PAR Technology Corp (PAR) 2012 Q1 法說會逐字稿

A very good day to you, ladies and gentlemen, and welcome to your Q1 2012 PAR Technology earnings conference call hosted by Paul Domorski, President and CEO. My name is Chris and I will be your conference coordinator for today. Throughout today's presentation your lines will remain on listen-only. (Operator Instructions)

Thank you. At this stage I would like to turn the call over to Mr. Domorski to start. Please go ahead.

Good morning, everyone. I would like to welcome you to the PAR Technology first-quarter 2012 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, 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, 2011, and to our press release. These are documents that identify important factors that could cause such a variance.

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 we'll continue this public call as needed to discuss and respond to appropriate questions.

As is customary, after I' provide my views on the quarter 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. This morning, PAR Technology reported net sales from continuing operations of $55.6 million and net earnings of $1 million, or $0.07 per diluted share, compared with the year comparable of $54.2 million in revenue and net earnings of $741,000 or $0.05 per diluted share. EBITDA improved 36% over the first quarter of 2011 to $2.6 million from $1.9 million. We have $18 million of cash and investments on the balance sheet, which is an all-time high.

Looking first at our Hospitality segment, revenues are lower than the prior-year quarter by $1.8 million, but operating income improved by $200,000. As we have talked about previously, 2010 and early 2011 results were bolstered by a large deployment for McDonald's in the US. We have a few more quarters of unfavorable comparisons due to that issue.

Offsetting some of that increase is an increase of 83% in domestic product revenues with Yum! Brands. Also, international product revenue grew 13% over the same period in 2011.

Subway continues to be a great partner with deployments of nearly 100 stores per week in recent months. Dunkin' Brands/Baskin-Robbins continues to deploy our hardware and software. Looking at the year and the timing events, the second quarter does not looking strong as the back half of the year does.

Notably in the quarter, we announced Wal-Mart will deploy PAR cloud-based EverServ, SureCheck, and temperature measuring devices for food safety measurement and check-list management in the stores. This sale confirms the compelling value proposition of SureCheck, although future revenue from other SureCheck deployments likely will be more representative of the software-as-a-service model we are utilizing, as the magnitude of this revenue recognized in the quarter reflects the scale of this particular deployment.

The SureCheck solution combines a PDA-based global application, cloud-based enterprise server, and a fully integrated temperature measuring device to automate the monitoring of quality risk factors while enhancing associate accuracy. We are aggressively leveraging this new customer win to drive new dialogues with big-box retailers and large grocery organizations. Many are names you have heard of.

This is an important solution that demonstrates PAR's ability to think out of the box and craft a compelling value proposition in the high-growth area of cloud computing. Shortly we will announce the productization of this innovative solution, which will hasten deployment.

We continue to make progress with our ATRIO cloud-based solution for hotels. In this past quarter we announced the initial deployment of our solution, and market interest remains strong.

Six properties either are deployed or are in the process of being deployed. We recently signed an alliance agreement with Microsoft that will significantly assist PAR in our marketing of ATRIO along with technical support and Azure cloud computing and hosting capability.

Besides small and midsize properties, we now have the basis for new conversations with chains that see the technology moving our way and the compelling benefits of the product. This quarter we had new international customer installs of our SpaSoft software package in several five-star properties around the world.

Our Government segment continues to perform well, as evidenced by the 19% increase in revenues from the same period in 2011. Growth continues to be driven by the contract to support the U.S. Army with intelligence, surveillance, and reconnaissance technologies and services.

Market conditions make the timing of new orders difficult to predict. While we face pressures on our communication system services business, we see opportunity to be able to continue in intelligence, surveillance, and reconnaissance programs and believe we are well placed for future awards.

Contract margins were 5.3%, down from the 6% reported in Q1 2011 and within our historical range of 5% to 6%. Our Government business ended the quarter with a healthy backlog of $121.3 million.

Before I turn the call over to Ron, let me make a few comments regarding our evolving Hospitality business model. PAR has long been a leader in advanced technology and highly-reliable POS, point-of-sale, hardware systems. Over the past six months we have been working hard to amplify the technical and design differentiation; to improve the TCO, total cost of ownership; and to add new products.

The results of that effort will begin to be realized in the second half of the year. PAR will continue to have a strong point-of-sale hardware business.

Given the early indicators that we have seen with our restaurant EverServ software, SureCheck, and ATRIO, we have seen opportunity to make inroads addressing the growing market demand for cloud-computing-enabled concept configurable solutions. Solutions must address the changing global demand for customer-facing order management, expanded back-of-house administrative requirements, and be able to seamlessly integrate external technology. The business model for these solutions is software-as-a-service rather than enterprise license or large upfront payments.

To go along with a world-class hardware and innovative software, you must have excellent services. PAR has professional services men and women who know the hospitality market. We are expanding our service offerings, adding project management and professional services capability which are necessary to do large deployments, while at the same time increasing our efficiency.

If you are a Hospitality customer, you know how important it is to have someone who understands your environment and knows every moment of downtime is money lost. Earlier this week I was at one of our largest customers' national conferences, and I heard from many franchisees. While they love our equipment, services is what makes the difference.

Last but certainly not least is execution. Anybody can do something once; what makes the difference is building an organization that is at its best every time it is in front of the customer and has a business model that will deliver to shareholders steady returns and growth. So our intention is to transition our business over time to a recurring revenue model, largely based on software-as-a-service and high value-add service contracts, in no small part enabled by our superior hardware.

Today a preponderance of our business is hardware sales, which invariably has ups and downs based on our customers' deployment plans. As I said a few minutes ago, we will strengthen our position in the market with new and innovative hardware announcements in the second half of the year. Beyond that, we want to build a recurring stream in both software and services.

What this will mean is in some instances we will have to give up some upfront license fees in exchange for a long term annuity. While that may have some short-term downside, it will enable us to go into the successive years with an increasingly growing annuity base. We think the result will be a much more valuable company with a business model that will deliver to shareholders consistent growth.

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

Thanks, Paul, and good morning, everyone. Just to recap, net income from continuing operations in the quarter was $1 million versus $741,000 for Q1 of 2011. Earnings per share from continuing operations was $0.07 compared to $0.05 for the first quarter a year ago.

Now let's look at some first-quarter details from continuing operations. Product revenue for the quarter was $20.2 million, a decrease of 7% compared to the same quarter of 2011. This decline was due to the completion in 2011 of the large technology upgrade program associated with domestic McDonald's restaurants.

Partially offsetting this decline was the sale of our SureCheck software to Wal-Mart, an increase in sales to Yum! Brands and Subway restaurants. Additionally, international revenues grew on the strength of several major customers.

Service revenue for the quarter was $15.4 million, a minor decrease of 2% compared to a year ago. This was due to lower repair revenue as older systems are being replaced in the field.

Contract revenue was $20 million for the quarter, an increase of 19.2%, which reflects the ISR integration contract that was awarded to us in the fourth quarter of 2011.

Product margins for the quarter were 45.6% versus 39.3% a year ago. This reflects the increase in software sales.

Service margins in the quarter were 31.3% versus 31.6% for the first quarter of 2011. Contract margins were 5.3% compared to 6% last year.

SG&A for the quarter was $10.1 million compared to $9.3 million in 2011. This increase is due to sales costs associated with the SureCheck sale and the Company's investments in its Hotel Technology sales and marketing assets relate to its ATRIO product.

R&D expenses decreased 5% to $3.5 million in the quarter. This was due to the completion of the initial development phase associated with our next-gen cloud-based ATRIO property management solution.

PAR's financial condition remains strong, and we continue to improve. As Paul mentioned, we have $18 million in cash and investments on the balance sheet. The Company continues to maintain an excellent debt-to-equity ratio as we further reduced our debt levels in the quarter to $2.3 million.

Cash flow from continuing operations was $6.7 million in the quarter, and we received $6.1 million in cash and stock from the sale of LMS. The Company expects to continue to fund future working capital requirements from cash flow from operations.

Days sales outstanding for our Hospitality business was 55 days, and for our Government business it was 54 days. Depreciation and amortization in the quarter was $825,000. Capital expenditures for equipment was $500,000, and capitalized software this quarter was $700,000.

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

Okay, Chris. If you would help us with that, please, sir?

(Operator Instructions) Sam Bergman, Bayberry Asset Management.

Good morning, Paula, Ron, and Chris. How are you? Several questions. The McDonald's spend that occurred last year, do you feel you got the correct percentage of business that PAR was looking at in the beginning of that spend, in terms of you sharing it with Panasonic?

Yes, Sam. We predicted from the beginning that we would get over 50% of the share, and we believe we succeeded in doing that.

Okay. Going on to another initiative that you (technical difficulty) I guess over China, Paul, what is your take on spend that took place in China? And what is your initiative going forward there?

Sam, are you asking in the context of McDonald's or just in general?

McDonald's and also in general. Because I wouldn't think that there would be just a spend for McDonald's in China. There would be other restaurant chains that you would be interested in.

That's correct. We continue to have good results in China particularly with McDonald's that we -- today. We are also working with a number of other Yum! Brand kind of customers on some opportunities over there as well.

So the business over there becomes -- is very encouraging to us. It is a market that we are -- we see as a growth market for us, and one that we think we can realize real dividends -- not just in hardware, but also in some of the software areas.

Going to the Hospitality suite of products, the ATRIO, you had mentioned you are almost in six properties or roughly installing six properties. Here we are almost at May 1. Is that below plans, above plans? Can you give us a little bit more color on that?

Well, we don't provide guidance in this particular area, Sam. But I think that we are, as I said in really one of the first conversations that we talked about this, we are introducing something which is totally different than the market has today. We are -- we have launched it very successfully, and we are going through a process right now of working with some midsized chains on deployment of that.

And as I said in my earlier comments we're also having interesting conversations with some of the larger chains. Now if in fact that were to lead to a -- some announcement, it would likely be a year or more for deployment, because the large chains require that kind of thing to occur before they are able to introduce it to such a large number of properties.

So the market demand is exceeding our expectations. It is a situation today that we are working with our clients on how best to deploy it in their environments.

And competition has that product? Or do you know of them working on R&D to get that product up and running?

There is no one that we believe that has a product similar and has the technical scale and capability of our product.

Going on to the restaurant side, restaurant business, many companies have reported terrific learnings. I am just wondering. What is your pipeline? I know you can't make forward-looking statements; but what is your pipeline of activity in that area?

There hasn't been any announcements other than probably the last Baskin-Robbins announcement or Subway announcement. Can you give us a little bit of color on that?

Sure, Sam. Well, I did say in my earlier comments that we see more market demand in the back half of the year continuing to occur. Some of our large customers are going to go through deployments.

As we've discussed before, some of them do not like doing technology press releases in this area. Some we talk about in the earnings call after the fact as opposed to doing a press release, just because that is their preference. But we see good demand in the back half of the year.

And the good demand you see in the back half of the year, are they deployments of hardware only, or hardware and software?

Predominantly hardware that has occurred. There are software deployments; but as I said in my introductory comments, largely those will be SaaS. We are trying to build a SaaS revenue stream in that area.

In the restaurant business?

In the restaurant business and in the hotel business. For that reason you will not see as much of the large upfront payments; but we think we will build a much more valuable and, frankly, predictable business stream going forward.

Last two questions. The Wal-Mart SureCheck announcement, was there any license fee, upfront license fees paid to you guys on that?

Again, I really can't get into the specifics on it. I can tell you that there was an upfront fee paid; and there are some recurring fees that will go on over some period of time.

Is that part of the reason the balance check sheet has more cash in it, because of that license fee, or not?

That contributed to the cash position, for sure. That was not the sole factor, but that contributed. Also, the proceeds -- the cash proceeds we received from the sale of LMS also contributed.

Have you sold the shares of the part of the agreement that you had with ORBCOMM on LMS?

We have not at this point, Sam.

When do you feel you will be in the market to sell those shares?

Well, we are evaluating that as we speak, and --

And that amount of shares is what, $1.6 million?

The current value at the end of March was about that, Sam. Actually, I'm sorry, it was over $2 million. The market value of the stock, it was about $2.4 million at the end of March.

So the amount of shares you have equals a market value of over $2 million?

At the end of March; that is correct.

So has some been sold?

None has been sold, and the price has come down. So the market value is lower as we speak, compared to March.

Okay. Thank you very much.

Sure.

Thank you, Sam.

Justin Ruiss, Sidoti & Company.

Good morning. How are you, Paul and Ron? I just had a quick question on -- I guess with the salesforce in terms of the ATRIO and the EverServ. Are you adding to that salesforce, or is that what you currently are using now?

No, we are augmenting our sales force in specifically the software areas -- software and new business.

All right. That's all I needed. Thank you very much.

Thank you.

Lee Matheson, Broadview Capital.

Hi, guys. Good morning. Just a couple things. As you guys look to transition to a recurring SaaS model, when are you going to start breaking out revenue streams coming from -- even just to break it out between license and maintenance, or recurring license and what have you? To try and kind of -- so we can get a sense of the growth in that income stream.

Lee, that is something that we are going to continue to evaluate. We need to get to a point where it is a larger component of our total revenue. And when it becomes at that point where we think it is meaningful, we will begin to break it out.

Okay, and are you going to continue to sell the legacy Springer Miller and other -- in the Hospitality software on an upfront license and maintenance basis? Or are you trying to switch everything to a SaaS model?

No, the legacy stuff will continue to sell on an upfront license basis.

Yes, okay. Given the LMS proceeds and obviously the work you guys have done in reducing the absolute level of inventory, the balance sheet is in great shape. Curious on what you are looking to do with it. Can you provide any color?

Well, the only thing I would say is that, in my view, in my assessment this Company has not had sufficient cash on its balance sheet in the past. We will continue to look at opportunities to deploy it in new ways that will accelerate our growth. But there is nothing that I have at present to tell you more than that.

Okay, and then in terms of what the appropriate amount of cash on the balance sheet is, I would have to assume you don't mean that you are going to run with $16 million of net cash at all times. What is the number that you feel comfortable maintaining?

Well, Lee, don't have specific projections for you, but certainly as you said we hope to look for opportunities to deploy that cash in a way that is going to give us a good return.

Okay. I guess the other one was recently Burger King is back in the news with Pershing Square taking a stake in it, and obviously under the 3G ownership there is some increased emphasis on repairing relationships with franchisees and investing in the stores and in the technology. Any sense on whether this presents an opportunity for you?

I am wondering if you could -- what the pipeline looks like in terms of -- from a multiyear basis on some of the other large QSR chains that you don't currently have as customers.

I really can't comment on prospective business. I think that's -- again I can generally say to you that -- what I said earlier, that in the back half of the year there are a number of large franchisees that are looking to do deployments. We would not be sole-source generally in those transactions. But nonetheless, we would have, we believe, a healthy share of that market.

So we see that beginning at that point in time. Invariably these things can slip, but based on what we know right now we see that continuing to occur. So I don't have any specific comments, because again we try to respect the wishes of our customers and (multiple speakers).

Sure, sure. And last question, given the NCR acquisition of Radiant, are you seeing -- I think somewhat central to that, the thesis on that investment was the ability to scale a transaction processing business from POS.

Is that something that you guys are considering? I mean it would obviously be another recurring revenue stream.

Well, I think right now we are trying to get our -- we see, as I said in my earlier comments, we see that the market is moving into a cloud-based SaaS model. We have had some success with our SureCheck product. We have had some beginning success with our ATRIO product. We are having some success in our restaurant software area.

So we want to be able to be in a position to be able to capture more of that market. Because if you look at us versus our competitors, we see some competitive opportunity in that market, and that is where we are likely to be investing our funds in the foreseeable future.

Okay. And sorry, last question. On the ATRIO, I think your initial deployment was at the Hotel Diva in San Francisco, which had an ownership group that owned a member of -- I think four or five other hotels. Of the ATRIO hotels that you have now, how many of them are under common ownership with Hotel Diva?

Well, I think again we don't -- our customers today -- Hotel Diva announced that -- I mean Personality Hotels announced that they were deploying our product. That process is underway and in some instances has occurred.

Beyond that, other customers have not -- only some customers want to be launch customers, so we are not publicly announcing who those customers are at present.

Okay, but there are customers for ATRIO that are not Personality Hotels?

Correct, correct.

Okay, great. Thanks, guys.

Yes, sir.

Robert Henderson, Rutabaga Capital.

Hey, good morning. Could you tell me what was the other income, and where did that come from? And also, you are including the other income in that EBITDA number you gave us for the quarter; is that correct?

Yes, Robert. It is included in the EBITDA number.

The driver was the appreciation on the ORBCOMM stock from the date that we acquired it versus the fair market value at the end of March.

Okay.

It performed quite well in the first quarter.

All right, okay. Then just one more thing. The level of SG&A in the quarter, is that likely to continue for the rest of 2012 at that level? Or might -- is it more likely to go higher, or lower?

We expect the total dollar spend to decline slightly over the balance of the year in that area.

Okay. All right. Thank you very much.

Sam Bergman.

Just a couple follow-up questions. On R&D, where do you expect the R&D number to be the next three quarters? Is it similar to the first quarter, or higher?

That will run pretty similar throughout the balance of the quarters for this year, pretty similar to first quarter.

And on your hardware products, the up-and-coming ones that you are going to announce latter half of the year, are they capable of accepting PayPal and also Google Wallet?

You're going to have to wait for the announcement, Sam.

Okay. I guess I have no choice. Thank you.

Okay. Thank you for your question. We have no further questions in the queue at this time.

Okay, everyone. Again, thank you for your interest in PAR Technology and we look forward to speaking to you at the end of the second quarter. Have a great day. Bye.

Thank you very much. Okay, so ladies and gentlemen, that does now conclude your conference call for today and you may now disconnect your lines. Have a great day. Thank you very much for joining.