PAR Technology Corp (PAR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First-Quarter 2011 PAR Technology Corp. Earnings Conference call. My name is Tania and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Tania, and good morning to everyone. I'd like to welcome everyone this morning to the call for our first-quarter 2011 financial results review. I'd like to take this opportunity right now if I can to take care of certain bookkeeping issues in regards to the call today.

We will be recording the call this morning, and it will be available for playback. Also we are broadcasting the conference call via the World Wide Web as well. So, please be advised, 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's newly appointed Chairman and CEO, Paul Domorski; John Sammon, PAR's Chairman Emeritus; Ron Casciano, the Company's Chief Financial Officer; and Greg Cortese, Executive Vice President and General Counsel.

I'd like to now 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 is subject to the Safe Harbor Statement included in our earnings release this morning.

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

Thanks, Chris. Good morning, everyone. For the first quarter, revenues were $55.8 million, a 3.9% decrease over the $58.1 million reported for the same period of 2010. Net income for the period was $404,000 or $0.03 per diluted share compared to net income of $582,000 or $0.04 per diluted share last year.

Looking specifically at the first-quarter details, product revenue for the quarter was $22.9 million, an increase of 7.7% compared to the same quarter of 2010. Contributing to this increase were international sales to McDonald's, growth in the Company's dealer channels, including both hardware and software, and sales in the Company's logistics business.

Service revenue for the quarter was $6.1 million, a decrease of 16.1% compared to the first quarter of 2010. Service revenues in the hospitality segment were negatively impacted by fewer McDonald's installations. Due to an accelerated deployment schedule, McDonald's is utilizing outside system integrators to meet an aggressive systems upgrade objective.

Contract revenue was down 4.6% to $16.8 million for the quarter as a result of funding delays on various contracts with the Department of Defense.

Product margins for the quarter increased to 38.5% versus 32.3% in 2010. Contributing to this increase were improved manufacturing efficiencies, a more favorable product mix of PAR terminals versus peripherals, and a 13.4% increase in software revenues.

Service margins decreased slightly in the quarter to 31.6% versus 32.2% for the same quarter of 2010. The aforementioned decline in deployment installation revenues also negatively impacted the margins. Contract margins increased to 6% compared to 5.9% last year.

Now, turning to expenses for the quarter, SG&A for the quarter was $9.9 million compared to $9.5 million in 2010, an increase of 3.9%. This slight increase is attributable to the Company's investment in the hospitality sales and marketing organization. Also contributing to the increase was a change in the currency rates.

R&D expenses increased $695,000 to $4.1 million in the quarter due to continued development associated with our next-gen hospitality software initiatives. DSOs for the commercial business was down to 57 days versus 58 days in Q1 of 2010 and down to 60 days from 65 days for our government business.

Our first-quarter results, although down from the previous year, came in on plan from a revenue and profitability standpoint. In the global hospitality QSR segment, our two largest customers, McDonald's and Yum!, are continuing to do well, as evidenced by the recent strong quarterly results and compared to the same-store sales.

We also see continuing opportunity in this segment with several of our newer accounts, such as Subway, Baskin-Robbins, and Pizza Hut, which also possess a large and growing international presence. PAR's products, services, and worldwide infrastructure provide us with a very favorable position as these concepts continue to grow globally.

Our hotel and spa business is starting to see a gradual and long-awaited recovery from the significant slowdown of the past two years. The timing of this recovery, and the substantial progress we are making in our next-gen software initiatives, seem to be in lockstep.

PAR's next generation of software initiatives in both restaurants and hotels are making steady and predictable progress. Early reviews of our offerings are very positive and, by all accounts, our hard work in identifying the market requirements, coupled with innovative implementation, has hit the mark.

We fully expect to start realizing the benefits of these investments by the end of this year and gain traction in 2012 and beyond. Simply stated, our strategy is to make PAR stronger and better positioned in the marketplace with the right products designed with the latest technologies and with a service capability that is second to none in the hospitality sector.

Our logistics management segment had an improved first quarter with revenues growing 28% from Q1 of 2010. However, we continued to operate off a small base and currently have approximately 17,000 units deployed in the field.

And so our government business, it appears that we are now beginning to be impacted by growing austerity within the DoD. While affecting our topline, we nevertheless have been able to manage our bottom-line performance and expect to be able to continue to deliver bottom-line results in spite of potential contractual slowdowns.

As for R&D and SG&A expenses, we continue to closely monitor all of our costs. This exercise in analysis is ongoing as we assess and implement more efficient ways of doing business. We also will continue to fund projects and initiatives that we feel have long-term intrinsic value to our business and have a real return on investment to our shareholders.

In conclusion, I'd say that our business is in transition. Over the past decades, we have built a strong hospitality business with an outstanding array of marquee accounts, along with a reliably profitable government business. Currently, we are investing in new products and channels in order to take our Company to a new level of prosperity. We feel we are making real progress, which in the long-term will improve margins, win new customers while preserving current customers, broaden distribution, and reduce dependency on major accounts.

I hope you'll excuse me for taking this opportunity to end on a personal note. On Monday of this week, I announced my retirement from my position as CEO, President, and Chairman of PAR Technology. I believe this is a good time for my decision since PAR is now well-positioned to enter an exciting area of growth resulting from the efforts of our Board and our management working closely to craft detailed business strategies.

Additionally, over the past few years, we have staffed our business with strong, experienced management personnel, who are fully engaged in the execution of their plans. Our Board and I have worked closely with our new business leaders to assure the continuance of the same principles which have built our Company and preserved our long-term customer relationships, namely the delivery of quality products and services, with integrity, thereby earning the trust of our customers. It is in fact this trust which is the foundation of our business.

42 years ago, I founded Pattern Analysis & Recognition, never anticipating it would become an NYSE international corporation with 1,700 employees, serving prestigious global corporations. Without the efforts of hundreds of employees and numerous customers, none of this would have been possible. So it is with a sense of profound gratitude and humility that I want to thank these people for creating PAR, while providing me with such an interesting career.

I will continue my involvement as Chairman Emeritus and Member of the PAR Board, and in this capacity, I will have the continuing privilege to work with management and our Board to help guide our Company.

I certainly have some mixed emotions about leaving a job that I love, but I feel good about leaving at this time, since we have in place a well-thought-out strategy, strong management, and now Paul as our new leader. I am confident our team is both capable and driven to execute our strategic plans and with success, PAR will generate significant growth in the years to come.

Paul has now succeeded me as CEO and Chairman of the Board. Paul comes to PAR with a distinguished record as a very successful business leader. I welcome Paul to the PAR team and know that his extensive experience and leadership in public companies, service businesses, mergers and acquisitions, DoD contractual business, IT solutions and integration, manufacturing and hardware and software products has prepared him well to lead us forward.

And now, I'd like to invite Paul to say a few words.

Thanks, John. I'm very excited to join PAR as Chairman and CEO. I want to congratulate John, and what he has accomplished, and thank the PAR Board for their confidence in me. Well, today is my third day on the job, so you can't expect me to have many conclusions. But, I thought I would share with you some of the reasons I joined PAR.

As John said, I've been in the technology, networking and services arena my entire career. Most of my assignments have had an element of change associated with them. What attracted to me to PAR were facts such as, for a company of its size, it has as customers many of the recognized leaders in its sectors. Those of you that have followed the Company will recognize names such as McDonald's, Subway, Baskin-Robbins, Mandarin Hotels; I could go on.

The Company has built a great reputation for the quality and durability of its products and how it services those customers. If we can build on that list, inject some additional innovation, improve the strength of our propositions, increase efficiency, we will be able to grow faster, increase earnings, et cetera. So, much to do, but nonetheless, I'm looking forward to the challenge and look forward to reporting back to you with progress.

Thank you, John.

Thanks, Paul. Okay, we'd like to now open the session to questions.

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

Good morning, everyone. I want to congratulate Paul on the new position.

Thank you.

But I do have one question for John on the new position in the sense that originally when we had discussions, I thought there was an emphasis on finding somebody that was POS experienced. And, hopefully, Paul is, but according to the resume that was printed on the press release, it didn't seem -- it seemed like more defense oriented than hospitality/restaurant.

Yes, Sam, we conducted an extensive search. And we had a national -- in fact, a global firm conducting that search. And we interviewed many candidates. Our focus was on finding the right leadership. We feel that the most important element of a CEO is to provide leadership to the Corporation and to represent us both internally and externally. And I think Paul does exactly that. That would be at the top of the list in terms of the qualifications.

Then beyond that, we are a fairly diverse company. We are a solutions company in the hospitality sector, and that means that we have to then create products, so there are both hardware and software. We have to do integration of products with third parties, and then we have to deploy and support those products and solutions globally.

And when we look at Paul's background, we see that in his background, he has the experiences of some hardware, lots of software, lots of integration, a very strong background in service, and has an international experience over many, many years. So, when we put it all together and look at what the qualifications for the job were and the attributes and experiences that Paul has, we felt that it was a very good fit and the Board thought that Paul was the right person for the job at this particular time.

So we feel really very fortunate that we have been able to attract Paul to this position and to provide the leadership that we need to move forward in the transitions that are underway.

Okay. Next question, in regard to the next-gen software spend, can you tell me how much is left on that spend in hospitality?

Hello, Sam. Good morning.

Hi, Ron. How are you?

Very well, thanks. We have several quarters to go on the next-gen software spend development efforts. It will be winding down somewhat in the second half of the year compared to the first half of the year. So you'll see R&D as a percent of revenue trending down maybe in the second half a little bit.

So are we half over on that spend or 75% done? I mean, can you give me some percentages?

On the -- we are beyond the 50% mark, Sam.

Okay. So, the wind-down is going to occur in third and the fourth and should we expect no spend or very little spend on the next-gen quarter one 2012?

Sam, as you know, the R&D investment is a continual thing.

I understand that.

As we get the major hurdle completed with the core of the new products, there will be continual enhancement to those products. And therefore, spend obviously will continue going forward. I won't project 2012 levels at this time, but certainly based on what we're anticipating right now, the year of '12 will be a slower spend than 2011.

So on the press release (multiple speakers) --

-- on our software next-generation products, both on the hospitality side and on the restaurant side. In the first quarter, we did release the first version of our QSR product and that development effort will continue as we build out the product as an enterprise solution. On the hotel side, we're making excellent progress. We expect that we'll be doing our first launch partner sometime after the first half of the year. And the results of the feedback from the marketplace and seeing the early versions of our software, I think, were quite positive.

But as to your question about R&D, we are a technology company and we are doing some very innovative things with technology and we expect that we are going to continue to invest in that technology as we go forward. But as a percentage of spend in R&D, we would expect that would be trending down as revenues start increasing with the new products being released.

In this quarter, was there much software revenue from restaurant?

Yes. There was, Sam. John mentioned over 13% increase in software revenue and most of that -- virtually all of that increase was a result of the restaurant business.

And is most of that from the Baskin-Robbins agreement?

No.

Has that agreement kicked in or is that starting soon or did it already start last September?

We delivered some of the initial requirements in the fourth quarter last year. The rollout slowed in the first quarter, but will pick up dramatically in Q2.

Can you give us an idea of what the component of the software revenue is on that contract?

I prefer not to get into that level of detail, Sam.

Okay. And last question, how do you gauge the progress in the next-gen software without having a launch partner, even though it was mentioned a launch partner perhaps will come in the second half, which I think is a little bit later than what was mentioned on the last conference call? I think you're a couple months behind schedule.

Actually, Sam, I don't think we are behind schedule. I did say in the second half, but actually, there is an earlier date in June that we expect that we're going to be meeting. And the way you judge the software is by showing potential customers what we have accomplished now. While the product is not yet released, we can still demonstrate some of the very innovative capabilities of the product. And I'm talking now about the hotel product that you are referring to, Sam.

And there, we've had the opportunity to address the CIOs of most of the major hotel chains in extensive conversations in meetings over the last few months. And the feedback is very, very positive. And it is positive for two reasons. One is that it's a cloud-based implementation, which is what the marketplace is looking for at this point in time. So, product that's been built from the ground up to meet the requirements of the market space that we're targeting and it is cloud-based, which is very positive.

Secondly, there is an innovation in terms of a user experience, the user interface. And there, we have done, I think, an exceptional job in terms of designing a very creative and innovative way of using the system. And that -- the response to those two areas, the cloud-based, and the user interface, is extremely positive. So, that's the way we judge prior to having the launch.

Okay. And just the second part of that question, adding sales people to the hospitality side, was that most of the spend this quarter on the S&G?

It was primarily in the international sales and marketing area.

Okay. Thank you.

Vincent Colicchio, Noble Financial Group.

Good morning, guys and congratulations to you, Paul.

Thank you.

John, I may have missed this, but what portion of software revenue in the quarter was for Baskin-Robbins; was that the bulk of it?

It was almost none of it.

No.

Okay. And so was it largely quick service or was it channel?

Most of the increase, Vince, was through the channel, although quick service and table service also contributed to the growth.

Okay.

Very little, as John said, was Baskin in the quarter.

So assuming Baskin-Robbins is going to be meaningful going forward, should we expect software revenue to continue to increase sequentially?

It will for sure in the second quarter.

Okay. You had mentioned that you made some changes to manufacturing, improved efficiencies in the quarter. Is that something -- first of all, what did you do there, and will we see further benefits in terms of product margin going forward?

We kicked off, Vince, an outsourcing program in an attempt to lower our product cost. And it began early in 2010 and ramped up slowly through the course of the year. So, we're now pretty much fully ramped and have started to realize some of the benefits of that program. And a second reason for the margin increase, as John mentioned in his remarks, was an improved product mix (technical difficulty) as we sold more terminals versus low margin pass-through peripherals.

On the McDonald's side, is there any way -- could you help quantify how much revenue opportunity lies ahead here for the rest of 2011 from the McD account?

There will be substantial revenue, Vince, throughout this year as the rollout program continues. McDonald's target is to complete it by the end of 2011, and so far they're on track to do that. But overall, as the program winds down, our total McDonald's revenue in 2011 will be less than what we did in 2010.

So going forward, will you be doing less sequentially as we work our way through the year?

Certainly, as we exit the year, yes. The middle quarters might be similar to Q1. But as we exit the year, it should start to drop a little bit.

Okay. And, Ron, what was the contribution from McDonald's and Yum! in the quarter?

30% of our total revenue was McDonald's for the quarter and 11% was Yum!.

Okay. Thanks, guys. I'll go back to the queue.

Thanks, Vince.

(Operator Instructions) Eric Holmes, Fifth Asset Management.

Good morning. My question regards the service revenue related to McDonald's. Your statement in the press release about the outside vendors installing the new registers at McDonald's, was that part of the original plan or were you going to be doing most of the installation?

It was going to be a combination of the third-party integration companies and ourselves. And last year, we did most of the installations. But as last year -- came to the tail end of last year, the third parties were building up their capabilities. And so therefore, the installation revenues that we had a year ago versus this last quarter were substantially reduced. But it's pretty much on plan.

That was what McDonald's had planned to do. They brought in the third party integrators recognizing that they had a capacity that was beyond PAR or Panasonic. But they had to have a learning curve in order to do it. And so they've gone through their learning curve and they are pretty much up the curve in their ability to do the installations.

And about how much of a decrease this year versus last year would there be for the service installation roughly?

If you look at the total service revenue for the Company, two-thirds of the decrease was within the installation area. So, it's the major factor, Eric, in the decrease.

Okay. Thank you.

Craig Hoagland, Anderson, Hoagland & Company.

Hi. Back on the next-gen QSR product, is that the product that B&R will be licensing or is that product aimed at smaller QSR chains?

The Baskin-Robbins has our Pixel product that they're utilizing. And the QSR product is targeted at the larger accounts. And so it's a different product. Its features and functions are primarily now on the hamburger chains. We will be releasing additional software to expand our marketplace in QSR to the Tacos, to the Mexican chains as well. So, no, the answer is Pixel software is going into Baskin-Robbins, and the QSR product is not going there.

Okay. But the QSR product is meant to address chains of all sizes?

Yes, it is. It's initially targeted at the larger chains and what we think of as a Tier 1, Tier 2, Tier 3. But it's also -- later, it will be released into the channel as a channel product, going to smaller customers.

Right. And Version 1 is now available. Is that correct?

Version 1 for burger chains is now available, right.

Okay.

Installed -- we've had --- we've installed about 40 stores in Q1 and it's into, I would say, maybe three different concepts at this point in time.

Okay. Thank you.

Will Lauber, Sterling Capital Management.

Good morning. This is Bill Lauber. I guess my question concerning the McDonald's issue in the quarter and the installation has been answered. On behalf of Sterling Capital here in St. Louis, Paul, I'd like to welcome you to the Company.

We talked with Chris Byrnes, I guess, Monday and he gave us a little bit of your background, and so on, and so forth. And he said in due time, we would have the opportunity to meet with you. And we look forward to that. But we're here in St. Louis, which is a sports town, and we'd like to think a good sports town. And we are constantly using sports analogies in our business. And we recently hired a coach for the Rams after a number of lean years. And we weren't looking for a Super Bowl champion in year one or year two, but we were looking for tangible evidence that there was some improvement.

As a long-term shareholder in PAR, very loyal and patient with no return, we are looking for tangible evidence here in the near-term that this transition that John refers to is going to lead to shareholder wealth, shareholder returns. And I'm not talking about five or six years. We're growing very impatient, and I sense in talking with other shareholders that we are not alone. So we look forward to meeting with you. And, John, we wish the best to you in your future endeavors. Thank you.

Thank you, Bill.

And thank you, Bill for your comments and your message is not lost on me, I understand that.

(Operator Instructions) Vincent Colicchio, Noble Financial Group.

John, on the government side, there's been some contraction due to austerity. Do we expect that? It sounds like from your comments that we expect that to continue for the rest of the year. Is that correct?

Yes, I think so, Vince. Yes, because of the mixture of the type of contracts we have, we feel that the topline will be missed off of our annual operating plan. But we feel that we're able to manage to the bottom line. So, we have anticipated that there's going to be further squeezing as the government goes through these austerity movements. But, nevertheless, we feel good about the ability to bring money to the bottom line as per the plan.

Okay. And, Ron, just some housekeeping. Do you have the number for capital spending, cash from operations, and depreciation and amortization?

Sure, Vince. Depreciation and amortization was $700,000 for the quarter. Capital expenditures for property and equipment was $300,000 for the quarter. And cash flow from operations was a negative $4.1 million for the quarter.

Okay. That's all for me. Thanks, guys.

Thanks, Vince.

Sam Bergman, Bayberry Asset Management.

A couple other questions. The Baskin-Robbins deal involves your Boundless Technologies hardware/software, I guess. Have you seen an increase in RFQs in that particular area this year?

Not much in the RFPs. But in terms of the direct interest, we have shown our software at one of the major shows in the month of March. And as a consequence of that, we've got significant interest in the product. And so we're moving along, we feel that our pipeline is building, and we're moving along towards the typical process whereby we first make a presentation stage and then we go into the labs, and then from the labs into a store task, and then on to a contract. We feel that we are moving down that path with several accounts as a consequence of releasing the software.

And do you find the overall RFPs comparing 2010 to 2011 improved and can you give me some percentages of improvement?

That business is not driven that much by RFPs. My own personal feeling about it is, if you are getting an RFP, you are already too late in the account. And the way we establish our relationships are through the marketing programs that we have, which we have an extensive and active marketing program, which brings us in leads.

And then at the shows, as I just mentioned, the demonstration of the products, that creates the relationship with the account. And, I think, there is only a handful of companies that provide the kind of software that we offer. And I think the customers in the chain business already know who those customers -- who those providers are. And it's really getting into the -- getting under the tent at an early stage as opposed to picking up an RFP and responding to that.

Okay. And going back to the IT side, what percentage of employees account for the total of PAR on the IT side?

A little clarification. Are you talking about hospitality or government, Sam?

Government only.

Yes, we have over 600 total employees in our government business, Sam.

Around 600?

Yes.

So should we (multiple speakers) --- excuse me --- should we expect some cutback in that area, knowing quite well the government is not releasing funds and also, cutting back on IT spending in 2012 and probably 2013?

As you know, we sell our labor in the government business, and if we don't have coverage for certain employees, certainly, we won't carry them in overhead for a long time. And the existing group, they do -- our government business, they do a great job of managing the efficiency and the chargeable hours of our government group. So, there is very few, quote, overhead people who are in charge of the contract. So, we watch that very closely. And certainly, if there was a major downshift in a program or something, the employee base would have to be adjusted accordingly.

Okay. Thank you.

There are no additional questions at this time.

Thank you, everybody. Have a good day.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.