PAR Technology Corp (PAR) 2013 Q4 法說會逐字稿

Good day to you, ladies and gentlemen, and welcome to the PAR Technology 2013 fourth-quarter and end-year financial results call. At this time, all participants are in listen-only modes. At the conclusion of today's conference call, instructions will be given for the question and answer session. (Operator Instructions).

I would now like to turn the call over to the host today, Chris Byrnes. Over to you.

Thank you, Gary, and good morning to everyone. I would like to take this opportunity to welcome you to the call for PAR's fourth-quarter and year-end 2013 financial results review. At this time, I would like to also take this opportunity if I can to take care of certain issues in regards to the call today.

Participants on the call should be aware that we are recording the call this morning and it will be available for playback. Also, we are broadcasting the conference call via the World Wide Web as well. So please be advised if you ask a question, it will be included in both our live conference and any future use of the recording.

Joining me on the call today is PAR's CEO and President, Ron Casciano, and Steve Malone, Vice President and Controller.

At this time, I would like to tell you that this conference call includes forward-looking statements that reflect management's expectations based on currently available data. However, actual results are subject to future events and uncertainties. The information on this conference call related to projections or other forward-looking statements may be relied upon and subject to the Safe Harbor statement included in our earnings release this morning and in our annual and quarterly filings with the SEC.

I'd now like to turn the call over to Ron Casciano for the formal remarks portion of our call, which will be followed by general Q&A. Ron?

Thanks, Chris. Good morning, everyone, and thank you for joining us today. I would also like to welcome you to our fourth-quarter and 2013 results conference call. During this call, I will review our fourth-quarter results and full-year results, Steve Malone will give the financial details, and I will give concluding remarks and then open the call up for Q&A.

The company reported fourth-quarter revenue of $59.7 million, a 10.2% decrease over the $66.4 million reported in the fourth quarter 2012. Net income from continuing operations in the quarter was $245,000 versus a net loss of $3.6 million reported a year ago. Earnings per diluted share from continuing operations were $0.02 versus a loss of $0.24 per share reported in the same period in 2012.

On a non-GAAP basis, the company's net income from continuing operations for the fourth quarter of 2012 was $1.2 million, or $0.08 per diluted share. These non-GAAP results exclude certain charges totaling $7.6 million primarily related to restructuring of the company's hospitality product portfolio as well as specific legal costs.

For the full year 2013, the company reported $241.4 million of revenue, a 1.5% decrease over the $245.2 million reported in fiscal 2012. Net income from continuing operations was $569,000 or $0.04 per diluted share versus a net loss of $1.8 million or $0.12 per share reported in 2012. On a non-GAAP basis, net income from continuing operations for 2013 was $1.1 million, or $0.07 per diluted share, compared to non-GAAP net income from continuing operations of $3 million or $0.20 per diluted share for fiscal year 2012. Full-year 2013 non-GAAP results exclude certain separation and legal expenses incurred in the first quarter as summarized within our earnings release.

In reviewing our fourth-quarter results, I would like to begin with our hospitality business. Overall revenue in this business was $37.5 million, a decline of 18% when compared to the prior year. This revenue decrease is due to the timing of system deployments primarily associated with two of our major global brands, McDonald's and Yum!. Hospitality revenue represented 63% of the total company revenue.

During the quarter, we continued to build traction and grow our SureCheck pipeline. As announced in the fourth quarter, PAR was selected by Wegmans Food Markets, a premier network of grocery stores based in the Northeast, to deploy our solution within their 83 stores. Our cloud-based SureCheck solution provides Wegmans with food safety and checklist management by monitoring and recording millions of temperature measurements performed within their stores each year. Our solution, which includes hardware, software, and data hosting, will maximize information accuracy and operational efficiency for Wegmans. We will continue to leverage our well-known reference accounts to advance new opportunities and to grow our SureCheck pipeline, which includes big-box retailers, large domestic grocery chains and restaurants, all seeking the competitive advantage regarding food safety and task management efficiency.

We are pleased with the progression of our sales pipeline and noting that we have multiple opportunities current and pilot evaluation stage.

With respect to the hotel market of our hospitality segment, progress continues with our ATRIO cloud-based solution for hotels. Although challenged by the longer than anticipated sales cycle and slow early adoption, we continue to be encouraged with the performance of our current deployments. During the quarter, we expanded our installed base and continue to gain momentum with ATRIO. The ATRIO product suite represents PAR's strategic growth engine for our hotel technology business.

In the fourth quarter, we also signed several new customer properties with our host property management and SpaSoft software products. These new customers included five-star properties in the US and other countries such as Taiwan, Turkey, China, Italy, and India, and included brands such as the Mandarin Oriental, the Ritz-Carlton, and Millennium.

Now let's review our government segment. We again had a strong fourth quarter and concluded a record fiscal year 2013 for our government business. This segment continues to be driven by contracts to support the U.S. Army and U.S. Air Force within their intelligence, surveillance, and recognizance, or ISR, programs. We continue to experience consistent funding for ISR programs and see growth opportunities in this particular area, as evidenced by the record $85 million ISR contract with the U.S. Army. Additionally, in the quarter, we signed a new $5 million contract associated with a U.S. Navy facility operation in Puerto Rico.

Even with our strong performance in this segment, we continue to be cautious and proactive as market conditions dictate length in procurement cycles due to softness in the federal budget surrounding the DOD and in turn make the timing of new contract awards difficult to predict.

I would now like to turn the call over to Steve Malone for his detailed remarks on the financials. Steve?

Thanks Ron, and good morning, everyone. Product revenue in the quarter was $22 million, a decrease of 21% compared to the fourth quarter of 2012. This decrease is due to the timing of system deployments primarily associated with McDonald's and Yum!.

For the year, successes with major deployments to CKE domestically, McDonald's of China, as well as consistent growth with our worldwide channel partners are accomplishments we executed well in 2013. In total, international revenue grew 17% and channel revenue grew 9% year-over-year.

Service revenue declined 14% compared to the fourth quarter of 2012 to $15.5 million, partially driven by installation services for certain contracts that did not recur in 2013. Although revenue is down for the quarter and for the year, we continue to focus on building our recurring revenue, knowing that 72% of our total fiscal year 2013 service revenue is recurring. We expect our recurring revenue to trend favorably as we deploy our software solutions within hospitality markets.

Contract revenue was $22.2 million during the fourth quarter, an increase of 8% or $1.6 million when compared to 2012. This increase was driven primarily by the timing of task orders on our ISR integration contract. As we have discussed in the past, the nature of our ISR integration work is to provide a rapid response to the evolving requirements of the US Department of Defense, which may create some level of short-term volatility within our government business.

Our contract backlog as of December 31 was $95.6 million. It is important to note that this backlog includes less than $1 million associated with the $85 million U.S. Army contract we announced in late 2013. Backlog on that contract is created as task orders are issued against the contract.

Product margin for the quarter was 29.5% versus a non-GAAP 27.2% in the fourth quarter of 2012, which excluded accelerated amortization of capitalized software. Product margins are improved due to favorable product mix of terminals versus peripherals as well as through improved operating cost controls.

Service margin for the quarter was 34.4%, an increase from the 32% reported in Q4 of 2012. This improvement is primarily due to efficiencies with our third-party service partners.

Contract margin was 9.1% in the quarter, up slightly from the 8.9% reported last year. This improvement is due to additional margin realized on certain contracts that were modified during the year. Partially offsetting this increase were investments in business development initiatives incurred in the quarter.

SG&A was $9.6 million, flat with the fourth quarter of 2012 non-GAAP expense which excluded certain legal and severance costs. R&D expense was $4 million, an increase of $200,000 over last year. The company continues to invest in its innovative next-generation software products, noting this increase is primarily associated with its hotel, resort, and spa software applications.

Now shifting to certain balance sheet and cash flow items, as of year-end 2013, working capital was approximately $42 million with a current ratio of over 2 to 1. Total debt was $1.1 million. Days sales outstanding for our hospitality and government businesses were 51 days each during Q4. The company generated $1.8 million of cash flow from continuing operations during the quarter. Depreciation and amortization were $825,000. Capital expenditures and cap software were $374,000 and $1.4 million respectively.

This concludes my formal remarks, and I would like to turn it back to Ron for his closing comments.

Thanks, Steve. To summarize, we remain confident in and committed to our strategy. Nevertheless, we are navigating certain challenges in 2014 for both our business segments. In the government segment, the Armed Forces are transitioning to a peacetime spending level, which is putting pressure on the industry as a whole, including PAR's government business.

In our hospitality segment, our software products continue to show tremendous market opportunity with both the ATRIO and SureCheck platforms gaining momentum during 2013. This momentum has encouraged us to accelerate our 2014 investment in these innovative next-generation platforms. However, due to their SaaS business model, it will take time to see the impact on earnings. We believe these actions will increase the probability for long-term success in 2015 and beyond.

In closing, I want to take this opportunity to address changes that will be made to our Board of Directors. After serving for nearly 30 years, Bill Ahn notified the company of his intention to retire from the board effective at the 2014 annual shareholders meeting. In addition to Bill's retirement, longtime directors Jamie Simms and Kevin Jost informed the company they will not stand for reelection at this year's shareholder meeting, citing personal reasons. PAR has benefited from their counsel, service and commitment over many years, and on behalf of our company, I personally thank each of them for their valuable contribution to PAR. We are presently conducting a national search to identify replacement candidates for our board and will recruit individuals with the requisite experience and knowledge to benefit our company.

With that, I will open up the call for Q&A. Thank you.

Thank you. Ladies and gentlemen, your Q&A session will now begin. (Operator Instructions). Matthew Paul, Sidoti.

Good morning. Thanks for taking my call. With regards to the two product launches in the year, maybe we can start with the SureCheck product. Could you address, to any more detail that you could provide, the market, your sales pipeline, maybe expansion within the Walmart franchise, maybe international expansion, and anything else?

Sure, Matt. Regarding Walmart, there are opportunities in the future to expand to their stores in North America and overseas. As I said in my remarks, our pipeline is growing in other retail concepts and other grocery chains and some restaurants. Because of the success with Walmart and Wegmans, we have advanced some of those opportunities to field test and hope to see some additional success in 2014 with some more wins.

Okay. In regard to ATRIO, could you address the current temperature within the hotel industry that you're looking at and maybe if the current operating performance is maybe delaying what the anticipated sales cycle might be for the product?

I think the hotel industry is very excited about transitioning to this cloud technology. That hasn't changed. There is a little bit of a longer sales cycle as you know. Many brands are being cautious. Again, as I said in my remarks, we are seeing some increasing momentum. It is slow, but we have signed additional customers in the fourth quarter and the interest is growing in the product. It is going to be a slow, steady process, but we are confident that, over time, adoption will be very good for this product.

Okay, thank you guys.

Sam Bergman.

Good morning, Ron, Steve, and Chris. How are you? In the Spa segment, can you talk about or tell us who your largest customer is?

Sure. Our largest customer in the Spa segment is the Marriott Company. We are deployed in virtually all of their spas.

Are you currently working with them in R&D to develop the next cloud upgrade or the next cloud product?

Yes, we are, Sam. We have been discussing that with them and have a plan to move forward with our next-generation product with them.

Do you have any idea when that is going to be released?

We are going to go slow with this. We hope to possibly have a beta test sometime late this year and we'll go from there.

Okay. In quick serve, I know it is hard to release customer wins at times, but I can tell --- I want to find out if you can tell us if there has been one or more substantial customers that have ordered hardware and software either in the fourth quarter or currently in the first quarter that has not been announced.

Sam, we have had some smaller wins in the fourth quarter. We have various sizes of opportunities that we are chasing currently. When we get to a point of an announcement, we will do that. So we've disclosed all of the significant events up to this time.

So are you saying there has not been any new wins in the first quarter that you have not announced in hybrid software?

No. I'm not saying that. I am saying that, at the appropriate time, we will make announcements for any significant wins where an announcement is appropriate. I ask you to stay tuned and we will see how the balance of the quarter ends up. And certainly we have some opportunities.

And the last question I wanted to ask you is SureCheck is great technology. It is transformational. I am just wondering. Since that has already been proven, Walmart has picked it up, I know Wegmans picked it up, and the pipeline seems to be getting better with some field tests and beta sites, why the disconnect in the stock with such great technology?

Sam, the progress of SureCheck has been very good during this year. It's a slow, relatively new product and we are now at a point where we are able to expand our reach and the interest is building, as I said, and we are on the right track. We have got some great momentum with it. And like I said, I am hoping for some additional announcements on the product later this year.

And on the SureCheck, has Wegmans installation started?

Yes, it has.

When is it supposed to be complete?

I think later in Q2.

Thank you very much.

(Operator Instructions). [Chris Bunge], [Melalapan].

Good morning. I just wanted to know how many customers do you have in each software space today, and if also few could provide how many customers are in beta testing as well, that would be great.

So, yes, that is a pretty broad question, Chris. We have thousands of sites deployed between all our products for software. And we are not going to disclose numbers of beta tests, but I can tell you that it has been growing.

Okay, okay. Great. And then just generally speaking, in software, are you seeing increased bidding on contracts, specifically in SureCheck and ATRIO? And kind of what is your competitive advantage over these competitors in these products?

We are seeing an increase in activity. Certainly, we believe our competitive advantage is several things. With SureCheck, we have a combination of temperature monitoring and task management, which gives us an advantage. With ATRIO is the leading edge cloud technology for hotel property management systems, and it is a really neat design and we are very confident that market acceptance is going to continue to grow.

Okay, thanks guys.

Lee Matheson, Broadview.

So, a couple of things. One, I was kind of surprised at the SG&A spend and I'm wondering if you could comment on Jerabeck's progress in wringing costs out of the organization. And is it an issue of he's pulled some costs. Have they been subsequently reinvested or we just haven't seen it yet?

I think we have started to see the results of the new management team and Bob's efforts. If you look at the fourth quarter, we've had improvement in product and service margins. That is all very key to our cost initiatives to improve things.

On the SG&A line, it was down year-over-year. In the fourth quarter, we had some marketing expenses that were due to timing of events in the quarter. But all in all, we are well underway in our initiatives to continue to look at costs throughout the entire organization.

Okay. And the changes to the board, I mean I think we need a little bit of context on that. I understand Bill moving on; he has been there long time. Some of the other guys still have relevant experience, haven't been there that long. What is the frustration from their perspective? Can you give us some color?

Yes. As far as Jamie and Kevin go, they both have been on the board for 10-plus years. They have personal commitments and that was the reason that they decided it was time to step down from their duties and the PAR board. And we certainly respect their decision and understand the personal commitments that they have.

And where is the --- in terms of getting the share price to a level that reflects the intrinsic value of the IP and installed base in software and the government business, our view had always been that the government business was maybe superfluous, but perhaps given the inability to execute on the hospitality side, maybe the opposite is true, particularly given multiples being paid in the software business. I mean is the board willing to take a broader approach to realizing value and perhaps engaging in the sale of part of the business at some point?

The board always from time to time takes a look at key strategies like that. I could tell you that it is discussed and addressed and there is nothing to announce at this time. So we are committed to staying with our strategy and we believe that, as our new products gain momentum and success, the idea of a recurring revenue model will be very attractive to shareholders in the future. And so that is our strategy at this point in time.

We will continue to look at different options down the road for sure. We are looking forward to getting some new board members with some good ideas, a different look at things. I think that will be a very good positive for the company. And so I'm excited about the opportunities too indeed for the share price.

And in terms of these new board members, what skill sets are you looking to add specifically?

I'm not going to get into the details, but certainly people that can understand our business and help us grow our business.

Okay, okay. Thanks guys.

(Operator Instructions). Sam Bergman.

Just a follow-up question. In terms of quick serve, can you give us the opportunities internationally with the restaurant side? And have any of those opportunities started?

Yes, Sam. There has been a lot of good momentum internationally in 2013. The leader was --- we've had great success in 2013 with McDonald's China. We disclosed earlier in the year that we won McDonald's UK and we have --- because of the announcement that we became one of the approved vendors for McDonald's worldwide now, it is going to be easier to compete in countries. You know, McDonald's, there are three worldwide approved vendors in McDonald's countries. Almost all require two vendors, so we are going to have an opportunity in many countries. One new one that's a small number of stores now but has great plans to expand is in Vietnam. So, we just recently installed the system in that country.

As far as other customers, we are growing our channel organization overseas in many countries, and that's --- even though the numbers are small, the rate of growth has been pretty good this year and we expect that to continue. And that is for both our hardware and software products.

So it is a combination of hardware and software versus before it was hardware?

Yes. And also we have opportunities with Yum! in Australia is another opportunity looking forward. That is just a good recap of some of the major initiatives we have going internationally.

And the only other question I wanted to ask you is in terms of ATRIO. I know, in the past, you signed some I guess distribution with a couple of Middle Eastern partners. What has gone on with them? Is there any installations of beta sites that you could talk about?

Those partners are very excited about the products. They are building their pipeline. At this time, there are no beta sites there, but certainly we are hoping to change that in the future.

Okay. Thank you very much.

We have no further questions.

Okay, well, thank you for joining our call and have a good day. Chris and I will be available afterwards of there's any additional questions. Thank you very much and goodbye.

Thank you very much, ladies and gentlemen. That now concludes your conference call for today. You may now disconnect. Thank you.