PAR Technology Corp (PAR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PAR Technology fourth-quarter 2010 earnings conference call. My name is Anika and I will be your operator for today. At this time, all participants are in listen-only mode. We will have a question-and-answer session towards the end of this conference. (Operator instructions.) As a reminder, this conference call is being recorded for replay purposes.

At this time I would now like to turn the call over to Mr. Chris Byrnes, Vice President for Business and Financial Relations. Please proceed.

Thank you, Anika. Good morning, everyone. I'd like to welcome you to our conference call for the fourth-quarter and year-end 2010 financial earnings 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 morning, 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 morning 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 the earnings release this morning.

I'd now like to turn the call over to Greg Cortese for the formal remarks portion of our call, which will be followed by a general Q&A.

Greg?

Good morning, everyone. Today I will be presenting the results for the fourth quarter and year ending December 31, 2010.

For the fourth quarter revenues were $64.4 million, a 10.7% increase over the $58.2 reported for the same period in 2009. Net income for the period was $1.2 million, or $0.08 per diluted share compared to a net loss of $4.9 million, or a loss per diluted share of $0.33.

For the year, revenues were $239.9 million, a 7.6% increase compared to the $223.0 million in 2009. Net income for 2010 was $3.1 million and earnings per diluted share were $0.21. This compares to a net loss in 2009 of $5.2 million, or a loss per diluted share of $0.36.

For comparison purposes, the fourth quarter of 2009 and the 2009 year's (technical difficulty) --

You may proceed, sir.

Okay. Thank you. I apologize, everyone, for the technical difficulty we just experienced. We're back on line. I hope everyone is still with us. And I turn the call back over to Greg Cortese.

I'm going to start over again. Again, I apologize also. We don't know where the problem occurred, but let's begin again.

The fourth-quarter revenues were $64.4 million, a 10.7% increase over the $58.2 million reported for the same period in 2009. Net income for the period was $1.2 million, or $0.08 per diluted share, compared to a net loss of $4.9 million, or a loss per diluted share of $0.33.

For the year, revenues were $239.9 million, a 7.6% increase compared to the $223.0 million in 2009. Net income for 2010 was $3.1 million and earnings per diluted share were $0.21. This compares to a net loss in 2009 of $5.2 million, or a loss per diluted share of $0.36. However, for comparison purposes, the fourth quarter of 2009 and the 2009 year's results were impacted by one-time charges that reduced operating income by approximately $6.5 million. In addition, in 2009 the Company recorded a $1.4 million valuation allowance for certain deferred tax assets.

Now looking specifically at the fourth quarter, product revenue for the quarter was $29.2 million, an increase of 46.6% compared to the same quarter of 2009. Contributing to this increase was the continuing domestic McDonald's technology upgrade initiative. Other contributors to this increase included sales to McDonald's China, new accounts and dealer channels.

Service revenue for the quarter was $18.6 million, an increase of 3.2% compared to the fourth quarter of last year. This increase was due to additional service opportunities related to the ramp-up of McDonald's business.

Contract revenue was down 18% to $16.7 million for the quarter as a result of the decrease in low-margin pass-through revenues that were present in 2009, but were not duplicated in 2010, and also in the delay of certain contract start-ups.

Product margins for the quarter increased to 34% versus 27.9% in 2009. Contributing factors for this increase were a more favorable product mix of hardware versus peripherals and the fact that in 2009 the previously mentioned one-time charges had a negative impact of 470 margin basis points.

Service margins increased in the quarter to 33.8% versus 7.4% for the fourth quarter of 2009. This increase was due to more favorable utilization rates, improved efficiencies, cost reductions and the fact that the referenced one-time charges in 2009 had a negative impact of approximately 2,500 margin basis points.

Contract margins increased to 7% compared to 5.6% last year, as higher margins were realized in the quarter, with the completion of certain contracts.

Now turning to expenses for the quarter, SG&A for the quarter increased $2.1 million to $11.5 million. This increase is attributable to the growth of our hospitality sales organization and increased commissions directly related to product revenues for the quarter. R&D expenses increased $400,000 in the quarter due to continued development associated with our next-gen hospitality software initiatives.

Now looking at the year, product revenue rose 39.7% to $101.4 million, primarily due to increased sales to most of our major hospitality accounts and our growing distribution channel business. Service revenue was down 3% to $71.9 million, primarily due to reduced demand for our depot repair and field service as a result of the increased percentage of new equipment installs within the last year which are still under warranty, and also due to the fact that in 2009 we realized significant revenue from the McDonald's combined beverage initiative.

Government contract revenue was down 13% to $66.6 million. This decrease was due to the previously stated reduction of pass-through revenues, and also a delay in the start-up of certain contracts. However, our pipeline remains strong, as we exited the year with a contract backlog of $158 million.

Product margins were 34.4%, up from the 32.5% reported in 2009. Service margins rose to 32.7% compared to margins of 23.8% in 2009. The previously-mentioned one-time charges in 2009 had a negative impact of 610 margin basis points. Contract margins increased to 6.4% from 5.5% in 2009.

SG&A increased by $4.6 million to $40.8 million. R&D expenses increased $2.9 million to $17.1 million.

DSOs for our commercial business improved to 59 days from the 63 days in 2009. And for our government business DSOs were 58 days, down from 64.

And PAR's operating cash flow improved to $12.6 million from the $7.1 million reported in 2009.

Consistent with our overarching strategic objective of obtaining predictable, sustainable and increasing revenues and profits through the growth of high-margin recurring revenues from a broad and more diverse global customer base, 2010 was a year of significant investment, combined with growth from legacy customers and enhanced new channels. Although these focused strategic investments dampened 2010 profitability, we did accomplish a great deal.

We were selected by Baskin-Robbins' parent company, Dunkin' Brands, to be Baskin-Robbins' sole domestic POS technology vendor for their 1,700-plus US stores. And we successfully finalized an agreement with Dunkin' late in the fourth quarter and began deployment. We are deploying the complete solution -- software, hardware, and services. In addition to their US stores, Baskin has approximately 4,500 stores internationally.

We solidified and expanded our position as a dominant in technology and service provider with McDonald's globally. Our channel revenues increased significantly over 2009. We initiated a partnership with ScanSource. We added several new dealers and resellers and won two new major accounts, Royal Caribbean Cruise Line and Rave Theaters.

We increased our international product revenues in 2010 across all regions. And for the year we experienced an increase of 27.4%.

Our logistics management business added 22 new accounts, including Chiquita and Target, and also added PeopleNet as a key strategic partner.

Our government business continued to show a strong backlog of $158 million. And our PAR Springer-Miller business unit won and deployed 24 new host systems, upgraded many others, and added 52 new major [spa] sites.

With respect to McDonald's, we continue to work closely with them on the deployment of their new point-of-sale software and the upgrade of their store systems. PAR captured a significant number of upgrades throughout 2010, with an accelerated rate in the second half of the year. Consistent with the seasonality we have experienced for many years, we expect that McDonald's sales will slow in the first quarter of 2011 and then ramp up again as the year progresses.

McDonald's, as our largest customer, continues to be and will be an important to our future success. However, as stated above, our strategy and focus is on significantly expanding our business outside of our traditional large restaurant customers, through broadening our business model, our markets and our product offerings.

Our distribution channels are expanding and our next-gen software development efforts are on target, with expected release of various products throughout 2011. Success with these transformational initiatives will reduce our dependency on large accounts, create broader revenue streams, and improve predictability and consistencies.

With respect to our hotel, resort, and spa business, we have done well in navigating the ongoing recession, with revenue growth of almost 10% in the quarter. Our team has performed well during a difficult period. And we are excited at the new opportunities and significantly expanded market the next-gen software will allow us to compete for.

Our government business was impacted by certain contract delays, reductions of lower pass-through revenues which did not materialize in 2010. We are aggressively pursuing new contract opportunities and remain confident in this business.

This concludes my remarks and I will now turn the call over to John for some closing remarks.

Thanks, Greg. Good morning, everyone.

I'd like to take a moment to comment on a very sad time for me personally and for our company. The unexpected and sudden death of the president of our restaurant division, Ed Soladay, affected all of us deeply. Ed came to us a little over two years ago to lead our restaurant technology business, and he built out a strong and very experienced new management team, and then led them by generating a winning attitude and a passion for success. And I know Ed loved his job and inspired confidence in all of the team.

For present I have assumed Ed's responsibility and will work closely with PAR's Board to install a permanent leader for our restaurant business. As CEO and Chairman of PAR, I'm very familiar with our restaurant business and worked with Ed daily on the transformational efforts underpinning his strategic efforts. I'm very fortunate to have a professional staff that continues to carry out the day-to-day operations. And so I have no doubt the Company can, and is, carrying on without Ed.

Last year I announced my intention to retire, and that remains my intent. The search has taken a bit longer than planned, and then, with the death of Ed, the situation was altered to some degree. Our search for a new CEO is continuing and, although it has been temporarily slowed by Ed's passing, we are now on track, working with a global search firm to fill the position.

And with that, I'd like to turn it over to questions.

(Operator instructions.) Vincent Colicchio; Noble Financial.

Nice quarter, guys. John, could you give us a little bit of help in terms of the McDonald's business? Over what period of time going forward will that roll out and sort of how does that look by quarter in 2011?

Yes, Vince. The McDonald's rollout is progressing well. There's a significant portion of the rollout yet ahead of us. The plan going forward is one where we expect that the rollout will be completed in early 2012. However, the objective of McDonald's is to complete it by the end of 2011. Just to be prudent, our plan has a little bit of a slippage and we think it's going to carry on in the first quarter of 2012.

As far as the projection quarter to quarter, I believe that in the first quarter it will be a little bit less than in the fourth quarter. I think that the shipments that were made in the fourth quarter are ahead of the installation schedules that we see going forward. And so we would expect them to have some downturn in Q1, but then restoring for the rest of the year.

Okay. On the SG&A side, the percentage was a little bit higher than I was expecting. I realize commissions went up, but I was expecting a little bit more leverage. I think in the past when you put up that kind of a revenue number you had a little bit of a smaller percent of revenue. Is that a new -- did you hire -- add sales people? Anything significantly happen in the quarter to make the number go up besides commissions?

Vince, hi. This is Ron.

Certainly commissions were a big part of the SG&A number. There was some reallocation of existing resources into the sales organization, as well as some external additions to the sales organization. Going forward, probably you'll see that number, that percentage of revenue, trending down. And we hope to end 2011 under 17%.

Okay. And one more for you, John -- how did overall software revenue -- could you characterize how that performed for both the hotel and restaurant side in terms of if there was growth on a year-over-year basis?

Vince, I'll take that if you don't mind. Total software revenue for the quarter was up slightly, but overall for the year it was down. There was some puts and takes amongst the pieces. But that's the overall trend. So obviously we were disappointed in the year's results. Certainly the plan next year is to increase it by a nice percentage going forward. So it won't happen right away, but by the second half of the year -- as you know, we've been investing in new products. As we get to roll out those new products we hope and are planning for our software opportunities to increase.

I think there's a couple of factors there, Bob, with the software. The hotel business has had hard times in the last couple of years with the downturn of the economy, although that's restoring, as you see in the fourth quarter. Also, we're out talking to our customers about our next-generation concepts. And with that there's some anticipation of the new product coming forward and that we would have an obvious slowing of some sales due to that particular factor.

We are planning to release next-gen software, both on our restaurant side and in our hotel business, in 2011. So, as Ron said, the expectation is that we would be building our software revenues in the future years. Which is consistent with the overall strategy of the Company, is to build our business through software, solutions with hardware and software where appropriate, and building a high-value, recurring revenue business going forward.

Okay. Thanks, guys.

Additionally, I just would point out, though, that we -- as Greg announced, we did win the Baskin account, which is a significant win in software going forward. That is a solutions sale. It's hardware, software, and services. So we're rather pleased with that win.

Thank you.

(Operator instructions.) Elizabeth Cooper; Observer Dispatch.

Hi. This is Elizabeth Cooper from The Observer Dispatch. I was just wondering whether some of the strong numbers that you've given could have a ripple effect here in the Mohawk Valley in terms of job creation?

Yes, this is Chris. Obviously we're always monitoring our staffing levels and that's an ongoing initiative. And we'll add or replace whatever staffing levels that we need to meet our business responsibilities.

Okay. Thank you.

Sam Bergman; Bayberry Asset Management.

A few questions -- can we go back to the SG&A where the commissions seem to have been a good portion of the SG&A? I'm just curious; with the McDonald's business being such a large percentage of the increase in the fourth quarter, why were there large commissions? And how is that defined in the quarter?

Sam, I'm not sure I totally understand but certainly the commissions are based on -- all revenues are different commission plans for each type of sales, McDonald's included, obviously. So that was -- as McDonald's revenue grew and the other revenues grew, if you look at sequentially our product revenue is the highest in Q4 versus the other quarters of 2010. And therefore the commissions were the highest in Q4.

What was the makeup of the rest of the G&A? You added some staffing. That seems to me to be a pretty high amount for a quarterly increase in SG&A.

Well, we added to our sales organization. Like I said, there were some reassignment of staffs from other functional areas into the sales organization to focus our efforts on new business and some of the sales activities that we are doing. That was not necessarily an overall headcount increase, but it was just a realignment and -- of responsibilities.

Also, a minor reason was we funded our retirement plan in the fourth quarter. That didn't happen a year ago in the comparable quarter or in the third quarter this year, for that matter. So that was a Board decision that was a nice thing to do for the people, so. But those are the main reasons, Sam.

Okay. Can you give me a timeline of the hospitality -- of the new next-gen hospitality suite, when it's being released in 2011? And at the same time, can you tell me if you've gotten somebody -- anybody on board to be behind that software as a lead hotel?

Yes, Sam. The next-generation hotel product will be released in its first version in Q2 of this year. And then what will happen at that point in time is we will be going into alpha tests with some launch partners. And with success with those alpha tests we'll be moving on to the beta tests and by the end of the year we should have a fully released product, moving into 2012.

If you look at all the market share Micros has in the POS systems over the last 10, 15 years, what makes you think that software, a new next-gen software in the hospitality suite is going to take away market share from them, when they've been so difficult to dig into in the POS area?

Well, Sam, I think there's room in the marketplace for a number of competitors. And based upon our reputation with the major accounts that we have globally, we're in a good position with a reputation that's very, very positive for building reliable products and giving excellent service. We feel that we have a very nice opportunity to compete against Micros and others.

Of course, we've also been looking at what the market requires in terms of new features, functions and architecture for software. And we've taken that into account and are truly building out a next-generation product which has functionality and has features that we feel will be very attractive to the general marketplace.

But I think it's our understanding of the requirements of the marketplace, the fact that we have an outstanding reputation in the restaurant market, vis a vis the largest restaurant companies in the world, and a great support organization.

Can Greg give us an idea of what the pipeline looks like for new opportunities this quarter versus the prior quarter? Hello?

Yes, we're here.

Sam, we're chasing a pretty large pipeline in looking at 2011 business. However, we don't -- we're not planning for a lot of that pipeline to actually close and turn into revenue in Q1. It will be later in the year.

We mentioned a new win with Baskins. Certainly that'll be a contributor to Q1 as a new account. But beyond that other new wins are planned for later in the year.

This is Greg. Some of the other drivers, I think, for the year, though, is we have been approved for sale into the Pizza Hut account in 2011, which is new for us. Our competition there is Wincor-Nixdorf, which is the incumbent. We think we will pick up a number of accounts there, in the franchise community in particular. Baskin-Robbins we mentioned.

Channels will also be a significant driver of this year. And those are coming through our various channel markets. We have distributors like ScanSource. We have ISVs, which are the independent software vendors that are -- have niches in particular retail or other hospitality-type segments that we don't play in. But we can provide them with the hardware that they desire and the services that they desire. And, as a result, we form partnerships with them, which should expand those channel markets.

And then also, internationally we have -- are investing money internationally. We had a great year this year, a great increase, and we expect that to continue both -- across all areas, both hotels, restaurants, channels, the whole area.

And also we expect the Subway account, which we won a year or so ago, to expand. We are picking up over 90% of all accounts when they come up for a renewal of their hardware, or for new stores. And that also will grow both domestically and, in particular, internationally.

So on the new account, the Baskin-Robbins account, can you tell me was that received through a reference account or was the technology that you have and the hardware far superior than competition? How was that awarded to you guys?

That was a competitive process. It was us against Micros and Radiant, all the normal people that we compete against. And we won it with our software, our hardware and our services.

Thanks. And going on to the LMS business, can you give me new accounts, the comparison this quarter to last quarter? I think you said there were 22 new wins or new accounts in the LMS Division?

Yes. That was a year-to-year comparison.

Okay. So can we do year-to-year, please?

Yes. Well, as Greg said, there was 22 new accounts. Most of them were small accounts. The larger ones were Chiquita and Target. The smaller accounts are coming through a dealer network that we have set up. We have direct sales to large accounts and we have dealers that are selling to smaller accounts. So we have a nice balance of our business going forward, which is something that we really want to stress in all of our businesses, is to get a broad distribution of customers and revenues and not have dependencies on just a few accounts, which is just fundamental to our strategy going forward.

So the 22 accounts are comprised of some large accounts and numerous small accounts. I think we're doing well in that business relative to building a pipeline. We have large accounts that have continued to buy month to month and quarter to quarter and now year to year. And the Ryder account is an example of that, is that Ryder is buying from us exclusively and is putting our equipment on all of their new reefers that they're building for this year.

So we feel that the business is progressing on plan and we're -- it's heading in the direction of a high-value, high-margin, recurring revenue business.

Thank you very much.

(Operator instructions.) At this time we have no further questions. I would now like to turn the call back over to Mr. Chris Byrnes for closing remarks.

Okay. Thank you, Anika.

Just want to thank everyone for joining us on the call today. We'll be available today for any follow-up discussions you'd like. And, again, thank you again.

Ladies and gentlemen, this concludes the presentation and you may now disconnect. Thank you and have a great day.