PAR Technology Corp (PAR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2010 PAR Technology's Earnings Conference Call. My name is Jeremy, and I'll be your operator for today. (Operator instructions)

I would now like to turn the Conference over to your host for today, Mr. Chris Byrnes, Vice President of Business Financial Relations. Please proceed, sir.

Thank you, Jeremy. And I'd like to welcome everyone this afternoon on our Conference Call for the Third Quarter 2010 Financial Results Review.

At this time, 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're 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 this afternoon is PAR Chairman and CEO John Sammon, Ron Casciano, the Company's Chief Financial Officer; and Greg Cortese, Executive Vice President for PAR Technology Corporation.

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 the Earnings Release this afternoon.

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'll be presenting the results for our third quarter ended September 30th, 2010.

The McDonald's technology upgrade initiative has begun, and we are working diligently to satisfy the requirements of this long-term customer. We are also experiencing increased levels of business with Subway, our international business units, and our distribution channels.

PAR's third quarter revenues were $61.2 million, a 22.6% increase from the $49.9 million reported for the same period in 2009. Net income in Q3 was $538,000, or $0.04 per diluted share; compared to a net loss of $778,000, or $0.05 loss per diluted share reported last year in the third quarter.

This past quarter's earnings were negatively impacted by an unexpected congressional decision relative to the Federal Department of Transportation funding concerning our logistics management systems business. This action had a negative impact of $0.03 for the third quarter and will impact the upcoming fourth quarter by $0.02.

For the first nine months of 2010, PAR reported revenues of $175.5 million, a 6.5% increase compared to the $164.8 million for the same period of 2009. Year-to-date, net income was $2 million, or $0.13 per diluted share; compared to a net loss of $293,000, or a loss of $0.02 per diluted share for the same period of 2009.

For the third quarter, PAR's worldwide hospitality revenue grew 41% from the same period in 2009. PAR's government revenues decreased 9.2% for the quarter versus the same period last year.

In our logistics management business, we are still experiencing the difficulties of an extended adoption phase as a transport industry. And [it's] specifically the cold chain segment transitions from early adoption to general business acceptance of Telematics Technology.

Product revenue -- product revenue for the quarter was $27.8 million, an 83% increase when compared to the third quarter of 2009 and a 21% sequential increase from the second quarter. The primary contributor to this increase was the accelerated technology upgrade in sales to McDonald's. Also contributing to the growth were higher sales to Subway restaurants and to our distribution channels. International product revenue also increased 33% in the quarter.

Service revenue for the quarter was $17.3 million, an increase of 1.5% when compared to quarter three of last year. Contract revenue was down 9.2%, to $16.1 million for the quarter. This decrease is associated with pass-through low-margin revenues that were present in the 2009 contract year but absent in 2010. In addition, contributing to the decrease were program funding cutbacks.

Now, turning to margins -- product margins for the quarter were 35.9% versus 34.1% last year. The primary contributing factors for this increase were our operational cost-cutting measures previously instituted in our hospitality business, and product mix; more terminals and less peripherals associated with our McDonald's business.

Service margins in the quarter were down slightly to 29.4% versus 30.1% a year ago. This decrease is due to higher call volumes associated with the acceleration of the McDonald's technology rollout. Contract margins increased to 6.3% from the 6.1% reported in the third quarter of 2009, and slightly higher than our normal range of 5% to 6%.

Now turning to expenses for the quarter -- SG&A for the quarter increased $1.4 million, to $10 million; as compared to $8.6 million last year. This increase is attributed to higher-commission dollars associated with the higher product revenues in the quarter, and also the continued investments in sales and marketing initiatives associated with our commercial businesses.

R&D expenses were $4.8 million, an increase of $1.1 million over Q3 '09. This increase is associated with our next-gen and new product initiatives in both of our hospitality technology businesses and in our logistics management business.

Looking at the first nine months of 2010 -- credit revenue for the year increased 37.1%, to $72.2 million, due primarily to increased sales to McDonald's and through our distribution channels. International product revenue increased 20% year-to-date with higher sales to restaurant customers. Service revenue was down 4.8%, to $56.1 million, primarily due to the completion of the McDonald's Combined Beverage Initiative which took place in the first half of 2009.

Overall hospitality revenue for the first nine months of this year increased 18%, to $122.1 million. Government contract revenue was down 11%, to $50 million, due to the previously mentioned lower pass-through revenues and completion of certain contracts.

Product margins were 34.5%, up slightly from the 34.3% reported in the first nine months of 2009. Service margins rose by over 300 basis points to 32.3%. This increase is due to more favorable utilization rates in cost reductions.

Contract margins were 6.2%, an increase from the 5.5% reported for the same period in 2009. SG&A increased by $2.5 million to $29.3 million, reflecting continued investments in our hospitality and LMS businesses. R&D expenses increased $2.5 million, to $12.6 million, due primarily to the previously mentioned new product investments in hospitality and logistics management.

As we exited the third quarter, the government backlog is a healthy $173 million. Cash flow from operations for the first nine months of 2010 was $6.7 million. Days outstanding for our commercial business were 57 days. And in our government business, they were 62 days. Inventory turns increased to four times in the first nine months from two times at the end of 2009.

In conclusion -- the McDonald's technology initiative was significant this recent quarter and will continue to be the primary business driver for the foreseeable future. However, Subway and Yum! Brands, along with our distribution channels and international business units, also accounted for PAR's strong revenue growth in the quarter and should be strong contributors going forward.

We continue to be pleased at the progress our restaurant business is making as we are witnessing improved business confidence with our targeted customers, even with the ongoing economic slowdown.

With respect to our hotel resort and spa business -- this area continues to be impacted by the reduction in capital spending by organizations in this industry. There are pockets domestically and in Europe and Asia where there are signs of improvement in the business environment for the midmarket and economy hotel segments. However, in our current target markets of luxury and independent resorts, the occupancy rate is increasing, but the average daily rate is still depressed, thereby reducing hotel operating income.

Our efforts to make PAR stronger and better-positioned as our markets improve are well underway, as we diligently develop our next-gen software offerings for both restaurants and hotels, and develop new products for our LMS business. Although these investments are impacting near-term results, they will increase long-term shareholder value as these new product offerings drive new customer wins, significantly expand our hotel and spa addressable markets and enhance and sustain our competitive advantage in our targeted markets. This investment strategy and focus should provide more consistent results, improve profitability and solidify our growth for the years to come.

PAR's logistics management business is still an early-stage company focusing on expanding its customer base. This past quarter, we've partnered with PeopleNet Communications Corporation to offer solutions combining PAR's trailer management systems with PeopleNet's onboard computing and communications solutions.

We were also selected by Chiquita Brands as a sole-approved supplier of trailer management systems for their refrigerated trailer network. We have taken a lead position in this emerging cold chain market and will continue to aggressively pursue new customer and partnership opportunities.

Going forward, our confidence in our company's business and standing in the industries we serve remains high. We have made significant progress with regard to many of the product [rolls] we've invested in during this economic downturn. We feel our go-to-market strategies will allow us to fully capitalize and profit from the growth from the product and service investments we are making in our business segments as the financials of the industries we serve improve.

With that, I'd like to thank you very much for listening. And we're now open for questions.

(Operator instructions) Brian Murphy, Sidoti & Company.

Hi, thanks for taking my question.

Ron, could you give us Yum! and McDonald's as a percentage of sales for the quarter?

Sure, Brian. For the quarter, McDonald's was 38% of total revenue, and Yum! Brands was 10%.

Okay. And I think Greg mentioned that international sales were up 33%. Can you give us a little bit more color on that? Was that mostly McDonald's, or Yum!? What was driving the strength there?

Brian, it was -- McDonald's, primarily in China and in Europe, were the drivers for the growth.

Okay. And on a quarterly basis, was that the biggest quarter you've ever had from McDonald's?

I believe it was, Brian.

Okay.

And I think in the past -- I mean, that's a pretty big sequential jump from the June quarter. I think on the last conference call, Greg said we could expect that to maybe ramp up sequentially -- September to December, sequential increase there. Is that still achievable for the fourth quarter for McDonald's?

Brian, no. The ramp in Q3 was actually higher than what we had expected. They had --

Right.

-- accelerated some of their installation schedules. So as a result, we had higher-than-expected revenue in Q3. And as a result, Q4 revenue for McDonald's will not be as high.

Got it, that makes sense. And --

(Inaudible) -- part of that, Brian -- this is Greg -- part of their revenue in the third quarter also was -- they're still buying peripherals from us. So peripherals were part of that mix in the third quarter. And as you go out, that mix will be changing to primarily just terminals.

Okay.

And Ron, how do we think about the service gross margin, going forward from here?

Well, certainly our goal is to get it over 30%, Brian. In the third quarter, we had some startup activity with the McDonald's rollout, which resulted in an increased call rate that we had to handle. And that was -- that usually happens when we're in the middle of a big rollout -- the call rate does increase. It should come down over time. And we should, over time, see the margins to go back up over 30% on the service line.

Oh, I see. So that's sort of a function of the much-higher-than-expected product revenue from McDonald's?

Yes.

Okay, got it. Okay, thanks very much.

Thanks, Brian.

Craig Hoagland, Anderson Hoagland & Company.

Hi. I was wondering if you could -- the loss of this government contract -- will it lead to revenue declines year-over-year for another quarter, or for longer than that, going forward?

Craig, this is John. The situation with the government contract you're referring to is a long-term joint funding program that we've had with the Department of Transportation. And over the last five years, we have received funding -- 50-50 split of funding -- to develop technology for the transportation industry.

We had our contract extended to the end of this year. And we put in our 50% of the funding. And we were expecting that the government would follow through, as they have in the last five years, with their 50% contribution.

Unexpectedly to us, Congress decided, due to political pressures and economic pressures, to send the funding that was intended for us to the states, and then gave the states the authority to do what they wanted to do with the funds. And our funds went to New York State, and New York State decided to put the funds in infrastructure development. And as we know, the infrastructure in the country is underfunded. And so our funds went into the infrastructure, causing the problem that we are citing in the announcement today.

So that funding will not continue in the future. That will be in our plan going forward.

Okay. And that's the reason for the revenue decline in the government segment?

That is a partial -- yes, that's right, it's a partial reason for the decline in the government contract revenue.

Okay.

Turning to R&D -- do you expect expenditure levels to be consistent with where they were this quarter going forward? Or could that go up, or would that come down as you work through that project, or those --

Craig, as we're in the middle of some very important next-gen development efforts, we'll see a slight increase in the fourth quarter in our R&D expenditures. And then, next year, they'll start to level off and come down as we complete some of these projects.

Okay. Thank you.

Paul Dorf, Dorf Asset Management.

Yes, hi, it's Carl Dorf.

My question is relating to the R&D, too. Is there anything unusual in your R&D expenditures for the new products? Or is this pretty much normal cycle of having your product come out and then having to invest in new products?

No, it's the latter. We're investing in some new products, some next-gen products. And as a result, we've increased our spend rate in the R&D area. So it's greater manpower --

It's --

-- and the combination of internal and some third-party resources that are assisting us.

I guess what I'm really asking -- is this just your normal business of your needing to invest in R&D (inaudible) product --

(Inaudible) The rate of spend this year is not our normal rate of spend, by any means. It's significantly higher because of the scope of some of the projects that we're currently investing in. So as I was saying earlier, when we start to complete these projects in 2011, we should see a more normal rate of spend.

When you say "more normal rate," what kind of a lower rate would be a more normal rate for a cycle [of] developing new products? Much lower than what you're spending now?

Yes. I would say around 6% of revenue.

Okay, thank you.

Sam Bergman, Bayberry Asset Management.

Good afternoon, gentlemen.

Good afternoon.

Couple questions -- first of all, I want to find out -- new customer wins in the hospitality or restaurant business in this quarter -- are there any that you can announce now? Or are there some that can't be announced, but they were wins for the quarter?

Well, Sam, in the quarter, there were -- let me just focus on one particular area that is -- contributed to the growth. Obviously, as we said earlier, McDonald's was the main driver in the growth. But one of our strategic areas that we're targeting for growth is our channel business. And our channel revenue grew 39% in the quarter, Sam. The base is still not what we'd like it to get to, but we are definitely headed in the right direction. And that growth represented sales to many different partners. So some we may have had before, some are new.

But that gives you a little flavor on some of the secondary reasons of what contributed to the revenue growth in the quarter.

If you take away the McDonald's ramp of the third quarter, and expecting it to be less in the fourth quarter, can you sequentially grow revenues in the fourth quarter with the Yum! business, the existing McDonald's business, ramping up; but a little less in Subway and everything else that's going on?

Sam, [we believe] we can. And the main driver for that sequential growth is we are anticipating an increase in our government contract business in the fourth quarter compared to the third quarter. And that will be the main driver for sequential revenue growth in Q4 versus Q3.

If we look at the SG&A, can you give me an idea, or maybe break out what the commission amount was in that increase in SG&A versus the spend in other areas?

Sam, we're not going to get down to that level. But just know that obviously commissions was an element of the increase because of the high product revenue that we experienced in the quarter.

Okay.

In terms of strategic alternatives with perhaps the LMS division or the defense division, is there anything ongoing with the Board right now in those two -- in those areas?

Sam, we wouldn't be disclosing what activities we have ongoing in the Board. But needless to say, we are always looking at our businesses to determine the best investments of capital going forward. So that's an ongoing process that we conduct. And you can understand that that's also something that would be coming up at our off-site meeting which occurs in November. But there's nothing specific to announce.

Okay. And is there any -- are you close at all to hiring a CEO at this point?

Well, yes, Sam, I think we're on track. As you know, we've hired a national search firm. And there is a special committee of the Board that is working with the search firm. We have -- the search firm has reported that they've reviewed numerous resumes; have conducted interviews with many candidates, both external and some internal. And they are making progress towards the objective of recommending back to the Board some final candidates for the full Board review.

Justin Borus, Lazarus Investment.

Good afternoon, guys.

Looking at the management logistics business -- for a number of years, your justification for having this business was, well, it's not costing us anything. Shareholders like me always thought this was a distraction, and we're not venture capitalists here. And now all of a sudden, it is costing us something. So how do you justify not selling this business, or doing something with it and keeping it in-house, as it is now?

Well, Justin, that question is something that we of course have to be looking at. You're correct that the business hasn't been costing us much in the past over the long term. And we're in a -- the business model, of course, is a very, very good business model. It's a recurring -- high-margin recurring-revenue business. And we have to get a number of units installed before the profitability really kicks in. So this recent event is something that just happened last month and is something that we have to be taking a look at going forward.

But we are making progress, nevertheless. We've got quite a few accounts that have taken our equipment and are in the process of slowly rolling it out as they buy new units. Food safety is a big driver for the [refer] business. And we have a number of accounts that we've mentioned before -- McDonald's, Tyson. We just announced Chiquita, and the Starbucks, Target.

And then there's accounts that are just using our equipment for logistics purposes, and there's several large ones that are doing that. They're -- Rider is a very, very large account that we have, and J.B. Hunt, and Hub in Chicago.

So there's a lot of possibilities for the growth of this business. But this unexpected event relative to the government funding is something that we have to be taking into consideration.

I mean, I don't need to beat a dead horse here, but part of my problem with management of this company is the lack of focus over the years. And there's a reason, I believe, that a number of years ago we were doing half the revenue, and we were making double the profits. I mean, we've made a huge investment over the years in personnel and other types of investments, and yet they still haven't paid a dividend. And it's getting awfully frustrating for shareholders that for 28 years now we've been investing for the long term. And yet, we've -- in 28 years have not created any shareholder value.

Do you sense the frustration from investors, in that we can't perpetually be investing for the long term? And at some point, gosh, when we have $61 million in revenues, we should be having a good earnings quarter as well.

Yes, I certainly understand the frustration that the stockholders would feel. But we have announced what our strategy is, and it's a Board-approved strategy. We are -- we have a platform of business that is progressing as we had anticipated. We have made decisions to make these investments in areas where we think we have a significant opportunity. And we have made these investments in the areas of software and recurring revenue. And this is the track that we're on.

As far as de-focusing is concerned -- I don't believe that we have a problem in that area. I think we have strong leadership in each of our four business units. And we have made significant changes in the organization. We have brought in a whole new team, a whole new management team in our primary business, which is the restaurant business; and similarly so in the hotel spa business.

And so we feel that we're on course, and we feel pretty good about the course that we're on. We're delivering in terms of the foundation platform. And the progress that we're making on our investments is quite reasonable, we think, at this point in time.

Well, this brings me to my next question on the CEO search -- what kind of skill set is management and the Board looking for in the new CEO? Do we have kind of a background that we're focused on? Is it a software background, is it a sales background, is it public company experience? What kind of mandate did you give your search firm?

Well, without going into a lot of detail, it really starts with the leadership capability. Public company background is one of the requirements, of course. Knowledge of industry is an important factor. Software solutions, I would say, beyond just software, is a very important factor in our determination. And a track record -- any individual that we would have would come forward with a track record of success, and a success within a company that has multiple functional units.

Yes.

And I think at this point in time, the candidates that we are getting look pretty good. And so I think that search is on track and will come to a successful closure in the near future.

Well, I just want to reiterate, for the Board members that are listening to this call, investors' frustration that the reason why we don't get the multiples of some of the pure plays in this industry is because we have four businesses; they're confusing. And we're probably not nearly as profitable as we could be if we had a very streamlined, focused business. But thank you.

You're welcome.

(Operator instructions) Sam Bergman.

Hi. Just a couple quick ones -- in terms of new customers or RFPs -- how would you compare the RFP pipeline right now versus last year this time, and also versus last quarter?

Sam, this is Greg. I think we're seeing --

Hi, Greg.

Hi, Sam. We're seeing some progress. We're seeing some additional RFPs coming out. However, it's still pretty slow. The market is still waiting to see exactly what the economy's going to do. So therefore, we're not seeing anywhere near as much as we saw probably four years ago. But we certainly are seeing some improvement over last year.

Great.

And on your next-gen software for hospitality -- are you planning to reach a certain plateau before you have a partner announced on the hospitality side? Or are you going to just continue the spend on the software regardless of having the partner at this point?

Sam, are you talking about the hotel side, or the restaurant side?

Only the hotel side.

On the hotel side, we are on track, and we will continue to spend for the development of this next-generation product. At the same time, though, we are in the process of working with a number of potential launch customers and hopefully will have somebody signed up before the end of the first quarter next year. And that seems to be on track.

And basically, they're -- as we stated before, the biggest reason we're doing this investment in this case is not only because we are looking for our next generation, from the standpoint of a technology standpoint, but more importantly, the fact that we were increasing our addressable market from the luxury independent resorts to a much broader market, both domestic and international. And in fact, it expands our market -- addressable market base by more than six times.

So you figure, by the second quarter of 2011, you will have a partner for the hospitality side --

Yes, definitely.

-- for the new software?

Definitely. The plan is the fact that we should be putting in our first stores with that person by the beginning of June.

When is that software supposed to be complete?

Would it be complete? Probably the end of the first quarter, beginning of the second quarter.

So how much of that spend in the R&D is related to the hospitality and next-gen software?

Ron?

Sam, let me just say, without getting into too many details, that the majority of the year-over-year increase in R&D expense is related to the hotel resort spa next-gen software in the project.

So then, we should expect, by the second quarter of next year, for those dollars to drop --

They should --

-- considerably?

They should start to decline.

Okay. Thank you.

Mr. Byrnes, there are no questions queued at this time.

Okay, thank you, Jeremy.

I want to thank everyone for joining us this afternoon. And obviously, we'll be available for any follow-up questions you may have. Thanks, and have a nice day.

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