PAR Technology Corp (PAR) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PAR Technology's fiscal year 2016 second-quarter financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Chris Byrnes, Vice President of Business and Financial Relations. Sir, you may begin.

Thank you, Tamara, and good morning, everyone. I'd also like to welcome you today to the call for PAR's second-quarter 2016 financial results review. The complete disclosure of our first-quarter results can be found in our press release issued today, as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please see the Investor Relations and News section of our website, at www.partech.com.

At this time I'd like 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. 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.

I'd like to remind participants 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.

Joining me on the call today is PAR's CEO and President, Karen Sammon; and Matt Trinkaus, PAR's Chief Accounting Officer.

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

Thanks, Chris. Good morning, and thank you for joining us today for our second-quarter 2016 conference call. This morning we announced that the Company reported first-quarter revenues from continuing operations of $52.7 million as compared to $58.9 million in the second quarter last year. Last year's second-quarter results included revenue from a one-time program with one of our international customers, and the completion of a Tier 1 deployment that were not planned to be duplicated this year. Additionally, our contract revenue decrease is attributed to specific timing of revenues associated with the Company's large Eagle Intel-X contract with the U.S. Army when compared to second-quarter 2015.

In the quarter, we recorded GAAP net income from continuing operations of $100,000 and diluted EPS of $0.01 compared to net income of $1.2 million and $0.08 diluted EPS in the same quarter in 2015.

On a non-GAAP basis, PAR reported net income from continuing operations of $629,000 and diluted EPS of $0.04 versus $1.7 million and $0.11 per diluted share reported in 2015.

I'm going to turn the call over to Matt Trinkaus for further details of our financial performance. After Matt's review, I will highlight our second-quarter performance and why we feel positive and optimistic about the second half of this year.

Thanks, Karen, and good morning, everyone. Product revenue in the quarter was $21.4 million, a decrease of $3.8 million or 15.1% compared to the second quarter of 2015. During the quarter, the decrease in product revenue was mostly driven by hardware sales sold our largest global customers and low volume through our network of channel partners. This decrease was offset by hardware pullthrough from deployments of Brink POS of approximately $1.5 million.

Service revenue was down slightly compared to Q1 2015, generating $11.8 million versus $12.1 million, noting a decrease of 2% or $300,000. This was largely due to installation revenue that correlates with lower global hardware deployments in the quarter. Although overall service revenue stream was negatively impacted during the quarter from the volatility of the global deployments, the Company experienced growth in software sold as a service and other recurring revenue streams, noting an approximately $700,000 increase compared to Q2 2015. In addition, service revenue generated by the Company's hardware repair center contracts increased compared to prior year, driving a higher volume of contracts.

The Company's recurring revenue base represents both software-related service and hardware support contracts. Of the $11.8 million of service revenue reported in Q2 2016, approximately $8.3 million or 70% is comprised of recurring revenue contracts as compared to $7.6 million or 63% of total service revenue in Q2 2015. The Company's SaaS revenue, primarily in Brink and SureCheck, continues to grow, increasing 74% over Q2 2015, and 18% on a sequential-quarter basis. The volume of hardware support contracts continues to grow, with a shift in the type of contracts that drive improved margin performance.

Contract revenue from our government business was $19.4 million, a decrease of $2.2 million from the $21.6 million reported in the second quarter of 2015. This is the result of a decrease in materials and subcontract revenue across all lines of business, offset by an increase in direct labor and associated value-add revenue. Contract backlog continues to be significant, building total backlog of over $125 million as of June 30, 2016.

Product margin for the quarter was 24.7% versus 27.6% in Q2 2015. The decrease in product margin percentage relates to the mix of product revenue streams during the quarter as compared to prior year. In Q2 2016, the Company experienced a higher percentage of revenue, driven by project work for our Tier 1 customers that contain lower-margin product offerings. Service margin for the quarter was 30.4% compared to 27.7% reported in second quarter of last year. Service margins were favorable during the quarter due to an increase in recurring revenue, primarily driven by higher SaaS content. Additionally, the Company has experienced a shift within our service contract offerings to a lower-cost and higher-margin model.

Government contract margins increased 8.7% as compared to 6.4% for the second quarter of 2015. This increase is largely due to more profitable contract mix, with a higher volume of revenue earned through higher-margin contracts.

GAAP SG&A was $7.1 million, an increase of $213,000 from Q2 2015. The increase is primarily due to two factors: legal and professional fees of approximately $304,000 incurred from the Company's continued investigation of the misappropriation of funds by its former CFO; and approximately $127,000 of investments made in connection with the Company's ERP system implementation.

Non-GAAP SG&A was $6.5 million, relatively flat from the $6.5 million recorded Q2 2015. The adjusted SG&A reflects the exclusion of costs incurred from legal and professional fees from the investigation, equity-based compensation charges, acquisition-related expenses, and the ERP implementation costs. The Company continues to analyze its fixed overhead cost to reallocate the cost structure in support of our higher-performing products.

Net R&D expense was $2.8 million, up from the $2.7 million recorded in Q2 2015. The majority the increase is due to software investments made in the acceleration of Brink and SureCheck product lines.

Now to provide information on the Company's cash flow and balance sheet positions. Cash within continuing operations was mostly flat during the six months ended June 30, 2016. However, cash generated during the quarter from continuing operations was approximately $1.1 million; cash used in investing activities of approximately $2.2 million relating to [cap] software of $1.2 million; CapEx of $1 million; and working capital payment of $940,000 in regard to the sale of the hotel business unit. Cash used in financing activities was $61,000.

Inventory increased from December 31 by $3.9 million, mostly related to inventory procured for Q3 deployments specifically tied to our global Tier 1 accounts. Inventory turns for our domestic and international operations continued to be consistent quarter-over-quarter. Accounts receivable decreased $300,000 compared to December 31, primarily due to the timing of revenues associated with the government segment and improved collection cycles within the restaurant/retail division.

Days outstanding improved within the restaurant/retail from 59 days at 12-31 to 56 days at 6-30. We did experience an uptick in the government collections, noting an increase to 47 days versus the 42 days reported at 12-31.

This concludes my formal remarks, and I'd like to turn it back to Karen.

Thanks, Matt. While our results in the quarter were not unexpected, we will not be satisfied until we are delivering predictable growth and profitability to our stakeholders. Changing our business from cyclical hardware revenue streams to a diversified client portfolio based on software-led solutions and high-tech services continues to be our strategy, and there are many indicators that it is working in both of our segments.

Changes of significance take time, and execution requires precision as we simultaneously operate as-is and in our new business model. We are proud of the improvements we've made within the Company in the last six quarters, and we see great opportunity for PAR going forward.

In PAR's restaurant/retail business, we are making progress by diversifying our customer base and expanding our reach through our innovative software solutions portfolio. In this recently ended quarter, we grew our software subscription revenue by 74%, led by the increasing demand of our Brink software solutions. Our Brink solution, which includes SaaS, hardware, and associated services revenues, grew 227% in the second quarter from the same period last year.

Brink's monthly recurring revenue grew 95% in Q2 from the prior-year second quarter, and we deployed nearly 300 new stores in the quarter. Brink's annual recurring revenues grew 86% versus 2015. And our total number of stores operating with Brink's software -- with PAR's Brink software now totals 1,600.

In the quarter, we announced several new customers -- including MOD Pizza, Graeter's Ice Cream, and BIBIBOP Asian grill -- that contributed $456,000 in bookings. Our forecast for the remainder of the year is strong as our backlog includes Five Guys, Pita Pit, Sonny's BBQ, to name a few. And our bookings reflect nearly $6 million in ARR, and site growth of 145%.

During Q2 we released the latest version of Brink, version 3.6, which included enhanced conversational ordering capabilities; touchscreen kitchen support; and integrated near field communication technology, NFC, to allow for Apple Pay and other large payment processors to integrate to Brink.

We are focused on achieving our Brink implementation goal for this year, and have line of sight to achieve 10,000 deployed sites with Brink and its recurring revenue stream by the end of fiscal year 2018 or sooner. As we achieve this goal, we will experience an annual recurring revenue stream of over $20 million, and the accompanying valuations that SaaS revenue companies now realize at that level.

As a reminder, these are estimates solely for our Brink POS solution, and SureCheck will add additional incremental revenue and profits.

Updating you on SureCheck, we are seeing that food safety is becoming more systematic and data-driven, which will require an automated digital approach. Food companies today are looking at options for equipping their employees with cloud-based mobile solutions that are designed to maintain compliance with FSMA-based HACCP checklist. That's the idea behind our SureCheck advantage solution, a tablet equipped with three temperature measuring modes: a traditional thermometer probe; infrared for checking the actual temperature of cooking surfaces; and RFID, which can track both temperature and read barcodes to get additional information, such as where a package of food originated by the sell date, how the food has been handled and stored, et cetera.

Wegmans Food Market -- one of SureCheck's early adopters -- commitment to food safety is a core value. As a power user, Wegmans is deploying the new SureCheck advantage to all of their 93 stores by the year-end, implementing near 1,000 units. Our pipeline of new opportunities for SureCheck is expanding in grocery and contract food, and we are encouraged by the six new customers we have engaged within the quarter. The SureCheck solution is consistent with our strategy of expanding our business through recurring, high-margin software revenues.

Being more predictable in our business will also allow our Company to accelerate profitability. This quarter, our restaurant/retail business was able to grow our recurring revenues 9% over Q2 2015, and 4% sequentially from this year's Q1. Recurring revenue now comprise 25% of our total for our restaurant/retail business.

Trends around mobile and digital, labor and operational efficiency, and BI are driving operators to look for technology solutions, and to PAR. Because we offer state-of-the-art proven cloud solutions, we are consistently included in product assessments and market proposal opportunities for Brink and SureCheck. We are winning new customers throughout our target markets and increasing our bookings month-over-month.

We launched our EverServ 8000 series of hardware platforms earlier this year for both Tier 1 and Brink customers. The modern, sensible style and competitive price point have created a buzz throughout the restaurant industry. The recent certification of the ES 8300 by McDonald's globally is generating a significant amount of backlog for the back half of this year.

The excitement about PAR's strategic SaaS solutions that also include our leading hardware as a component, will motivate us; and we are keenly aware of how it changes our trajectory and the future of our Company.

As I do every quarter, I met with many current and prospective customers. In addition to learning a lot, it is gratifying to hear the confidence that our customers feel with PAR as a true technology and innovation partner.

Now to review our government segment. This business continues to perform well, and produce profits in the quarter that increased 15% over last year's second quarter. We continue to increase value-added revenue contracts that include more direct labor and high-tech contract work within our Intel solutions business line.

This quarter, we announced a new prime contract award supporting the U.S. Navy in Djibouti, Africa. We are also pleased to have recently announced a $5.1 million contract with the Air Force Rome laboratory. That contract is included in a group of 12 newly awarded contracts our Company has secured in 2016. And I am pleased to report that the contract backlog for our government segment is now at a very healthy $125 million.

This 54% growth in our contract backlog over the last three months insures a strong second half of 2016 for this segment; and also validates our core competencies of solving complex problems for our government customers through our continued innovation, deep experience, and passion and strong market reputation for performance excellence.

Our government team is also pursuing additional and exciting opportunities in expanding our technology reach to other commercial and municipal applications. Recently, PAR Government participated in a very important State of Colorado emergency management exercise, addressing wildfires and how first responders respond to such emergencies. PAR's technology was utilized to address gaps in radio communications in situational awareness, which are critical to firefighter safety. There's much happening in our government business. And we are excited about the opportunities, and look forward to giving you detailed updates on our progress.

In summary, the investments that we've made in our business over the past year will contribute to a solid second half. Our focus remains on innovation and execution that allows our customers to enhance the end-to-end user experience for their customers and their businesses. We believe our technology and capabilities are well-suited to take advantage of the growing market trends in both of PAR's business segments that feature mobility, wireless connectivity, and expanding digital content.

I remain optimistic about opportunities for each of our businesses. And, as always, I want to thank our employees, our customers, suppliers, shareholders, and the communities in which we work for all of their contribution towards our success.

This concludes our formal remarks, and I will now turn the call over to the operator to start the questions and answer session.

(Operator Instructions). Sam Bergman, Bayberry.

A couple questions; one regarding Brink. Can you give us any more color on the types of accounts that you have engaged, either in Tier 1 accounts that you are engaging right now in beta sites? Or is it similar to what's been announced over the last six months, in terms of customers?

Thanks for the question, Sam. The Brink -- the Brink sites that we are engaged in span from Tier 1 to Tier 3 in terms of our pilot sites and where we are deploying. We have -- we've been increasing the number of organizations that we are working with. So we have a lot of new logos; we've increased our backlog and furthering our deployments. So, yes -- so to answer your question, yes, we are increasing the number of customers throughout all the tiers. I'm not sure if that answers your (multiple speakers).

Can you talk about any of them?

At this point, I really can't talk about names. But they are names that you would recognize.

How far along are you with, let's say, the largest one, in terms of where you think that's going to head out in 2016?

I don't believe that we will see many sites from a Tier 1 in 2016. We are in a handful of sites right now. They are going through their final evaluations, and we are working our way through the stages of completion.

And in the McDonald's business that you talked about in the second half, what kind of uptick are we looking at? Can you give us any percentages?

The McDonald's business for the second half -- so we introduced our 8300. They let us showcase it at their convention in April. We received a really strong backlog from that convention. We have gone through all the pricing exercises, the field tests that they require. And we are -- right now we are able to deliver the product. So it's going to be a pretty significant uptick.

Can you talk about some of your other Tier 1 customers, and how well they are doing right now; and what your expectations are for them, the second half of the year?

Over the course of 2015, we have really wrapped up deployments with KFC, Jack in the Box. So they -- in the previous year, we had wrapped up a major rollout with Subway. So there is steady business, but not big deployments happening with them. So that's -- that contributed to the second-quarter -- the decline in revenue in the second quarter. So our relationships are strong. We continue to do lots of project work, but we are in the downside of the deployments.

And in terms of going back to Brink, are there any customers like Five Guys on the horizon that you are close to signing, or not?

Yes. So there are larger customers that have a large number of stores that are in our pipeline. One is signed, and we are going through -- they are not quite as large as Five Guys -- but we do have a few large ones that have multiple hundreds of stores that we are beginning the initial stages of deployment in the second half the year.

Sounds good.

I just wanted to remind you that Brink is on target, even without a Tier 1 in the mix. Any Tier 1 that we landed this year, we are going to see -- we will see the benefit of it in 2017.

Understood. So let's go on to SureCheck for a minute. There's been a lot of [mileage] on SureCheck. We haven't seen too many new customers. I assume the pipeline must be pretty full with SureCheck. When should we see some announcements that these are going to be implemented and installed in 2016?

That's a great question. And you're right; our pipeline is growing. We've added sales -- salespeople to our team. Our product is strong, and we are really starting to expand. So we are seeing the pipeline expand in really a couple of different areas. So grocery, where they were the initial early adopter; Contract Food has expressed interest, and actually is leading us into new opportunities; a bit in C-store and then into restaurants. So to answer your question, we have a bunch of pilots going on. And we expect that we will be able to announce some new customer wins, probably later in the year, Q4 time frame, as we start to get the deployments out.

Can you give us any feedback on your implementation with Target?

That implementation is included back in 2015, and that was a while ago.

In terms of an upgrade, like Wegmans, are they doing any type of upgrade like Wegmans has done recently or not?

Currently, no. Wegmans is really committed to food safety; like I said, it's one of their core values. And they are a serious power user of the solution. And we are seeing adoption in an uptick in the use of SureCheck by some of our other grocery customers, like Lunds & Byerlys and Festival Food. So they continue to push the solutions through their system.

So last question, in terms of SureCheck, do you have any large Tier 1 grocery chains that are looking at the product, since you have Wegmans that has such a good reference point, and of course Walmart (technical difficulty) reference point. One would think by now, you would be very close to signing a Tier 1 grocery customer.

We do. So we do in the US, we are in pilot with one right now. We have a meeting in a couple weeks with another. And then in Latin America, we also have another grocery chain that is in pilot. So we have several.

Thank you very much.

Richard Dearnley, Longport Partners.

Good morning. I'm new to your Company, and trying to figure out how -- which revenues go where. You mentioned you did $1.5 million in Brink POS. Is that the up 61% quarter-to-quarter, and 220% year-to-year number?

I'm going to let Matt explain this to you. We can also catch up with you off-line.

The $1.5 million represents really the hardware pullthrough on the customers that we won with the software, so they are also buying -- purchasing the PAR hardware. That is included within Karen's remarks of the 227% growth in the Brink solution. So when we talk about the Brink solution, we talk about the software, hardware, and services combined. That is included within that number. It is not included within the recurring -- when we talk about the recurring revenue, and that type of growth of quarter-over-quarter versus last year. So there is a differentiate between the hardware that we look at with Brink and how we look at the full solution, and then the recurring revenue, as well.

So that's the hardware part. Then what would the software part and the service part be?

So the software is included within the $700,000 that I noted in my comments. So that's where -- the software and the recurring revenue of service contracts would be in that number.

So the $700,000 includes the software and the service.

Right.

And can you break that out into software and service?

At this time, no. (multiple speakers)

And then you mentioned a goal of -- wait, where was it -- that $20 million of recurring revenue by -- at the end of 2018. Could you -- what was the recurring revenue, then, in the first half of this year?

So total recurring revenue -- and I think total recurring revenue for Q1 -- well, first half of this year for our service revenue was about -- a little over $15 million in total, but that includes our hardware contracts. What Karen is referring to is just the SaaS software for Brink.

Okay. And you're not going to reveal just the software -- the number that would be comparable to the $20 million target.

So, Richard, at this point we have not disclosed that information. We are giving different -- we are giving metrics around our growth. So some of the things that I said was that we've -- we ended the second quarter with roughly 1,600 Brink sites. Our objective is to grow the number of Brink sites by the end of fiscal year 2018 to 10,000. We have line of sight to get to that number.

Our backlog for Brink is about $6 million of annual recurring revenue. So these are the kind of metrics we are starting to disclose, so we can get to that point to tell you exactly what you're asking. Right now, the revenue contribution is small. We are starting off with a small base and we are growing. And the things that we can see are positive, as we accelerate our plans to deploy Brink and bring new customers into the fold.

Right. And small base (multiple speakers).

And just to repeat -- to your question, the $20 million of SaaS revenue, annual recurring revenue, relates to the 10,000 sites, and it relates to Brink. We are also focused on bringing SureCheck to the market, and the SaaS revenue associated with SureCheck will be on top of that.

Right. I see. And then stock comp was down 25% in the six months, but up 400% in the second quarter. Does that bounce around normally like that? Or does it reflect quarter-by-quarter results? And just conceptually.

So the stock comp -- with the new Board that came on a couple years ago, and we kind of revamped the compensation committee and how we looked at our stock compensation -- so last year, it did run pretty low, based on the new awards and new agreements that the compensation committee approved and worked on -- that was approved in 2016. So we will see a little bit higher run rate in stock comp this year versus last year.

I see. Now I probably read the proxy, but I've forgotten. Do you use a compensation consultant?

Not at this time. We have in the past, but not at this time.

Generally speaking, I think management should know what they should be paid without compensation consultant, but that's just me. Okay, thank you.

(Operator Instructions). Gary Siperstein, Elliott Rose Wealth Management.

Just a couple of bookkeeping items first. So you pulled, out on the non-GAAP basis, another $300,000 in charges for the ongoing investigation. I thought that mostly wrapped up in Q1. Can you give us some color on that, and are we through those expenses now?

So we should be through the majority of the expenses. It should be very minimal going forward. The $300,000 really related to some additional work that both our lawyers were doing and on the accounting finance side, as it relates to remediating the internal control deficiency that we reported at the end of the year. We had incurred extra audit fees and additional consultants that we used to make sure that we are able to remediate those internal control deficiencies. But going forward, we should see pretty limited action here, unless something were to trigger additional legal fees.

Okay. And you still expect to, through insurance or other means, recover -- I guess it was about a $700,000 loss from that malfeasance?

Gary, we have filed the appropriate claims, and we will be reporting on it as we are notified.

Okay. And is that something you expect before year-end, or is there no guesstimate on when that can come in?

We really don't know. But it is clearly something that's important to us, as well, and so we are continuing to follow the direction from external counsel and internal counsel to make sure that we remediate the situation.

Okay. And there was also some expensing non-GAAP in the quarter on the ERP system. Is that mostly done, and it will be capitalized expenses going forward?

How do you look at that, Matt?

Going forward, for the rest of this year, the majority will be capitalized. There will be very minimal expenses coming through on the ERP project. And then later into 2017, we might see some uptick in that again, but nothing significant.

Okay. And then on the balance sheet, so there's about $5.5 million in cash. You might have that $700,000 receivable on the insurance. And then I saw you move from long-term to short-term -- that note receivable to current assets. Is that expected within 12 months, or is it sort of expected to come in before year-end?

So that's based on the APA that we signed with Jonas, our consolation -- that is to be received in June of 2017.

Okay, about a year from now. The entire $4 million?

Right. And just be clear, we do not have a receivable for the insurance claim, because we can't make a probable cause yet for that.

Okay, super. And one more bookkeeping question, then I'll have some business questions. Karen, can you give us a little color on the CFO search?

The CFO search continues. We have enlisted a retained search. And we have some candidates that we are interviewing, and I hope to have a CFO on board shortly.

Super. Okay. And then business-wise, so just going over the quarter and the first half. So for the quarter, it seems like of all the things we're pretty excited about future-wise, growth was nice, and the only thing that hurt us is legacy hardware. So we sort of don't look at the legacy hardware as a growth business.

But outside of the difficult comp in the quarter, which you had called out in the last conference call, so it was no surprise, based on your earlier answers to questions with McDonald's getting approved; you are seeing some uptick on planned shipments for the back half the year.

But that just doesn't hurt us anymore if it's just flat with all other parts of the business; SureCheck and Brink growing, and government growing and contributing. And I think for the first half, government, even though sales have been off a bit, it still increased its contribution to the bottom line. It looks like the most important things for our future are going in the right direction. Is that how you look at things?

That is how I view it, Gary, so you really articulated it well. I think, as discussed in the past, we are focused on the SaaS component of our business; and with the government, the higher margin Intel systems business. So that's our area of investment and focus. While our core business, as we call it, the hardware business continues to be the engine to help us drive this change for into this new business model, and it's doing well too.

So the adoption of the hardware is really exciting to us. And it's going to be -- it's going to provide us with a good opportunity in the second half of the year. And sometimes, as we are looking at diversification, we are pulling out these metrics for you to show you how we are growing. It gets obscured by the success of our hardware business. So we have to balance this out. And that's why I want to start to call out some of the trends that we are seeing, so you can see how our investments are starting to work.

Super, okay. And you mentioned -- I don't know if I heard you correctly -- on SureCheck, you said there were -- where there six new customers in the quarter? Or I know you used the number 6; I don't know if it was new customers or rollouts or prospects and trials. Can you just explain -- tell me what you said again?

I said there were six new customers that are in one stage or another, but within at least in pilot. So six new names, so outside of -- we talk about Walmart and Wegmans all the time. And I just wanted to highlight the fact that there are six that have moved the funnel that are in this stage of at least in pilot, and some are further down into the pipeline.

Okay. And usually, what's been your experience on pilots? How many of them turn into actual deployments and contracts and orders? Is it half? Is it one-third?

So far, all of them. We are starting from a small base again. In SureCheck, our big first customer was Walmart. But all the pilots that we have entered into have turned into business so far. Can that continue in the future? As we've had more and more pilots, maybe not. And competition is coming, so that trend may not continue in the future. But right now, just answer your question, factually they've all turned into business.

Okay So, so far, 100% success rate. And competition is coming, but mightn't that actually be a positive; because it's such an embryonic industry, maybe that gives it legitimacy? And we won't win them all with competition. But if it widens the aperture, that could be good for us.

I agree with you. I said often that a market without competition might not be a market. So where we are is in early stages of a developing market. With an early-stage solution, we are further ahead than any of our competition. But there is competition. So we are starting to see people come in, which again there's more interest because of FSMA. There's more interest because of issues that are happening within the US market and in international markets. So we are starting to see more demand. So we are expecting that as the market matures, we are in a good position.

Moving that thought over to Brink, where do you see yourselves versus competition on Brink? Are you six months ahead of them, a year ahead of them? And what are the positives of our product versus the competitors?

When I talk about the competition for Brink, I look at it in terms of our traditional competition and the new competition. The traditional competition really dominated the market. And we are grabbing market share from some of that traditional competition, the Alohas and the Micros of the world. And they are not going away. But we are able to grab market share, because there is demand for hosted cloud-based solutions, and we have a very strong platform.

In terms of our new competition, there is competition. There's a lot of cloud-based solutions. But in order to -- the cost of entry to this market is pretty significant -- not pretty; it is significant. So what PAR has is the infrastructure and the capability to not only design and develop, but also to sell and deliver and support customers within this market segment. So we are taking our infrastructure. We are giving our sales team Brink and cloud solutions, so we can go and address the demand to the market in terms of cloud solutions, mobile, digital, business intelligence and information to drive their business and make good decisions.

Okay. And talking about the cadence on Brink, so you mentioned we have 1,600 installations now. You've mentioned you did 300 additional ones in the quarter, so -- and then with the 10,000 goal for the end of calendar 2018 -- so what are you looking to basically finish this year at? Is it like 2,500 and then you jump to 5,000 in 2017 and 10,000 in 2018? Can you give us some color on your hope for cadence?

And then, secondly, what makes you think you can do that? What do you see in your pipeline and your opportunity out there that makes you think you can go from 2,500 to 5,000 and from 5,000 to 10,000 units?

The answer to your first question is around -- we are 1,600 now. We expect to be between 2,500 and 3,000 at the end of this year, ramping up to 10,000 at the end of fiscal year 2018. When I look at the number of stores, and the opportunity for greater than 90% is more than $10 million in annual recurring revenue, just under 3,000 sites.

When I look at the total opportunities -- a conservative look at our opportunities; not every single thing is in here -- there's roughly 20,000 sites. So we are already going to end the year -- so we expect to end the year around 2,500. We are building a pipeline that right now, at this point, has roughly 20,000 sites. So we have line of sight to get us to our goals and objectives.

It's a matter of selling what we -- developing and staying ahead of the competition; selling what we have to customers, and then upselling to our existing customers; deploying and supporting; and doing that all methodically and professionally.

So the 20,000 stores, that is sort of what you see now? There's obviously materially more than 20,000 stores out there, so that's sort of -- prospects?

(multiple speakers) Those are our customers that are engaged today.

Okay, that you are engaged with today. So if you are engaged with 20,000, you're hoping for at least a 50% win rate to get to the 10,000 (multiple speakers)?

Yes, no, we are continuing to build the pipeline. So we can't expect to win 50%, so we need to get to 3 or 4 times. So we're just heading in that direction, and building the pipeline so we can secure -- if we can secure those 10,000 sites.

Okay. But today, with the goal of 2,500 by year-end, you actually have some touches with companies representing 20,000 stores.

Yes. The answer is yes. And so we are optimistic that we can get to 2,500 and probably exceed it.

20,000 is remarkable. So right now, we are -- you hope 10% or so, 10% to 12% would get you to 2,500. Okay. And then if you get to 10,000 and $20 million in revenue at 2018, with 80% to 90% margins; so even using 80%, if you hit your goal, that's $16 million in gross margins. That's about $1.00 a share. And that doesn't take into account the profitability of the hardware business, SureCheck and government. Am I crazy, or is that pretty much on target?

When we get to our 10,000 sites, you're heading down the right direction. And those are our objectives.

And, lastly, so for the first half of this year, non-GAAP, you've done $0.10 versus $0.15 last year. And you're optimistic on the second half. I think previously you guys had an aspiration to beat what you did last year, and I think you did $0.39 non-GAAP last year. So that would equate to about a $0.30 back half. Can you refresh me on what we did in the back half last year, and is that achievable?

I'll let Matt take the question. He's got the numbers right in front of him.

Gary, I do think it is achievable. Restaurants this year did have a soft start of the year. Last year it had a strong Q2 and Q3, with a soft Q4. We are expecting, this year, a big uptick in Q3 and Q4 to exceed what we did last year from a business unit perspective. Government should be consistent with year-over-year. I do think our financials will be pretty consistent with last year's performance, if not better, by the end of the year.

And Matt, what did we do in Q3 last year and Q4?

I don't have that off the top of my head here.

All right. But you did $0.15 non-GAAP in the first half. So that would be $0.24 in the back half. So to beat it, we would have to do at least $0.30 in the back half. And you are saying that's doable. Okay, so if we do -- okay, $0.40, yes. So we are at a pretty low PE. And that would be obviously higher-quality earnings as the recurring revenue model and the higher-margin software starts to become a bigger and bigger piece of the pie.

That's exactly where we are going with this, Gary. Yes.

Okay. Sounds good. Thanks for taking my questions.

I'm showing no further questions at this time.

I'd like to turn the conference back over to Ms. Karen Sammon for any final remarks.

I want to thank everybody for your time today. We look forward to communicating our progress in our third-quarter call. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.