PAR Technology Corp (PAR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 PAR Technology Corporation earnings conference call.

My name is Regina and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

Today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Paul Domorski, PAR Chairman and CEO. Please proceed, sir.

Good afternoon, everyone. I would like to welcome you to the PAR Technology second quarter conference call. Joining me is Ron Casciano, PAR's Chief Financial Officer.

Before we begin, I want you to know that any statements made during the course of this call regarding product expectations, program opportunities and schedules, and future financial results are forward-looking statements. Actual events or results could, of course, differ materially. I refer you to the statement of risk factors in our annual report on Form 10K for the year ended December 31, 2010, and to our press release. These documents identify important factors that could cause such a variance. Our remarks will also include certain non-GAAP measures of financial performance. Please refer to our press release, which is available on the Company's website, for a discussion of any non-GAAP measures.

During the course of this call, we will take questions from participants. Under SEC rules, we cannot provide material information in subsequent private settings, but will continue this public call as needed to respond to appropriate questions. After I provide my views on the quarter, then I will turn it over to Ron for his comments. From there we will answer any questions you might have. Thank you for your continued interest in PAR Technology.

After the market closed this afternoon, we announced second quarter 2011 revenues of $58.3 million, and net income of $1 million, or $0.07 per share excluding charges. This compares with the prior-year quarter of $56.2 million in revenues, and net earnings of $849,000, or $0.06 per share. While the headline numbers sound similar, EBITDA increased 21%. We also realized sequential bottom line improvement in EPS, as the first quarter this year was $0.03.

The Company incurred non-recurring charges totaling $29.4 million on a pre-tax basis, $18.9 million on an after-tax basis in the quarter, as well. The largest of these was a non-cash charge of $20.8 million to reduce the carrying value of goodwill and intangible assets associated with prior acquisitions. The other charges, totaling $8.6 million, were associated with reserves for discontinued inventory, severance, office closure and certain other assets. Of the $8.6 million total, $8 million was non-cash. Including these nonrecurring charges, the resulting net loss on a GAAP basis was $17.8 million, or $1.19 loss per diluted share. Despite this, the Company has strong underpinnings. We have little debt, $6.6 million, a $20 million line of credit, and have internally funded our investments through cash flow.

As you know, I joined PAR a little more than 3 months ago, and I see this quarter as a start, nothing more, nothing less. The company's most notable strengths, as I see it, are its marquee customer base, its highly reliable and cost-effective hardware and sector focus service organizations, and the investments that it's made in software. The customers that I've talked to want to do more business with PAR, and I take great encouragement from their coaching. The business environment remains challenging for everyone, but I am confident in our forward progress.

My goals when I joined were to, 1, streamline the Company; 2, to reduce the time it takes products to get to market; 3, to realize the value from investments made; 4, to improve consistency of performance; and 5, to improve results. Clearly, accelerating innovation is also going to be a big part of the strategy going forward. There is still a lot more to do, but with 100 days in, we are making progress. And I think what you will see as the quarters progress, is a much more valuable Company.

Looking first at our hospitality business, we go to market as PAR, and PAR Springer-Miller. The next time you go to a McDonald's, you have a better than even chance that the point-of-sale terminal that takes your order is a PAR terminal. If you check in at a Mandarin Oriental Hotel, or are lucky enough to go to Pebble Beach or Glen Eagles, or to many of the finest resorts in the world, the CRM software that handles your reservation or cares for your every whim is a PAR product. Revenues in this segment -- and by the way all of the numbers going forward are non-GAAP -- were $40.2 million, or nearly 70% of the total. Operating income in this segment increased $1 million to $1.3 million. Despite the fact that McDonald's domestic product revenue decreased 16% from prior year quarter, we were able to grow the overall hospitality revenues 5%.

Last year, results benefited from a McDonald's technology upgrade program in the US. We continue to work with McDonald's on new opportunities as they continue to grow. We were able to make up for the McDonald's shortfall and more with product revenues from large accounts such as Yum Brands, Subway, and Baskin-Robbins. Our ability to do large deployments, integrating PAR and non- PAR hardware and software in a cost-effective way, is a competitive advantage. We are ahead of our deployment schedule at Baskin-Robbins. We continue to strengthen our position within Subway, as they recently named PAR their Technology Partner of the Week 2 weeks ago at their national convention. Injecting new hardware and software products into the mix will only increase the strength of our propositions going forward.

International product revenues grew 39% in the quarter, 28% overall, as we benefited from better organizational alignment and increased sales to McDonald's Europe and China. Last quarter, we introduced the quick serve restaurant industry's most advanced enterprise point-of-sale system, PAR EverServ QSR. This new system is being well received in the market, and we are enthusiastic about the product potential as the leading enterprise solution of choice for the quick serve industry.

Earlier this quarter, we announced that PAR is one of the first enterprise POS software providers in the hospitality industry to offer an integrated end-to-end encryption for enterprise point-of-sale software. PAR has integrated VeriFone's VeriShield total product, secured by RSA Solutions, into its PAR EverServ software, to help make payment and card transactions safer for restaurant customers while simplifying and reducing the cost of payment card industry PCI compliance for restaurant operators. We signed 15 new channel partners, both domestic and international, in the quarter, as we continue to focus on expanding our market reach. We are adding sales people and solutions architects, and at the same time not filling indirect positions; and our pipeline of new business is improving, despite the economic headwinds.

For our hotel technology business, PAR Springer-Miller -- while many of our competitors retrenched, given the economy's impact on travel, PAR invested. Springer-Miller Hotel Management software is the industry standard at the best resort facilities in the world. This quarter, we added to our install base within the Mandarin Oriental hotel chain, as well as completing additional new installs in the Caribbean, the British Virgin Islands, and in Canada. We also released version 18.5 of our host software, which is the standard in many world-class facilities.

In late June at HI-TEC, the industry's largest technology exhibition and conference, we announced our newest software release, the ATRIO Guest Management platform, an innovative cloud computing solution, fortified by Microsoft's multi billion-dollar investment in Windows Azure. At a detailed product briefing with 18 of the world's leading hospitality technology consultants, we presented ATRIO to them. The benefits were apparent right away. And they particularly liked the architecture, innovation, user experience, and true cloud computing deployment option. We believe ATRIO represents a paradigm shift; and is perhaps the most significant software development in hospitality in 25 years, with a potential to rapidly become the preeminent platform in the hospitality industry. I would ask you -- why is it easier to drive away in a $20,000 rental car, than it is to check into a $100 hotel room? ATRIO will change that.

Everyone knows that the hospitality industry has been slowly coming back from the downturn of 2009. We estimate that ATRIO's software as a service will deliver between a 25% to 35% TCO benefit, compared to an on-premise deployment. In any economy, this is interesting. In this economy, it's compelling. ATRIO turns capital cost to operating cost, and was built with zero training in mind. Now, timing is always difficult to predict in this economy, but this expands significantly our addressable market to mid-market properties. We expect to install ATRIO within several launch partner properties within the next quarter, and there is lots of interest in this product. We are talking to some of the largest chains in the industry. As a result of this being new, it represents upside revenue and margin.

Our Government business is comprised of PAR Government Systems Corporation and Rome Research Corporation, representing about 28% of the Company's revenues. Revenues in the quarter were $16.3 million, and operating income was $0.9 million, both flat with last year. PAR Government Systems Corporation provides advanced technology solutions and services in the areas of intelligence, surveillance, and reconnaissance systems, as well as systems engineering and evaluation. Rome Research Corporation provides strategic information management services for the operation and maintenance of communications facilities. The primary customer in this segment of our business is the US Department of Defense and other federal government agencies, as well as private industry customers.

It's no secret that the government acquisition cycles have been lengthening, and this unit has felt the impact of that. This quarter, we've received awards for an $11.3 million multi-year contract with the US Navy, to operate its naval satellite communications facilities in Chesapeake, Virginia; and a $1.6 million R&D contract with the Air Force Research Laboratory Information Directorate, supporting their communications intelligence information operations. In addition, the Company received $3 million in contract extensions and modifications on existing work. Market conditions continue to make the timing of new awards difficult to predict, but we currently have a contract backlog of $147 million as of the end of the second quarter.

PAR LMS, the Company's logistics business, continues to make projects to become a more stable and predictable revenue generator for our Company. Revenues were $1.8 million, and the business had an operating loss of $0.5 million, similar to last year. Although operating off a small base, revenues for the quarter grew 21% from the second quarter last year, and 10% from the previous March quarter. In the quarter, we released new versions of our tracking solution for the dry van and flatbed trailer market. Our solutions generate real-time information fleet owners require to quickly optimize logistics and management of trailers and employees. The result is improved utilization, reduced operating costs, and enhanced customer service. We look to expand our customer base, get profitable, and increase share in this emerging large market.

So in summary, I am bullish on the Company. I see the issues that the Company has as fixable. Having said that, there certainly is a lot more work to be done. It didn't take 1 quarter to get to where we are, and it will take more than 1 quarter to change the outlook; but I think in the weeks and months to come, you will see the trajectory improve. I look forward to reporting to you on our progress the rest of the year, and on into 2012.

So with that, I will turn the call over to Ron.

Thank you, Paul. Good afternoon, everyone.

We are pleased to announce that our second quarter revenue and non-GAAP earnings exceeded estimates. Our revenue growth of 4% was led by a nearly 5% increase in hospitality revenue. Within Hospitality, international revenues grew 28%, on the strength of McDonald's in Europe and China. Domestic revenues were flat, as McDonald's revenues declined as their upgrade program is slowing as it nears completion later this year. However, this decline was offset, primarily by revenue from one of our newer customers, Baskin-Robbins. Government revenues were flat for the period, and as Paul said, LMS revenues, while still small, increased 21% for the quarter.

Now looking specifically at some of the second quarter details. Product revenues for the quarter were $24 million, an increase of 4% compared to the same quarter of 2010. Contributing to this increase were sales to Baskin-Robbins and international sales to McDonald's; partially offsetting this increase were lower sales domestically to McDonald's. Service revenue for the quarter was $18 million, an increase of 7% compared to the second quarter of 2010. Service revenues benefited from an increase in contracts and installation activity, primarily from our major accounts, McDonald's and Yum. Contract revenue was $16.3 million, virtually unchanged from last year, reflecting the slow pace at which funding has been authorized for new and renewed contracts.

Product margins for the quarter increased to 37.4%, versus 35% a year ago. Contributing to this increase were lower manufacturing costs, due to outsourcing, a more favorable product mix of hardware versus peripherals, and an increase in software revenue. Non-GAAP service margins declined in the quarter to 28.2%, versus 35.4% last year. This was primarily due to a change in mix and service revenues. Contract margins were 5.7%, compared to 6.5% a year ago.

Now looking at operating expenses for the quarter. Non-GAAP SG&A for the quarter were $9.6 million, compared to $9.8 million in 2010, a decrease of 2%, as the Company continues to monitor its spend levels. R&D expenses decreased 14% to $3.7 million in the quarter, as more of our software development work related to our next-gen products was required to be capitalized under the accounting rules.

Relating to the second quarter charges. As a result of the reduction in PAR's stock price through the second quarter, the Company determined an impairment of goodwill had occurred, and in accordance with the relevant accounting rules, recorded a non-cash impairment charge of $20.8 million. This charge is not in any way indicative of an adverse change to the Company's long-term financial outlook. In addition, during the quarter, the Company recorded additional charges totaling $8.6 million, related to discontinued product lines, severance, and office closures. These additions -- of these additional charges, $8 million was non-cash.

PAR's financial conditions remains strong. The Company continues to maintain an excellent debt-to-equity ratio, and its debt level remains low, at $6.6 million at the end of June. We have been able to finance the largest level of product development in the Company's history through cash flow from operations, which has been in excess of $19 million over the last 2.5 years. The Company expects to continue to fund future working capital requirements from cash flow from operations. In June, we renewed our line of credit facility with our bank group for $20 million, and as of June 30, $17 million of this facility was unused. It's a 3-year facility which will expire in June of [2004].

Some other financial metrics -- days outstanding for our Hospitality business were 55 days; and 61 days for our Government business. Depreciation and amortization for the quarter was $700,000. Capital expenditures for equipment was $300,000 in the quarter; and capitalized software was $2.4 million.

That concludes my remarks. I would now like to open up the call for questions.

(Operator Instructions) Sam Bergman, Bayberry Asset Management.

Good afternoon, Paul, Ron, and Chris. How are you?

I'm good, Sam, thank you.

Good afternoon, Sam.

Several questions. First of all, on R&D. Can you tell me if that's the high point of R&D for the year? And is the ATRIO product R&D cost almost out of the R&D line?

Sam, the ATRIO product development will be winding down in the second half of the year. As I mentioned, the vast majority of that development cost ends up being capitalized, in accordance with the accounting rules. As far as the R&D that gets expensed, we should probably see a leveling off, but no dramatic decrease in the second half of the year.

If this was an ordinary McDonald's quarter, without any of the upgrades, how much -- what would be the normal percentage of business McDonald's would have given you for the quarter? If you go past -- if you go over the last 12 months, before the upgrade?

I think, Sam, McDonald's has run 25% to 30% of our total business over the last several years, not counting the big spike last year where it grew to 34%. We are at 28% for this quarter, 29% year-to-date. So, it's a little higher than normal, because the upgrade program is still continuing, dollar wise; but as a percent of revenue, it's not dramatically different.

Now, those are two different things, Sam. The dollar amount of McDonald's is higher than it's been, and the percent of revenue obviously depends on a lot of other business. We project the McDonald's revenue remaining relatively constant through the balance of this year. However next year, as the project ends, we will see a decline in McDonald's revenue.

Paul, can you talk about what the pipeline looks for RFQ's this quarter and other activities at PAR?

As I said in my comments, Sam, I've been encouraged by, being candid, the coaching that the customers have given me. It's been, frankly, refreshing to me to talk to many of them. I mean, they know PAR, they have a lot of faith in PAR, they believe in the Company, they feel we can better in a lot of different areas. So a lot of what has gone into my thinking has come from them.

So to answer your question, I have been encouraged by the pipeline of activity that we've seen. And I'm talking about now specifically in the restaurant business, which I think is what you are asking me.

Correct.

-- that there are a number of RFPs. And frankly, a consult -- consultative conversations with them that say to us that we are going to continue to do what we did this quarter, which is to find a way to continue to get additional business. It was great. It was great to hear that we were at Subway's national convention that we announced their -- that we were their technology partner. They've got, as you know, a huge base of sites out there. And that is very affirmative to me.

And the last question. If you look at the three divisions that you have, and Paul, you have been there for 90 days. Do you think the divisions, such as the Government and the LMS division, should stay with the Company? I know you put some effort into making some decision into that. It just seems to me, if you focus on hospitality and on the restaurant space, it would go much further than concentrating on two businesses that aren't doing a whole lot for shareholder value.

As you said, Sam, I've been here for 90 days and I've been going through the businesses. There are -- there are synergies, that elusive term, between, amongst the businesses themselves. But, I and the Board continue to look at how we enhance shareholder value. So, we will continue to do that going forward. So I don't have anything to tell you beyond today.

But as I go through this process, and I talked about sort of some of my goals were to streamline the Company, reduce the time it takes products to get to market -- I won't repeat all of those. But those were -- those remain front of mind, in my mind, to getting -- to being able to increase the value of this Company.

Thank you.

Vincent Colicchio, Noble Financial.

Hello, guys. Paul, Ron, and Chris.

Hello, Vince.

A few questions.

The software business, it sounds like you're continuing to make progress there, you certainly have a broader portfolio of product. Do you -- first question, do expect software revenue to continue to grow sequentially throughout the rest of the year?

And also, on the hotel next-gen product, I'm curious what the outlook looks like there, in terms of pipeline?

Vince, this is Ron. We expect software may level off in the third quarter and then continue to grow beyond that. With our two new software products for restaurants and hotels, we will start to see some initial level of sales in the second half of the year. And then next year of course, we are expecting some nice growth in our software business.

And Vince, this is Paul again.

Just to echo what I said in my comments, that we are -- me coming into the Company three months ago, not knowing what I was going to find in regards to these products, I've been encouraged. I mentioned before that sitting with 18 technology analysts and getting an objective view of -- for example, ATRIO, it was very affirming. And when you look at the proposition and you look at what the capability of the product is and you see what's there, it's very encouraging. As I said earlier, it represents upside to the Company.

The only wild card that I would say is the -- it's a -- the economic headwinds which we are all under, as to how -- what impact that has. So it could skew timing little bit. But in my mind, it's -- the proposition is compelling. The ability for a hotel to put in something brand-new and not have to front capital costs, and to be able to turn capital costs to operating costs in this market is -- it was interesting before, it's more interesting now.

Just to understand -- is the ATRIO different than the hotel next-gen product? And if so, is -- how is it different?

No, it's the same thing. ATRIO is the brand or the product name.

Okay. I figured as such.

A couple for you, Ron. Assuming we continue to grow revenue, will we see SG&A leverage in the next two quarters?

We expect to.

Okay. And then what portion of revenue was Yum!, and what were cash from operations in the quarter?

Yum! was 12% of total revenue for the quarter, Vince. And operating cash flow was a positive $4.4 million for the quarter.

Okay. I will go back in the queue. Thanks, guys.

Thank you.

(Operator Instructions) Lee Matheson, Broadview Capital Management.

Hello, guys.

Hello, Lee.

Good quarter.

Could you just let me know how many subscribers you have on the logistics side?

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

You don't? Okay. That's fine.

And in terms of capitalized R&D, what is going to be the total related to the next-gen product?

Right now, the Company at the end of June, Lee has -- the total of $8.5 million of capitalized software for both, which is made up of both restaurant product and the hotel product. It will continue to grow a little bit. Not quite as fast, but it will continue to grow in the second half of the year and then level off. And as of course, as we start to sell, it will begin to amortize it over expected useful life.

Got you.

In terms of the goodwill impairment charges, specifically what acquisitions or what -- the goodwill that you wrote off, to which acquisitions did they pertain?

It was a component -- the acquisitions that we did earlier related to the hospitality business. We acquired a couple of software companies. We acquired, of course, Springer Miller. All those acquisitions resulted in goodwill being recorded on the books. And it was that goodwill that was impaired in this quarter.

So was it tied to any specific acquisitions that you did? I mean it's --

No. You look at it as total restaurant goodwill and total hotel goodwill. And each one gets reduced according to the mechanical calculation and the accounting rules.

Got you.

And in terms of going forward, Paul, you're obviously quite sanguine about the existing product portfolio. Can PAR sort of get the sales ramp-up that it needs just by organically selling, or are you looking to do -- would you be looking to do any M&A, in terms of growing sort of an installed base by buying out a competitor in the hospitality space?

I think certainly organic and inorganic are certainly part of the PAR play book here. Coming in new, what I want to be able to do is to figure out where -- what the Company is really good at and where are the gaps in the portfolio, and then seek to use inorganic and organic means to be able to fill that gap.

As I described before, there's nothing eminently happening from an M&A per perspective, but certainly I see that as another key component in our go forward plan.

Great. And when do you think you will have a -- call it, a full strategic plan that you will -- I presume you're taking it to the Board, and then you'll communicate it to shareholders. Do you intend to do that? And if so, when?

I would imagine that in the latter part of this year that I will be out in front of shareholders talking about our go forward plan.

Great. Well, well done and look forward to hearing from you.

Thank you. Thanks for the questions.

You have a follow-up question from the line of Sam Bergman.

Hello, Paul. Just a couple of follow-up questions.

Sure.

We got to the top line and bottom line. Where do you see the Company heading 12 months out, for after-tax margins? I know the margin's pretty skimpy at this point. Do you think you'll be able to get the organization to watch the creep on expenses, and also see the revenue with the software picking up so that the bottom line has a better margin going forward?

I don't want to -- I don't feel in a position to be able to provide guidance going forward, at this stage. But I would say that -- and I said this earlier on, my goal is to be able to increase the value of the Company over the quarters that occur. That doesn't mean every quarter will be a stair step up. But I do believe that we will be able to leverage our costs, I believe that we will -- software will become a bigger component of our product mix than it is today, as evidenced by the comments that I made earlier today about our pending releases.

I also believe that we will be able to -- to expand our market share. Frankly, I see many of the issues that PAR has, is it's own to fix. Once we get some of those things moving along, I think we will get revenue to grow and I think we'll get margin to expand. And so that is the expectation I'm setting for you.

And the only other question, on the restaurant side, can you talk about any new beta sites that you have that could potentially drive revenue going forward?

We have -- I don't want to provide names of specific accounts, but we have a number of accounts that we have, for example, we've deployed our EverServ product, we have a launch partner coming up with ATRIO, we've expanded our channel program. So some of our software products are being sold through the channel. We've been very encouraged by the adoption of that. We had 15 new partners this quarter.

All of those things, I think bode well for us going forward. We have more opportunities for success in my view with that -- what that mix.

Okay. Thank you. Good luck going forward.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call. I'd like to turn the call back over to management for closing remarks.

Okay. So let's wrap this up again. Thank you all for your questions. I look forward to reporting to you on our progress next quarter.

Thank you.

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.