PAR Technology Corp (PAR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 PAR Technology earnings conference call. My name is Jasmine, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Paul Domorski, Chairman and CEO of PAR Technology Corporation.

Thank you, Jasmine. Good morning, everyone. I would like to welcome you to the PAR Technology third-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 the 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 will continue this public call as needed to discuss and respond to appropriate questions.

After I provide my summary on the quarter's performance, I will then 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. The Company reported third-quarter revenues of $61 million, a 4% increase over the third quarter in 2011. Net income from continuing operations was $1.3 million and earnings per diluted share were $0.09 compared to $1.6 million of our earnings per diluted share of $0.11 for the third quarter of 2011.

Overall net income was $1.4 million, a 13% rise from the $1.2 million reported a year ago and earnings per diluted share were $0.09 versus $0.08 per share reported in the same period in 2011.

Overall hospitality technology revenues for the third quarter were 64% of PAR's total and were reported at $39.1 million, a 9% decline from the same period in 2011. As you've heard me say before, 2012 comparisons to 2011 are adversely impacted by the 2010 and 2011 domestic rollout of McDonald's. Despite this, we saw sequential growth in hospitality revenues from the second quarter to the third quarter of 8%.

Part of our strategy is to diversify our business so that no one customer can impact overall Company results. Over the past three quarters, we have made progress in that area. Product and services revenue with Yum! Brands increased 8%. We also continued to increase our market share within the Subway account as they continue their aggressive new store expansion plans. Product revenues in Subway grew by 17% in the quarter and the plan is for continued strong sales.

Global economic uncertainty is a reality primarily in Europe and the Middle East. Despite that, international product revenues grew 8% in the third quarter with increases in Latin America at 65%, China at 51%, and the Middle East at 26%.

A few updates. We recently announced our new EverServ 7000 hardware platform. Shipments have begun. The EverServ 7000 supports various multi-touch options or gesture-based applications on supported operating systems and the flexibility to be mounted almost everywhere be it wall, low-profile, or kiosk mounts. The 7000 family of terminals has superior processing speed and the ergonomics customers want. We will be introducing new hardware products extending the line shortly.

We will also be announcing in the next few days a press release regarding Carl's Jr. and the Hardee's chain. SureCheck continues to be deployed on schedule into a high customer satisfaction with the world's largest retailer. While the deployment has gone very well, it has taken a short-term toll on our ability to scale the product to other concepts. While there have been some smaller deployments, we anticipate most of our success for this product will be in 2013 and beyond.

Given the clear benefits of the product, some retailers in pilot in evaluating the product are just beginning to understand what our launch partner already knows. Keep in mind most of our success with this product is likely to be Software-as-a-Service or SaaS revenue. This will over time build a recurring profitable revenue stream for the Company.

SureCheck was recently recognized with Microsoft's Partner Excellence Award as part of their global retail initiative for our deployment on a Royal Caribbean cruise liner and the practical uses this allowed the crew to better manage their point-of-sale and food safety operations.

Progress continues with our ATRIO cloud-based solution for hotels. I said last quarter that we were close to signing a large hotel launch partner. That has not changed. It is just taking longer than anticipated. While there can be no guarantees, our hope is to have this concluded by year-end. Like SureCheck, our goal is to build a base of recurring revenues to go along with the up-and-down hardware sales. In the past quarter, we installed several one-off properties. Based on these deployments, we continue to enhance the product with improved functionality and features that will improve its economics as it scales.

Like SureCheck, we've seen most of the success with the product occurring in 2013 and beyond. In the quarter, we installed 11 new customer properties with our standalone SpaSoft software package. These five-star properties included the four seasons, Ritz Carlton, Mandarin Oriental, and Rosewood Resorts located in Barbados, Morocco, United Arab Emirates, Saudi Arabia, along with several domestic locations.

We continue to seek out additional channel partners for a hotel spa and restaurant products and have positioned distributors as primary channels for many of our international regions. We recently signed an agreement with Summit Technology Solutions and NexHos. Both will focus on regional expansion of both ATRIO and the SpaSoft product lines. Further expansion of partners is an opportunity to cost-effectively get our products to market.

Our government segment, representing 36% of the Company's revenue, again delivered strong revenues in the third quarter. Revenues increased by 40% over the same period in 2011 and operating income grew by 27% from the third quarter of 2011.

Growth continues to be driven by the contract to support the US Army and US Air Force with intelligence, surveillance, and reconnaissance or ISR technologies and services, which is called Eagle Intel-X. Even with a strong third quarter for this segment, procurement and US budget deliberations make the timing of new awards difficult to predict. Contract margins were 6.4%, down slightly from the 6.9% reported in the third quarter of 2011 but still above our historical range of 5% to 6%.

Our government business ended the quarter with a healthy backlog of $108 million. At the same time as we continue to build and invest in platforms for the future, we continue to find ways to streamline our Company, lowering the breakeven point and focusing our resources on impact products and services. Overall, our financial strength remains strong with positive cash flow and more than $18 million of cash on the balance sheet and virtually no debt.

I would now like to turn the call over to Ron for his remarks on our financials.

Thank you, Paul, and good morning, everyone. Looking at the third-quarter details, product revenue for the quarter was $22.3 million, a decrease of 8.5% 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.

The Company was able to partially offset this drop with an increase in sales to Yum! Brands and sales of our SureCheck product. Additionally, international revenues grew 8% on sales to McDonald's and several smaller customers.

Service revenue for the quarter was $16.7 million, a decline of 9.7% which is due to fewer deployments related to the decline in product revenue. Contract revenue was $22 million for the quarter, an increase of 40% from 2011 reflecting the ISR integration contract that was awarded in the fourth quarter last year.

Product margins for the quarter were 34.3% versus 35.5% in 2011. This change is due to product mix as the Company sold fewer systems in 2012. Service margins for the quarter were 29.6% compared to 28.8% reported in last year's quarter. This was due to favorable mix in service offerings.

Regarding contract margins, they were 6.4% compared to 6.9% last year which is slightly higher than our historical range of 5% to 6%.

SG&A for the quarter was $9.4 million compared to $8.7 million in 2011, an increase of 7.6%. This was primarily due to sales and marketing activities associated with our new ATRIO product.

R&D expenses were down slightly at $3.3 million compared to $3.4 million a year ago.

Regarding tax expense, the low tax rate in the quarter primarily relates to a true up to our fiscal 2011 tax return.

PAR's financial condition remains strong. We now have over $18 million of cash on the balance sheet. The Company continues to maintain an excellent debt to equity ratio as we further reduced our debt level during the quarter to $1.3 million.

Cash flow from continuing operations was $2.5 million for the quarter and is $13.7 million for the nine months of 2012. The Company expects to continue to fund future working capital requirements from cash flow from operations.

I am pleased to report that Days Sales Outstanding for our hospitality business were at 49 days and for our government business were at 44 days. Depreciation and amortization for the quarter was $900,000. Capital expenditures for equipment was $200,000 and capitalized software this quarter was $871,000.

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

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

Good morning, Paul, Ron, and Chris. How are you? Much improved quarter, good to see. A couple questions I have. Can you give us the amount of beta sites for the ATRIO product right now versus prior quarters?

Let me answer you the best way that I can, Sam. The product is deployed in numerous -- a number of individual sites that we have been working on over the last -- as I said, the last couple quarters to be able to deploy it to a large launch partner and that effort has been underway. I talked about it last quarter and I commented on it in my earlier comments.

So we anticipate that we will have that executed in the days and weeks to come.

Okay, McDonald's revenue for the quarter? Does Ron have that?

Sam, for the quarter, McDonald's revenue was 20% of the total consolidated revenue and it was 31% of our hospitality revenue.

When you go into next year, 2013, what's the normalized run rate of the McDonald's revenue? When do you expect that to occur?

I think, Sam, that the run rate next year will still be below historical levels due to the completion of the very large historic upgrade last year. So we are going to be below historic levels on the product side. There are opportunities on the service side to do a lot more projects for McDonald's in the future.

I would add to what Ron said, Sam, by telling you that while US market has gone through a relatively short recent upgrade program, there are other opportunities that exist elsewhere around the world and while I won't comment on the specifics of where those locations are, we are actively engaged in those processes. So time will tell whether or not we are successful or not.

In those areas overseas, are you bidding still against Panasonic on other projects with the same customers or are there multiple competitors?

I won't comment on any one specific competitor, but I will tell you that in those processes invariably there are multiple companies that are being considered by McDonald's and we are -- our products are in evaluation modes. Our new 7000 are in evaluations in those markets. So as I said, time will tell whether or not we are successful.

Now the EverServ 7000, I guess it was announced in May. Was it released in May?

No, the EverServ 7000 was released just recently, third quarter were the first shipments that we had. CK had a couple shipments and Subway had a couple shipments. I don't believe it was May. Ron or Chris, maybe you can comment on that.

I think it was July, Paul and Sam.

I know it was announced in May but the release date was perhaps in July?

Correct.

How would you compare the actual feedback from customers and perhaps if you can mention any beta sites on that EverServ 7000 versus the prior product you had in some of those accounts?

Sam, it was between our 6000 product and our 7000, it was about 3 1/2 years, which is a long time for a product transition. And the product does not -- the product has gone through its beta phase. It is now shipping into Subways. It's now shipping into CKs which are the parents of Carl's Jr. that's in Hardees. So it's being deployed now.

If you look at the product versus our 6000 product, while the 6000 product was beloved and I don't say that lightly, by many of our customers, many of the largest fast food chains in the industry, when you look at the 7000 compared to the 6000, there is no competitor in that at least internally. What I mean is that if you look at the processor speed, you look at the ergonomics, you look at the fact that it has gesturing on the front of it, you look at the fact that it has the ability to basically future proof your technology investment and what I mean by that is that you can think about your PC if you could only just simply slide in, slide out a new processor and the device would still continue to be the latest rev of product.

It is -- has easy serviceability features. It has great ergonomics. As I said if you look at it online, you will see what we find so attractive about it.

And the last question on the SG&A, you had an increase of $665,000. Can you tell me where that went to?

Sam, most of the increase was related to our hotel business as we are trying to build up our sales force and marketing efforts for our ATRIO product. So that's where most of the increase came from.

Would you say 50% of the increase, 90% of the increase?

More than half.

More than half. And where did the other half go or the other 40%? site?

Nothing specific, over several smaller areas, Sam.

Okay, thank you very much.

(Operator Instructions). Vincent Colicchio, Noble Financial.

Paul, I'm curious on your government business. You said the timing of new contracts is tough to predict. I understand that but having said that, do we expect that business to continue to grow sequentially in upcoming quarters?

If you look at our press release, I think you know this, Vince, we won a $42 million contract and we won a $48 million contract in a relatively short period of time and it was because of the deployment of the funds that were under the $42 million contract went quicker than what was originally anticipated in that contract period.

So it's tough for me given what's happening with the sequestration process, given what's happening with the Federal budget deficit and all those reasons to want to predict what will happen in the future, but if you look at the past as a precursor to what's happened in the future and you look at the returns that we have had in the government business over the past few quarters, they have been very good. And so we remain always optimistic but cautious, which I think is prudent given the state of the US budget deficits and the process that will happen at the end of the year with the budget-cutting process.

You had mentioned a couple of your growth accounts, Subway, Yum!. I am curious what's going on with Baskin-Robbins. Is that still growing? Did you complete deliveries there? What's going on there?

Vince, we completed that last year, essentially, so right now it's -- we are just providing the normal services to the Baskin account.

Okay. Thanks for that, Ron. Paul, you had mentioned scaling challenges with SureCheck. Could you give me some more color on that?

Well, it's just that when you try to deploy a product that was in pilot with 4000 stores, with the largest retailer in the world, there are deployment issues and what I mean by that is that again these are not by any stretch of the imagination negative issues. They're just issues associated with getting the product out there and getting all the features and functionality deployed to all those different locations.

And when you do that particularly with something that is -- was just being deployed, it prevents you from doing other things. That was my only point was that those issues which we anticipate largely coming to an end between now and the end of the year have curtailed our ability to deploy other large locations. So our sales cycle remains active. We have a building pipeline. We remain very optimistic about the product but that's just the reality over the last couple of quarters.

Okay. Nice quarter and thanks for the feedback.

Craig Hoagland, Anderson Hoagland and Company.

You mentioned that you have an objective of reducing McDonald's size in your revenue stream. Do you have a goal in mind there? Is the current 20% level --?

I think that it's just the reality is that in 2010 and 2011, those large deployments occurred as a result of that, so we have roughly 55% of the share of McDonald's in domestic US and the reality is that McDonald's doesn't go through deployment like that every year or every couple years. So our comparisons suffer when we compare ourselves against that and you saw that occur in the quarter.

So what we have done is we knew that and we anticipated that, which is why we divested -- we invested our resources into the various Yum! Brands, Taco Bell, KFC, etc. as well as also in Subway and you have heard me talk about on other calls the fact that we are deploying in some weeks 100 Subway locations.

So our goal is to diversify our business and to take our product in the markets that it has not been before, so hopefully there will be what I would call creative tension (inaudible) material. Hopefully we will win some more McDonald's business and hopefully what will occur is that we will be successful in taking our product into some of the other chains that have occurred and that will enable us to diversify our product business so that no one customer can impact our overall Company results.

Okay, could you talk also a little bit about the strategic thoughts about SaaS revenue versus product and traditional service revenue going forward?

Well, we have -- if you look at our hardware business, it is -- it has ups and downs based on issues just like you and I just discussed a few minutes ago. That's inherent in the business, not just us. It's anyone that has a hardware business and what we have sought to do is to build a base of profitable annuity revenue. So as you know, there are various paths and customers have opinions on this as well which is you can either go kind of the newer route or you can go the SaaS route and many of our customers given the attractiveness of cloud-based computing particularly in our ATRIO product and particularly in our SureCheck product, have been very attracted to the SaaS model that enables them to avoid large capital expenses, enables them to make their fixed cost variable and to be able to have very, very clear paths to return on investment.

So our goal is to over time to build a recurring base that sort of smoothes the ups and downs that are inherent in the hardware business and so that's our strategic goal. It takes a little longer but we think the results for shareholders will be better in the long run.

Is it --? It sounds like there has not been the opportunity to develop a SaaS model to serve the restaurant industry.

Well, we continue to evaluate all of our business areas and we continue to look at the model. We continue to see where we have our strengths and weaknesses and seek to make them better so time will tell what we do in the future in that area.

Thank you.

At this time, we have no further questions. I would like to turn the call back to Mr. Paul Domorski for closing remarks.

Okay, thank you very much for your continued interest in PAR Technology. I look forward to speaking to at the end of the fourth quarter. Have a great day. Goodbye now.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.