PAR Technology Corp (PAR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 PAR Technology Corporation Earnings Conference Call. My name is Chanel and I'll be your operator for today. (Operator Instructions) I would now like to turn the conference over to Mr. Paul Domorski, CEO of PAR Technology.

Good afternoon, everyone. I'd like to welcome you to the PAR Technology Third 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 10-K 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 include certain non-GAAP measures of financial performance. Please refer to our press release which is available on the Company's website for discussion of any non-GAAP financial measures.

During the course of this call, we will take questions from participants. Under SEC rules, we cannot provide material information in subsequent private sittings but will continue this public call as needed to respond to appropriate questions. After I provide my views in 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.

Let me begin. Revenues for the quarter were $59.8 million, down 2.3% from the third quarter of 2010. Net income was $1.2 million, 123% increase over the $538,000 reported in the same period last year.

EPS doubled, an increase of 100%, to $0.08 compared with the $0.04 reported in the same period last year. EBITDA in the quarter was $2.7 million, a 42% increase from the third quarter of last year. The $2.7 million of EBITDA was also a 20% sequential increase from the prior June quarter.

While I am glad EPS and the other indicators of improved profitability have increased each quarter this year, I am a long way from being satisfied. We compete against much larger companies, with closed solutions that lack flexibility. When customers factor in the purchase price, the ongoing maintenance cost, they find they are stuck with a solution that has a much higher Total Cost of Ownership or TCO than what they bargained for. In this, we see opportunity.

The customers I've talked to like the fact we have open platforms that enable them to build best-of-breed shops. Let's take for example our new ATRIO solution. ATRIO is a new technology platform designed to support the various system requirements of a hotel. Instead of all the up-front capital costs, you have a fixed price per hotel room per month. We estimate that ATRIO SaaS will deliver between 25% to 35% TCO benefit compared to an on-premise deployment.

ATRIO's system architecture includes an Enterprise Service BUS that manages and facilitates communication between ATRIO's internally built as well as third-party applications. You are not locked in. Operators avoid large up-front costs, fixed costs become variable, you get a new product which requires virtually zero training, and an open architecture. What is not to like?

Our EverServ restaurant product was designed to run on our competitor's hardware. Our competitor's software runs on our hardware products. Operators seeking to preserve precious capital for business needs don't need to replace everything when they want to upgrade functionality. Customers who see where we are today and our roadmap for the future like what they hear.

To further get the message out, we've added additional sales capability. We are having conversations we never had before, and I fully expect those conversations will yield results. Upon this we want to build a much more valuable business model.

Looking first at our hospitality segment, which encompasses both restaurants and hotels and represents 72% of PAR, revenues were $42.9 million, a 3% decline from the same period in 2010. As I mentioned last quarter, 2010 included a large US McDonald's upgrade program that is coming to its planned end. Even with a small decline in quarterly revenues, operating income rose 45% to $1.9 million year-over-year and the same percent sequentially from the prior quarter. We had a record domestic product quarter of $3.5 million with Yum!. We experienced two record sales weeks with Subway at over 80 stores per week. We had a 37% increase in channel sales from the same period last year and a 13% revenue increase in the quarter coming from international sales. Asia-Pacific and Latin America had specifically strong quarters, when compared with third quarter of last year.

As proof of our continued success in our EverServ ecosystem partner initiative, we signed 18 new channel partners, well above our target for the quarter, as we continue to focus on expanding our market reach. Our partner initiative enables us to work with a wide variety of partners including channel, software and alliance partners as well as providing integrated and tested enhancements of our product offering.

As an example, we announced in the quarter availability of our latest release of PAR EverServ [PixelPoint] Version 11 POS software. It includes 38 new features and enhancements. Included are many new tools to enable restaurant operators to increase efficiency and make it easier to manage their business.

PixelPoint Version 11 offers tools that accelerate the process of integrating third party applications and services that bring value to restaurant operators and their customers.

I mentioned earlier our ATRIO hotel product. Within the next few weeks, we will go live with our launch partner. The countdown to deployment is going very well. There is as you can imagine a lot of internal, as well as external, excitement about this. Besides that, we have had new installs of our Host and SpaSoft product during the quarter, in several well-known ski resorts in the US and in Bali, Italy, Maldives, UK and Bermuda.

Our government business has remained strong and steady despite the well-documented lengthening of the Federal acquisition cycles and budget deficit issues in Washington. Revenues were virtually flat with a prior quarter last year and the preceding quarter, and profits remain consistent as well. Our Guam communication contract ends in September, and we are working on being insourced by the Navy where the global information grid augment contract was scaled back as troops return from overseas assignments and were available to support Army communications missions in the US.

We reported several notable contract wins in the quarter. They included a $42.5 million intelligence, surveillance and reconnaissance multi-year task order contract with the Army, a $3.4 million three-year contract to operate a Naval Communications Facility in Jacksonville, Florida, and another $3.4 million one-year contract modification of our Army communications facility contract in Camp Roberts, California.

Obviously, the most notable on that list is the $42 million system integration contract which we announced a few days ago. It's a classified contract so I can't talk about it much, but it will bring together the equipment and outside services to provide the total solutions the customer desired. We are providing intelligence, surveillance and reconnaissance technologies and services in support of the [Intel Eagle X] effort. This indefinite delivery, indefinite quantity, or IDIQ contract, has a five-year period to performance with a total contract ceiling value of $42.5 million.

The Eagle Intel-X contract supports US military and coalition partners by providing advanced ISR technology and provides a rapid response for the implementation of these critical technologies. These awards have enabled us to maintain a significant government contract backlog of $141 million at the end of the third quarter.

PAR LMS continues to make steady progress in establishing itself as a leading provider of technical solutions to leading shippers and logistics companies. Again, operating off of a small base, revenues for the quarter grew slightly from the third quarter last year. We continue to focus on enhancing our products and the bottom-line results improved more than 30% from the third quarter of 2010. We signed a new customer, Tony's Fine Foods, with a fleet of nearly 150 containers. We have gained traction with two significant field trials with large prospective accounts that have fleets in excess of 1,000 units to begin with. We continue to focus on the expanding pipeline with our strategic partner, PeopleNet, and market our products to their growing network.

Our solutions generate real-time information fleet owners require to quickly optimize the solutions and management of trailers and their employees. The result is improved utilization, reduced operational costs, and enhanced customer service.

Before I turn the call over to Ron, I think it's important to note the progress we've made in reducing inventory and generating cash from operations. Since last quarter, we reduced inventory $5.4 million or 15%. Operating cash flow increased 49% from the third quarter of last year. We see these all as the basic blocking and tackling required to run a business.

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

Thank you Paul, and good afternoon, everyone. We are pleased to announce that our third quarter earnings of $0.08 exceeded estimates, and as Paul mentioned, revenue was only down slightly at 2% from the same quarter a year ago. Let's look specifically at some details.

Product revenue for the quarter was $24.9 million, a decrease of 11% compared to the same quarter in 2010. This decline was due to the domestic McDonald's as their large technology program is nearing completion. However, partially offsetting this decline was increases in sales to Yum! Brands, our channels, and a 13% growth in international revenues on the strength of McDonald's and Yum!.

Service revenues for the quarter was $19.2 million, an increase of 11% compared to last year. Service revenues benefited from increasing contracts and installation activity. Contract revenue was $15.8 million for the quarter, down slightly at 2% from the same quarter a year ago, reflecting the slow pace at which funding has been authorized for new and renewed contracts.

Product margins for the quarter were 34.8% versus 35.9% in 2010, reflecting a slightly unfavorable shift in product mix of hardware versus peripheral equipment.

Service margins in the quarter were 28.7% versus 29.4% for the same quarter in 2010. This also was primarily due to a change in mix and service offerings.

Contract margins were 6.9% compared to 6.3% last year, and looking at expenses, SG&A for the quarter was $9.2 million, down from $10 million a year ago. That's a decrease of nearly 8% as the Company continues to reduce its spend level.

R&D expenses decreased 23% to $3.7 million in the quarter as more of our software development work related to our NextGen products was required to be capitalized under the accounting rules.

PAR's financial condition continues to be strong. The Company continues to maintain an excellent debt-to-equity ratio as we further reduced our debt level $1.9 million during the third quarter to $4.7 million at the end of September. We have been able to finance our large investments in new products through cash flow from operations which was $3.8 million for the third quarter. The Company expects to continue to fund future working capital requirements from cash flow from operations.

I am very pleased to report that our Days Sales Outstanding for our hospitality business were a record 50 days, down from 55 days in the previous quarter. DSO for our government business were a steady 60 days. Depreciation and amortization for the quarter was $670,000. Capital expenditures for equipment was $160,000 and capitalized software in this quarter was $2 million.

That concludes my remarks, and I would now like to open the call for questions, thank you.

(Operator Instructions) Your first question comes from the line of Vincent Colicchio of Noble Financial.

Good afternoon guys, nice quarter. Paul, could you talk about the ATRIO a little bit more? Would you say that your interest list is higher now than it was say last quarter, the last earnings call? Also, can you talk to when in time we may see some meaningful revenues from that new product?

I remain bullish on the product, that has not changed from Vince, when I talked, when I mentioned it last quarter. Obviously, it's further along than it was last quarter, and we are as I said in my earlier remarks, imminently ready to launch at a launch partner. So, in the days and weeks to come, you should expect that to occur.

As far as revenue is concerned, I think you will see revenue mostly in 2012 on that product.

Okay. What did your overall software revenue look like this quarter, on a sequential basis?

Vince, this is Ron. Software revenue was pretty flat from the second quarter this year. Not much change.

Could you guys talk a little bit, maybe directionally, about where you expect your revenue lines to go next quarter on a sequential basis? Any help there would be appreciated.

Well Vince, as we mentioned in our remarks, the McDonald's revenue or the McDonald's program is winding down, so we will experience a drop-off in the fourth quarter in total McDonald's revenue. So, that will temper some of the growth in some of the other areas that we are anticipating.

I would add, I wouldn't disagree with anything Ron said, but I would just add to that, which is that as I said in my earlier comments, we last year did a large deployment for McDonald's across the US. As unfortunately we can't do large deployments in the US every year for them, so as a result from that we have been diversifying our revenue base, and started an effort to go make that happen. You heard me mention earlier that we had a very good quarter with Yum!, we had a very good quarter with Subway, and we continue to work on other accounts, other large accounts, to be able to diversify our revenue position. I think that Vince, you should -- it's not going to take one quarter to change that, but we think we're going to make progress in that area. But, I think what you'll see is, you'll see the planned continued decrease in McDonald's and the planned increase in the other accounts to make up for that.

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

Thank you.

Your next question comes from the line of Sam Bergman of Bayberry Asset Management.

Good afternoon, gentlemen. How are you?

Good, good, thank you.

Good afternoon, Sam.

A couple questions. On the ATRIO product, is there a launch partner name that you can give us?

We have not disclosed that as of yet. It will be disclosed when it goes live.

And when it goes live, is this launch partner the type of partner that the investment or the shareholders would be excited about, or is this a very you know, a very small launch partner at the initial stage?

I think what I would describe it as, is this. You could imagine, Sam, that our goal is to prove the product and to ensure its scalability. So, we are likely to put it into a reasonably-sized account first, before we scale it to a larger account.

Could you give us an idea of the license fees that goes with the ATRIO product? Because part of it's -- it's a SaaS model, right?

It is a SaaS model, but we're not at present disclosing the -- I can tell you it is a charge per room per month, but I can't disclose to you what the amount is.

Okay. And going to the restaurant side, can you -- have you evaluated the R&D on the restaurant side and found out whether or not you're happy with the return of investment that it's giving the Company on a long-term basis?

Go ahead.

Sam, we're expecting a return on the long-term basis on the software investment. We haven't quite achieved, have not achieved our target, up to this point, but we certainly expect to down the road over the next couple of years.

In which way are you going to be able to benefit from what's going on internally or externally to achieve those goals?

A little bit more on your question, please? Just can you add a little more to that?

Well, I know you're using outside contractors for the hospitality suite. Are you going to search outside for outside consultants to enhance the software so it's stable and more reliable going forward?

I would argue, again, our software is stable and reliable going forward. We use today internal and outside parties to be able to provide products to us.

So, why doesn't the company have the ability to grow the software part of the business quarter-after-quarter? I know the LMS business is probably growing a little bit, but that's also I believe a SaaS model, right?

The LMS product, there is a fixed, there is a product cost and there is a service cost associated with it. And to answer your question, I think you will see as evidenced by the fact that our profitability is increasing and over time our mix will increase, that you will see the returns associated with that mix improvement in the quarters to come.

Okay, and the last question on the Duncan Donuts-Baskin Robbins contract, have you started implementation of that order?

Sam, the initial order for Baskin Robbins was completed in the third quarter. We certainly expect some follow-on work next year with them, but the initial order was completed in the third quarter this year. Certainly, we'll have ongoing service revenue of course associated with that account, but the initial deployment was completed this quarter.

Okay, thank you.

Thank you.

You're welcome.

(Operator Instructions) You have a question from the line of Bill Lauber, Sterling Capital Management. Please proceed.

Yes, Ron, I think you indicated that the -- I think you were referring to the EPS of $0.08, and that exceeded estimates, and I know Paul you said earlier in your commentary that you weren't satisfied there is some improvement. I'm just wondering, exceeding the estimates, that was estimates by Wall Street?

Correct.

Okay. In terms of your budget inside, your projections inside, how did the quarter turn out compared to what you expected?

Well, I think again, we're on track for what we set out to do, but as I said in my earlier comments, I'm not satisfied with our performance. We have a lot more opportunity in the market to be able to improve, and certainly that's what I'm focused on.

Okay. As far as the LMS business, you said revenue was up slightly and you have field trials going on with two companies, and I think I understood you to say that both would exceed 1,000 units, is that correct?

Correct.

When do you find out on those two?

I'm not certain of the exact date of deployment on those kind of contracts. There are numerous other things that we are working on as well, some of them much larger than that, that will -- we expect that we'll go to trials and ultimately we'll result in -- have results from.

As I recall from past conversations or conference calls, the LMS business in 2010 cost you all $2 million or $3 million, and then I think this year was still going to be operating at a loss, but at a lesser loss, and then I think in your release you made mention that it would be profitable in 2012. Can you give us some color on that progression as going back to 2010, this year, and what you see in 2012?

Yes, Bill, you're correct. Obviously we lost money last year, we're going to continue to lose money this year, and the expectations next year are for it to turn profitable late, late in the year next year. Now, if some of the larger accounts that we're chasing come in on a timely basis, that could change.

Are you seeing any -- I know that one of the big concerns was the industry acceptance of this. Are you starting to see, are they a little bit more interested, now? Are you finding more interest now than you did say a year ago?

The answer is absolutely. I mean, you're probably aware, you see in the news a lot of things about the -- there was a report recently on MSNBC about food safety and some of the issues about that, and the regulations are changing as well. So, we're getting a lot of customers who are very concerned about those issues, rightfully so, and that is resulting in an increase in interest.

Okay. Thank you very much.

Your next question comes from the line of Lee Matheson, Broadview Capital Management.

Hey, guys.

Hi, Lee.

Hello, Lee.

Hey. Just a couple quick ones. On the LMS side, what was the EBITDA loss of LMS in the quarter?

For the quarter, LMS lost almost $700,000.

$700,000, okay. And subscriber base at LMS about now?

It's around 20,000 units that we have out there, Lee.

Okay, great. And then on the hotel side, I mean, certainly the lodging REITs and other publicly-traded players have gotten knocked around quite a bit of late. Are you seeing any, or hearing any, sort of hesitancy in that group to deploy capital into new products at this point?

Quite the opposite. In fact, that's the beauty of our solution. The beauty of our solution is you largely don't have to deploy capital, and some of those concerns that the industry has I think are the beauty of our solution. We're instead of you having to go out and put up a big up-front cost, it's a SaaS model so customers are very interested in that, and I remain very encouraged by that product and its adoption in 2012.

Again, could you comment on the McDonald's business in terms of what was booked in the quarter, and again what you see maybe for the next quarter?

Well, Lee, let me just say what we normally discuss about McDonald's. It was -- the McDonald's account was 30% of our total revenue for the quarter.

Okay.

And, it was down from 38% for the same quarter last year.

And how much was it in the prior sequential quarter, prior quarter?

It was 28%.

28%. Okay, great. Okay, thanks guys.

Sure, thank you.

Your next question comes from the line of Craig Hoagland from Anderson Hoagland and Company.

Yes, a follow-up on the McDonald's. Is this the last quarter you expect to see upgrade-related revenue?

For the most part, yes, Craig.

Okay.

There'll be some residual stores that will need to be upgraded, but the majority of it is over.

Okay, and just to -- the percentages you just gave to Lee, made it sound like it actually was a significant component of this quarter's revenue. Is that correct, or --?

Yeah, that certainly is correct, and that percentage includes service revenue as well. And, it's a worldwide McDonald's, so we had even though domestic McDonald's revenue was down versus the comparable quarter, international revenue was up.

And just to emphasize what Ron said, I don't want you to think like we're going to zero McDonald's revenue. We have a large, ongoing business in that area. It's just that not every year, unfortunately, do they upgrade their entire US systems.

Yes, we're just trying to figure out how big the drop-off's going to be from the upgrade revenue into the fourth quarter.

I mean, we don't give guidance, but I don't think you're going to -- I don't think that you should expect a large fall-off in our revenue going forward overall as a result of the McDonald's revenue.

Right, okay. Okay, my other question had to do with the increased effort in the channel, and I'm curious what margins are, how margins through the channel compare to margins sold direct.

Well, I won't get into specifics, Craig, but certainly we do sell a fair amount of software through the channel, and obviously that combination of software and hardware will yield a higher margin than just the typical hardware sales.

Right, okay, thanks.

Your next question comes from the line of Sam Bergman, Bayberry Asset Management.

Is there any way you can give us a dollar amount of the upgrade to McDonald's restaurants in the US for this quarter, out of that 30% number you gave us?

Sam, I don't want to get specific on the dollar amount. I'll let you do the math, but on the total, but we're not going to break it out that fine.

Can you look forward to McDonald's revenues coming in from Asian operations and other parts of the world to make up for that drop-off in the fourth quarter and going forward? Because I know, I know you are their distributor I believe in China.

Yes, we'll continue to see growth in McDonald's in other parts of the world. You mentioned China, Europe, Latin America, so we have a lot of good things going on with McDonald's around the world that will help ease the pain of the drop-off in the domestic revenue.

And with the Yum! Business in this quarter, is there an ongoing program with Yum!, like there is with McDonald's? So, you can look forward to similar revenue, or increased revenue with Yum!, going forward?

Let me just say with Yum!, their base is aging, and we certainly expect the business with Yum! to pick up going forward. Can't comment yet on the rate of that, but certainly we expect that to help us next year.

Are you exclusive to Yum!, or are there other partners, POS partners?

No, there's multiple vendors for Yum!.

What is the percentage of PAR Technology's business through the -- in the Yum! business?

Yum! for the quarter was 15% of the total company revenue, Sam.

And the McDonald's upgrades, you and Panasonic shared the business, what percentage -- do you know what percentage you were able to obtain through the upgrade?

It's an estimate, Sam, but we estimate we got at least 55% of the business.

Okay. And, the last question I wanted to ask you was, on the pipeline of -- on the restaurant business, can you comment on the pipeline of either field trials or what's out there? I mean, you did have a news release on the fence side, or the IT side, but your main business is restaurant/hospitality. I know you do a lot of upgrades, but I have not seen any new accounts on any press releases, so can you talk about what it looks like out there in terms of the quality of perhaps new accounts that you're working with?

We are absolutely, Sam, on working on a number of major accounts and I think is evidenced by you know, we put out a press release within the last 90 days I believe on being named Technology Provider at Subway, for example. And, we have done, we've had an increasing amount of business with Subway. Subway, as you know, is the largest franchisee in the world, and our prospects remain very good there as well as in a number of other sort of marquee-named accounts. We are seeking to expand the accounts that we have penetration. I mentioned before we've added sales resource, and we are doing that because we believe that we have opportunities that we have not gotten in the past.

I certainly don't want to knock the Subway account, but the Subway account is similar to McDonald's, it's all hardware. Am I correct?

Hardware and services, Sam.

Hardware and services. When can we expect you to besides the Baskin Robbins-Dunkin Donuts account, which was hardware, service, and software, when can we see more evidence of the software working, the R&D spend working for the shareholders and I guess getting business in that area where your software sales start to increase?

I think you will clearly see results in the quarters to come.

Very good, thank you very much.

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to your CEO, Mr. Paul Domorski.

All right, everyone, again thank you for taking the time to come on today's call. We look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.