PAR Technology Corp (PAR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to PAR Technology's fiscal year 2011 fourth-quarter and year-end financial results conference call. At this time, all participants are in a listen-only mode. Later, we'll facilitate a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the call over to Paul Domorski, Chairman and Chief Executive Officer. You may proceed.

Good morning, everyone. I'd like to welcome you to the PAR Technology fourth-quarter conference call. Joining me is Ron Casiano, 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, 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 the Form 10-K for the year ended December 31, 2010, and to our press release. These are documents that 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 a discussion of any non-GAAP measures. Due to the sale of our LMS logistics business, the LMS results are classified as discontinued operations.

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 discuss and 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.

Well, let me begin. The Company reported revenues of $60.1 million and net earnings of $1.8 million or $0.12 per diluted share. This compares to the prior-year fourth-quarter results from continuing operations of $63.5 million in revenue, and net earnings of $1.7 million or $0.11 per diluted share. For the year 2011, PAR reported total revenues from continuing operations of $229.4 million, down 2.4% from the $235 million reported for fiscal year 2010. On a GAAP basis, reflecting nonrecurring charges incurred in the second quarter of 2011, net loss from continuing operations for 2011 was $13.4 million, representing a loss per diluted share of $0.89.

On a non-GAAP basis, excluding these charges, adjusted net income from continuing operations for the year was $5.5 million or $0.36 earnings per diluted share. The results compare to the $5 million of net income and the $0.33 earnings per diluted share reported for fiscal year 2010. Operating cash flow from continuing operations as of 12/31 of 2011 was $13.6 million; debt was halved; inventories down significantly; SG&A is down, but salespeople are up; and we are accumulating cash on our balance sheet.

Over the past quarters, we continue to make consistent progress to position the Company for growth and profitability. I said on my first earnings call that some of my goals were to, one, streamline the Company; two, to reduce the time to get products to market; three, to realize the value from investments made; and four, to improve consistency of performance; and five, to improve the results. 2011 was a down payment on that.

Reviewing the year, revenues from continuing operations increased sequentially every quarter, fueled by growth in our hospitality business. While growth in the economy is always good, the 2010 comparison year had a large technology refresh at McDonald's, and we still have a couple more quarters of that to go. Earnings from continuing operations increased sequentially throughout the year, and profit growth exceeded revenue growth. The last time the Company earned $0.12 in a quarter was the second quarter of 2006.

In the second quarter, reviewing the year, we announced a $29.4 million write-off of goodwill in obsolete and excess inventory. Only $0.5 million of that was cash. In the fourth quarter, we announced a $42.5 million, five-year US Army ISR task order. Our government business reported revenues of $20.1 million this quarter, which represents a 21% increase over the fourth quarter 2010, and 28% sequential increase [through] the prior third quarter.

Margins were 7.8%, significantly higher than the historical 5% to 6% run rate. We don't see these margins as the new normal going forward, but we are working on improving the historical rate, determining whether margin dollars or rate are best. The ISR contract gives us stability, and at the same time, the opportunity to grow, just as we did in the fourth quarter during this uncertain government spending period.

We also announced in the same quarter the sale of our logistics business, PAR LMS to ORBCOMM. The selling price was $10 million, comprised of $6 million in cash and a couple-million dollars of ORBCOMM common stock upfront, with a potential earnout of $4 million. That transaction has closed.

Other highlights in the year included Baskin-Robbins selecting PAR's complete solution, which is software, hardware and services. Subway named us their technology provider of the year. We released the latest version of EverServ PixelPoint software to address the needs and requirements of the independent restaurant channel, and launched a webpage demonstrating our hospitality focus. There are many other wins, but some of our customers don't like to disclose technology upgrades for competitive reasons, and we respect their wishes.

Since the start of the new year, we announced that Wal-Mart will deploy PAR EverServ SureCheck in temperature measurement devices for food safety measurement and checklist management. PAR EverServ SureCheck is a powerful, web-based tool for managing hazardous analysis and critical control points, HACCP, and inspection programs for retail and food service organizations.

The SureCheck solution combines a PDA-based mobile application, a cloud-based enterprise server, and a fully integrated temperature measuring device to automate the monitoring and quality risk factors, while enhancing associate accuracy. SureCheck enables the capture task and food safety datas wirelessly, ensuring consistency chain-wide. We replace paper.

Telling you what you already know, Wal-Mart is the largest retailer in the world. This global rollout is a multi-year contract comprised of an enterprise license as well as subscription hosting services. I can't disclose further details on this transaction. I can tell you that having Wal-Mart as a launch customer is a great place to begin the introduction of this compelling product.

Earlier this week, we announced the identity of our ATRIO launch customer, Personality Hotels in San Francisco. ATRIO is the industry's only platform purpose-built for true cloud computing, a highly innovative user experience, modular design, and the use of an enterprise service buss. The installation at the Hotel Diva marks the culmination of a 22-month development effort that delivered an extraordinary advancement in the state-of-the-art technology in the hospitality industry.

I've said all along that we wanted to be able to demonstrate this product working in increasingly more complex environments, and that is what we're doing. Our technology is supported by industry heavyweight Microsoft Azure, who sees the strategic aspects of our application. The product has a potential to be a game-changer, like our SureCheck product. Both have compelling, simple financial and technological propositions in one of the higher hottest areas of computing, cloud. Customers we talked to, it is no longer a question of if, but when, cloud is the right answer. No one else has what we have.

I continue to work with our Board on a strategic plan to better position the Company. So what is different in 2012? Results then we anticipate will include the benefits from an improving hospitality market; ATRIO's market adoption; SureCheck, both in Wal-Mart and other retailers; stronger propositions; continued growth in our Quick-Service and Table-Service software, as well as our new hardware products that will be begin to be launched around mid-year.

Each has unique differentiators. We will continue the progress we made in 2011 to improve the efficiency of our operations, and we'll continue to blend the strategic and opportunistic mindset, as we did in 2011.

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

Thank you, Paul, and good morning, everyone. As Paul mentioned, we divested our LMS business. And as such, the LMS results are now classified as discontinued operations. So for the fourth quarter, on a continuing operations basis, revenue was $60.1 million, a 5% decline from the same quarter a year ago. However, EPS was $0.12 versus $0.11 for the fourth quarter of 2010.

And looking at some of the details, product revenue for the quarter was $22.1 million, a decline of 23%. This decline was due to domestic McDonald's, as their large technology upgrade program was completed this year. Partially offsetting this decline was an increase in sales to Yum! Brands, Subway, and growth in international revenues on the strength of some second tier customers.

Service revenue for the quarter was $17.9 million, a minor decrease of 1% from last year. Contract revenue was $20.1 million in the quarter, an increase of 21% from 2010. This growth was driven by the Company's new ISR technology contract. Product margins for the quarter were 32.2% versus 34.5% last year, reflecting the unfavorable shift in product mix during the quarter. Service margins for the quarter were 29.8% versus 34% last year. This is primarily due to the change in mix in service revenues.

Contract margins were up to 7.8% compared to 7%. Both quarters reflect higher than normal margins for our government business. In the fourth quarter this year, margins were driven in large part by the Company's first license sale of its full-motion video product.

SG&A for the quarter was $8 million compared to $10.8 million in 2010, a decrease of 26%, as the Company continues to focus on its spend levels. R&D expense decreased 18% to $3.4 million in the quarter, as the Company's ATRIO product was released. For the year, total revenue from continuing operations was $229.4 million, a decline of only 2%, as the drop in McDonald's revenue was offset by growth in Yum!, Channels, and several other customers. Gross margin was 25.4% versus 26.3% a year ago. Operating expenses declined $5.2 million or 9%. Non-GAAP earnings from continuing operations, as Paul mentioned, were $0.36 in 2011 compared to $0.33 in 2010.

PAR's financial condition is strong. The Company continues to maintain an excellent debt-to-equity ratio. We further reduced our debt level during the quarter and ended the year at $2.7 million. We have been able to finance our investments in new products through cash flow from continuing operations, which was $13.6 million for this year. The Company expects to continue to fund future working capital requirements from cash flow from operations.

A few other metrics -- days sales outstanding for our hospitality business were 54 days, and for our government business, they were 57 days. Depreciation and amortization for the quarter was about $600,000. Capital expenditures were $200,000. And in capitalized software this quarter was slightly over $300,000.

This concludes my remarks. I'd like to now open the call up for any questions. Thank you.

Okay, Operator, we'll take questions, if you would help us with that, please.

(Operator Instructions). Justin Ruiss, Sidoti.

Congratulations. Just had a quick question on the McDonald's completion. That's only domestic. Is there any room for international? Is there any exposure there or --?

Well, I think what's happening is the domestic rollout, which occurred in 2010, has been through our results in the first -- in 2011, and it will be in our results for the first couple of quarters of 2012. So it's mostly a domestic issue as opposed to a European issue.

Yes, Justin, if we look at the year for McDonald's, while we had a significant decline in McDonald's domestic revenue, our international McDonald's revenue was actually up on the strength of Europe and China.

Got you.

So that's -- international picture is different than a domestic picture.

Perfect. All right. That's all I needed. Thank you, guys.

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

(multiple speakers) Several questions. In terms of the McDonald's cycle, how much would you say is complete at this point? And what's available to the revenue line in the first and second quarter -- of 2012?

Well, let me just be clear as to what this is. And you may already know this. But it isn't -- it is a comparison issue as opposed to a current year issue. What I mean by that is, is that in 2010, the Company was going through the domestic upgrade program. And as a result of that, we had increasing revenues in that category.

So, in 2011, unfortunately, all of our customers don't refresh their product every year. That was not in the 2011 number. It's not an insignificant number. So -- and as it says in the press release, were that not to occur, the Company would have experienced further growth than it did. So we have two more quarters of that to work our way through. But again, that's what -- we're focused on it and aware of it.

And on the Yum! Brands refresh, I know it was a pretty good and healthy increase for this fourth quarter. Is that the very beginning of their upgrade?

Yes, Sam, we expect probably more towards the second-half of 2012 there will be continued opportunity with an upgrade for Yum! Brands. And we should experience some more growth next year.

Paul, I think when you were at the Nobles conference, you mentioned somewhere in the near future there would be announcements regarding Quick-Serve customers or new Quick-Serve customers. Can you talk about any beta -- any new beta sites for these Quick-Serve customers? Or opportunities?

Well, we continue, Sam, to work those things. I mean, there are things that have to occur. I mean, I guess what I've learned is, is that many of our customers don't like us to announce their technology upgrades because of competitive reasons, and they have their own reasons.

So we will announce significant upgrades as they occur, much like we've done in our press releases. And you can go back and look at what we did in 2011. I would anticipate that we would continue to release at that pace, if not greater.

And I have two remaining questions. One on the SureCheck solution. What other industries could that become available to, if at all?

Well, we see it primarily in the retail and the food service industry as being the primary area, but it's a compelling -- it's compelling, simple. It enables you, in a simple world, to be able to collect data that occurs in those environments. And you might say, well, gee, that happens today. But I think what its unique differentiator is, is the ability to assimilate data chain-wide, and be able to ensure consistency across the chain without having full scale enterprise adoption.

So it's -- it replaces paper. It replaces logs. It replaces all the things that you see in those environments. So we are -- I mean, having Wal-Mart as a launch customer is a great starting point. So, I think long story, but food service and retail first, but further ability to expand beyond that, certainly.

Can you give us any parameters of what that license fee was?

I can't. I'm sorry.

You can't. Okay. And the last question is regarding ATRIO and the customer that you just went live with. I'm comparing that to -- and probably I shouldn't, but I know in the past, you did the Mandarin in Boston and I guess you did hardware and software. And here, we're doing hospitality with a new suite of products, ATRIO, which is cloud-capable, yet it doesn't seem like you picked up a very significant reference customer.

Well, the first thing I'd say is Hotel Diva is a great partner of ours, and I'd like to again thank them publicly for their help in this. The reason why they were a customer for us is that they're a great establishment, and that they are a technological leader in a technologically-savvy city, San Francisco.

So, I think I've said on subsequent -- or in prior earnings calls that ATRIO represents, as I said earlier in my comments, a 22-month effort. And it is a -- it's not just cloud-capable. It's a cloud product. It is a clear cloud product. And we believe that it will be exciting. We believe it is best-in-class in that space. And I compared this to -- we want to roll it out in a logical way. And we will continue to roll it out in a logical way and we will gain momentum. And we will -- I think you will see it pick up momentum as the year progresses.

Can you give us any time-frame of when another launch customer would be onboard?

I can't, but I would anticipate that you're going to see a number of announcements this year.

Sam Bergman Okay. Thank you.

And I will update you as we go forward.

Thank you, Paul.

Thank you.

(Operator Instructions). [Matthew Eber].

Hi, Matthew.

Yes. We've heard some good news today here, but my question is, what plans do you folks have to improve communication, outreach, and engagement, to build on all the good things that are happening?

Well, I mean, certainly, we do these calls every quarter. Beyond that, we urge you to go take a look at our webpage. We have a brand-new webpage. We've put a lot more clear information regarding the Company out there. We anticipate taking that base to be able to build upon that.

I think if you look at our press releases, we have had -- I went through kind of a summary of those on my -- on the call. I believe that an investor or an interested party in PAR can certainly go back to the webpage and look at what we've announced over the last seven or eight years, and see the progress that we've made. So, if you have suggestions, I'm interested in those.

Okay. I was concerned, because there, for example, with the press release that came out the other day, there's burying the lead, and then there's taking 400 words before it actually tells anybody what ATRIO does. And I understand there is a website, but hey, it's February in 2012. Saying we've got a website -- you know, not quite enough.

So my question is, are there any additional plans -- anything unique? Anything remotely interesting or exciting that's on the horizon here?

Well, let me -- and I've said this on each one of my earnings calls. I mean, we believe ATRIO is unique and different. ATRIO is a cloud-based product.

No, I'm sorry. I'm talking -- I meant with regard to communications and taking all of the good stuff that you're doing, and really getting the information out there. Anything on the communication front to support what the Company is doing?

Have you looked -- have you gotten an opportunity to see our new webpage?

Yes, I have.

What would you suggest we do beyond that?

I mean I -- (laughter) I don't know how much time you've got, and then whether this is the appropriate place.

(multiple speakers) Let me suggest, in deference to time and everybody's here, if you have a suggestion on what we should do with communications, send me a letter or email, and I'd be happy to look at what you have.

Okay. Thank you.

All right? Thank you. Thank you for your suggestions.

Bill Lauber, Sterling Capital.

Your comments concerning the government business, I think you said that the margins were 7.8% versus the historical 5% to 6%?

Yes, sir.

And you said that's -- this is not -- I assume, the 7.8% is not the new normal. Is the new normal somewhere between 6% and 7.8%?

Bill, this is Ron. I would say more towards the lower end of that would be going forward. It all depends on contract mix. We had a little rich mix in the fourth quarter. Going forward, we hope we'll exceed the lower end. We used to say 5% to 6%; so now I'd say it's closer to 6%.

Okay. (multiple speakers)

(multiple speakers) But not at this level unless -- there's certainly an opportunity to grow the margins with some upside things. But right now, we're comfortable in the 6% range.

Okay. And as far as the bidding process, how does it compare to recent years?

We were very successful this year in our government business. We had to -- a lot of recompetes due to the timing of some existing contracts coming up for rebid. And we were pretty successful in that area, and our government team did a great job there.

Well, I guess what I'm saying is -- not necessarily a reflection on the climate in Washington, in terms of government spending and so on, but are you seeing any meaningful change in opportunities, say, in 2012 versus 2011, 2010?

No, not at this time, Bill, we're not.

Okay. I have a question concerning the Wal-Mart contract, them being the launch customer. I guess it's similar to the question earlier on the Hotel Diva launch customer. I assume that you folks worked with Wal-Mart for quite some time on this, prior to this launch?

Yes.

In terms of getting additional clients for this product, what kind of -- what are you anticipating? Are you expecting to sign on new clients, Paul, like you said in terms of the hotel in Denver -- are you looking for new clients within -- announcements within 2012 with this product?

Absolutely. I mean, I'm not trying to give you one but we -- as I said in my earlier notes, I believe that we will -- since the beginning of the year, we signed up Wal-Mart, we signed up Hotel Diva. I believe that we'll -- we will have significant announcements in both those products in 2012. And they will be a significant component of our 2012 results.

Okay. And one last question, concerning the other wins that you mentioned that you've had that your clients don't want you to disclose, are these typically large accounts, medium-sized, small?

All the above. I mean, obviously, there are names that I can think of that are major customers, and that you see their results occur, and you hear their names come up, and when we talk about the results that are here. But they are not -- they don't like us to go announce their -- what they're doing in their technology environments. And we respect their views. So I tell you what I can tell you in these environments, but -- and we refer to their achievements in our numbers, but we don't put out press releases to that effect.

Okay. Well, congratulations, it looks like we're at an inflection point and we like the direction. Thank you.

Thank you.

Sam Bergman, Bayberry Asset Management.

Paul, can you tell me what the full-motion video products regarding the Army ISR contract is?

What it is, is that we have the ability to collect what's called metadata. And metadata is -- I mean, it's just like if you go back to the old days where there was photography taken in different environments, and there were various statistics that capture all the different climatic and other environmental conditions that are out there. And that data enables you to be able to look at video that's on the ground, and not only just have the picture, but also have a lot of other facts related to that picture and its conditions, and time, and climates, and et cetera. Probably 15 different items.

So it is that ability and also the ability to take that data and then port it to a device -- maybe an Android device or something else like that, so that somebody could look at that data and be able to make some judgment on some action that needs to occur. Typically, you can imagine, these are military situations. I can't go into a lot more detail on it.

But it is the ability to -- you know, PAR originally stood for Pattern Analysis and Recognition. And it is the ability of being able to take those various disparate pieces of data and correlate them into some conclusion, so that somebody can make an action decision.

And those contracts are up for bid first-half of the year or more towards the latter half of 2012?

Well, we have today an overall contract, which I mentioned before, which is a $42.5 million contract. So certainly within that, that will last for the next four years or 4.5 years. Besides that, we obviously go out and try to leverage our expertise in this area, and to compete in other contractual situations.

And so we're still optimistic that we will -- that our technology is value-add. And again, the fourth quarter was a demonstration of that. I mean, that was a customer looking to exploit some of that technology for another application. And that enabled us to be able to improve our results in the quarter.

And the last question is in regard to software and software on the press release. Do you think sometime in 2012 you'll be able to give us a software number for Quick-Serve hospitality, which we have not had in the past? Because more of the effort is geared towards selling software and hardware and not just hardware?

I think we'll evaluate that as the year progresses. It's a good suggestion.

Okay. Thank you again.

And at this time, there are no other questions in the queue. I'd like to turn the call back over to Paul Domorski for closing remarks.

Okay, everybody. Again, I sincerely appreciate your continuing interest in PAR Technology. Thank you for taking the time, and I look forward to updating you at the first quarter, if not sooner. Thank you.

Ladies and gentlemen, this concludes your presentation. You may now disconnect.