trying to isolate the table serve portion of the market and take out, the independent success you may be having, has the market improved? Is technology spending growing again there?

I would think in the table service markets that we are going after, which is primarily through the channel market, through the dealers, we are not seeing a significant increase in that area yet. That area still seems to be being pressured by the economy and there seems to be a lot of the smaller mom and pops going out of business and so we don't see that yet.

I think until employment picks up, that probably will be the case. Not necessarily the case probably maybe with some of the larger chains but at the present time, we are not addressing most of those larger chains.

Okay, one last question, Ron. I don't know if you've mentioned this already or not, McDonald's and Yum! proportion of revenue?

I did not mention any, Vince. McDonald's was 29% of the total revenue for the quarter and Yum! was 11%.

Okay. Thanks, guys.

Marc Shapiro, Palisade Capital.

Hey guys. How are you doing? Just a couple questions. Can you just run us through the numbers again on the opportunity around McDonald's and at what point do you expect to get to your I guess quarterly peak run rates? And then if you could expand outside domestically, talk a little bit about the international opportunity with McDonald's. And then I have a couple other questions.

Yes, I think we foresee right now as far as the ramp, we saw some in this past quarter. We will see an increase in this next quarter, I think an increase beyond that in the next quarter and then probably ramp to probably the second quarter of next year, at which point they will probably be at their maximum number of units being installed. And then you will probably see that max rate running for three to four quarters and then drop back off again as the last stores are installed at the ending period of the two-year period.

So sequentially we should see a ramp for the next four quarters or so and then we should see that run rate for several quarters before we see it taper off in (multiple speakers)?

Yes, that's what I would say.

How about internationally? Can you talk a little bit about the opportunities there?

Yes, internationally there is -- we haven't heard exactly yet, but Canada will be following the Americas or the United States in their ramp-up of this particular upgrade and that's about 1200 stores. That should either take place starting next year or somewhere around the end -- sometime during next year I would think that would start.

And then also certainly internationally, we are continuing to see -- it has nothing to do with the ramp-up here or this new [pause] but we are continuing to see growth in our China market and our other international markets.

Okay, can you talk a little bit also about how you expect the McDonald's revenue to play out over the next 18 months or so? Do you still expect the peripherals to not be part of the revenue opportunity therefore resulting in higher gross margins or will you get some of that revenue?

I think maybe we will probably get some of that revenue still for the third quarter. But then as the period runs -- goes forward, I think we should see less of that revenue, but we are not totally sure of that yet. It all depends upon the final plan that McDonald's has. That is their current plan. They probably will see that dropping off and it will be just primarily terminals and service.

So we should still see some for the third quarter and then start dropping off and be primarily terminals and, yes, the margins will definitely be an increase -- will definitely increase once the peripherals are eliminated.

Okay. And as far as the business model, sort of the operating model, as McDonald's ramps and revenue ramps for the company, I know McDonald's probably has some impact on the mix around margins. But can you talk about the operating leverage you might see at higher revenue run rates and could we get back to the 5% to 7% operating margin targets as we move into 2011?

Marc, this is Ron. You are exactly right on. We will see some nice leverage as the topline McDonald's revenue continues to grow and we will realize that as you say as an increase on the operating margin. And next year certainly that range is very, very doable and very reasonable.

Marc, also you bring up McDonald's but there's another player here that's significant to us also and that's Subway. Subway has been a major player both domestically and international. They also have new software that's coming out that they're building themselves, both for the domestic and international. They expect to start rolling that the beginning part -- end of the first quarter next year and that should cause a significant increase in the number of stores that switch their hardware and software at that point in time.

In addition, they are also announcing a funding program or a financing program for their franchisees, which is being done at no profit to Subway, but in order to incent people to move to the next generation of hardware and that should cause an increase in our sales there also. Although they are already increasing pretty good and we are getting 90% of all new orders at the present time.

So it sounds like if you roll up McDonald's, you roll up the government growing again next year and you roll up some of the activity at Subway that better than double-digit growth in 2011 seems pretty conservative.

That's a fair statement, Marc.

Okay. I guess the other question I have is around the pipeline. You guys have talked about some recent activities, some recent wins. Is there any update you can provide us on the recent win activity and at what point might we start to see that show up in the sales [part]?

Well, I think in the recent wins, one, we have announced in the past, that was a win, but hasn't started yet. And that should be starting in the end of the third quarter, beginning of the fourth quarter. And that was a large chain that had both domestic stores and international growth for us.

And then in addition to that, we have also coming out in addition is the Taco Bell. I think we mentioned that last time. Taco Bell also has new software coming out that should be starting to roll probably the beginning of next year again, and that will require a significant increase in the number of stores that have to put in brand-new hardware. In that case, there is probably 4500 stores that are going to need brand-new hardware out of that group.

As far as other new wins, we have a number of smaller wins but nothing of significance.

Okay. All right, thanks, guys.

[Sam Berfman], [Bayberry Asset Management].

Good morning, gentlemen. A couple questions. In terms of the McDonald's rollout, is that 100% green light at this point?

Yes.

So, can you give me an idea on what percentage of the hardware that has been outsourced the first six months and where do you expect that number to be at the end of the year?

Sam, in the first six months, it was probably less than half and our run rate towards the end of the year will be between 80%, 90% outsourced.

Outsourced.

Yes. As we exit the year.

And could you give me an idea --? You had mentioned, I guess Greg mentioned a couple new trials. Any name to those new trials and how large -- if these are new players and how large they are?

This is Greg. In the coffee initiative, it was a small player, not of major substance. However, the burger chain it's one of our existing customers. However, it's not a customer whereby we have a significant -- we have a portion of their software in their stores, but there's a large portion of their stores, probably 70% of their stores that do not have our software. So therefore this provides us with a significant opportunity going forward in that particular chain, and it's a chain that is of substance. It is somewhere around a 5000 to 6000 stores.

Sam, this is John. I would just like to add one other thing. This software is -- has been in development for some time and we are very satisfied with where we stand in the evolution of the software. As Greg indicated earlier, it is built on the .NET platform. It is SOA compliant and we selected to two opportunities to test the software and just to demonstrate the scalability. The coffee shop is a rather small operation whereas the burger chain is a full system including back office and quite a lot of sophistication. The software was running very well in both of those environments demonstrating both the technology and the scalability of that technology.

When would be your expectations of some type of contract to ship product to these places and install?

That's a work in process. We go through a beta test and then we look for launch partners, significant launch partners. I think that is what you would be referring to and we have a number of those opportunities before us. But we want to go through the beta test first and assure that the quality of the product is where it needs to be.

Actually we have three other accounts identified where this software be installed over the next few months. Again, various different concepts that we are putting it into. And at the end of all that testing is when we will then start a general release and start rolling into some major accounts.

When would you expect the software content of the revenue to start inching upwards?

It would be 2011, Sam.

First quarter, second quarter?

I would think towards the first part of the year.

And can you tell me in the SG&A, the LMS increase if you have that number?

Sam, we're not going to -- we don't disclose that level of detail. Obviously as you know, we are investing in that business and that is a reason for the growth in SG&A. But let me just leave it at that.

Okay, thank you very much.

(Operator Instructions) Brian Murphy, Sidoti & Company.

I just have a quick follow-up for John. John, could you just give us an update on the pending leadership transition maybe how the search is going and whether you are leaning more toward external candidates at this point or somebody in house?

Yes, Brian, the search has been kicked off with a prominent national search firm. We have not interviewed any candidates at this point in time. We are still collecting resumes and doing some vetting of some candidates. So it's too early to answer that question. We are -- have open minds relative to the leadership that we are going to put in place, whether it comes from the outside or the inside. So it's a little early yet to answer that question.

Okay, thanks very much.

Craig Hoagland, Anderson Hoagland & Company.

Hi, just a detail. You mentioned that Subway might be doing a software rollout next year. What's the number of stores do you think would be involved with that?

Domestically would be somewhere around 24,000 stores.

24,000. And how does the size -- or the dollar volume of each store compare to a McDonald's or a Taco Bell?

Much smaller, significantly smaller. Usually one or two terminal type stores versus six terminal store in a McDonald's.

Okay, thanks.

If there are no further questions at this time, I'd like to turn the call back over to PAR management for closing

Yes, this is John. I would just like to conclude by stating that we feel rather good about the position of our Company at this point in time. Both the management of the Company and the Board have done a lot of work in thinking through our strategy and looking at our opportunities. And based on the improvement, general improvement in the economy and the McDonald's rollout and forming a strong basis and foundation for growth going forward, this provides a platform for us. And we feel very, very good about the investments that we have chosen to make both in the hospitality sectors, that is hotels and restaurants, and in the LMS sector as well.

We think we're on a good track and we think that that's going to produce significant growth in revenue and profits and new markets which I think are very, very important for us.

We've also invested considerably in new management in the Company. I believe in our restaurant business we have 11 new executives from the top through the organization. A few of them are headcount adds, but generally replacements of people that we have had in the organization and a similar statement applies to the hotel sector.

So we really feel good and the Board and I feel good about the management that we've put in place and the strategies that we have put in place. And the progress that we're making on the investments. So I think all of this makes us conclude that we are on a very good track for 2011 and 2012 and into the future. So this is a long-term strategy and we feel very good about the progress that we are making in it.

Thank you very much for calling in and we will be available for future meetings and discussions relative to anything that you'd like to talk about.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.