PAR Technology Corp (PAR) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PAR Technology's Fiscal Year 2017 Second Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce your host to today's conference call, Mr. Chris Byrnes. You may begin, sir.

Thank you, Kevin, and good morning, everyone. I'd also like to welcome you today to the call for PAR's Second Quarter 2017 Results Review. The complete disclosure of our 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 and other forward-looking statements may be relied upon and subject to the safe harbor statement included in our earnings release this afternoon and in our annual and quarterly filings with the SEC.

Joining me on the call today is PAR's President and CEO, Dr. Donald Foley; Bryan Menar, PAR's Chief Financial Officer; and Karen Sammon, the company's Chief of Staff and Strategy.

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

Thank you, Chris. Good morning, everyone, and thank you for joining us today for PAR's Second Quarter 2017 Earnings Call.

First, our consolidated financial highlights. Our second quarter revenue was $62.3 million, up 18.2% from the second quarter in 2016. Our second quarter GAAP net income was $2 million compared to $100,000 in the same period last year. Earnings per share were $0.12 per diluted share versus $0.01 per diluted share in last year's second quarter. Our non-GAAP net income was $2.6 million, an increase of $2 million versus the $600,000 in 2016. Our non-GAAP earnings per share were $0.16 per diluted share versus $0.04 per diluted share in the same period last year. As usual, I note that our press release has a full reconciliation of our GAAP and non-GAAP results.

Turning to our segment highlights. Our restaurant retail segment second quarter revenues increased 43.5% year-over-year, as our Tier 1 customers accelerated hardware deployments and one-time system integration projects. These first half hardware deployments and system integration projects wound down this quarter. And while we fully expect our business will achieve our annual goals, we do not anticipate the same pace of business in the second half of 2017 as what we achieved in the first half of the year.

Our government segment revenues declined 25.1% year-over-year, as we continued to execute our strategy and consciously transitioned to contracts with higher value-added components, especially within our high technology intelligence, surveillance and reconnaissance line of business, and this is important. While our revenues declined in the quarter, we were able to modestly increase our year-over-year government profitability due to our contract mix, which focused on our higher value added lines of business.

As a company, we continue to make steady progress on our goals on executing our strategic plan of being a true solution company, led by cloud software offerings and fully supported by our industry-leading hardware and services.

I would now like to turn the call over to our CFO, Bryan Menar, to give further details on our financial performance for the quarter.

Thank you, Don, and good morning, everyone.

Product revenue for the quarter was $32.7 million, up $11.2 million, a 52.4% increase compared to Q2 2016. During the quarter, the increase in product revenue was primarily driven by demand for our hardware solutions due to the timing of major project installations with our Tier 1 customers, primarily McDonald's, which represented 36% of total revenue in Q2 2017 versus 24% in Q2 2016. Additionally, the hardware associated with deployments of Brink increased approximately 400,000 versus Q2 2016.

Service revenue for the quarter was $15 million, up $3.2 million, a 27.4% increase compared to Q2 2016. We continued to expand the recurring revenue base, which includes both software-related services and hardware support contracts.

Recurring revenue for the quarter was $9.4 million, up approximately $1.2 million, a 13.9% increase compared to Q2 2016, due to software up $0.8 million and hardware support contracts up $0.4 million.

Momentum continued with our deployments of Brink and SureCheck, noting 106% increase of software as a service compared to prior year. We exited the quarter with approximately $5.7 million of annual recurring revenue from software as a service contracts.

Contracts revenue from our Government business was $14.5 million, down $4.9 million, a 25.1% decrease compared to Q2 2016. This decrease was primarily -- was driven by the wind-down of a large multi-year contract within our program management product offering. Contract backlog continues to be healthy, noting total contract backlog of over $111 million as of June 30, 2017.

In regards to margin performance for the quarter. Product margin was 25.4%, relatively flat versus 24.7% in Q2 2016. Service margin for the quarter was 35% compared to 30.4% in Q2 2016. The service margin rate increase was primarily driven by favorable fixed cost absorption on increased volume and continued revenue mix shift to Software as a Service platforms. Government contract margin for the quarter was 11.2% compared to 8% in Q2 2016. The favorable variance is the result of a shift in revenue mix from PMO to higher value-added product offerings of intelligence, surveillance and reconnaissance and mission system lines of businesses.

Now to review operating expenses. GAAP SG&A was $8.9 million, up $1.8 million versus Q2 2016, primarily due to variable costs related to favorable year-over-year financial performance and investment in personnel to support the current and future growth in our Brink and SureCheck products. Non-GAAP SG&A was $8.2 million, up $1.7 million versus Q2 2016.

Research and development expenses were $3.3 million, up $0.5 million versus Q2 2016, primarily driven by software investments made to support the acceleration of our Brink and SureCheck product lines.

Now to provide information on the company's cash flow and balance sheet position.

For the 6 months ended June 30, 2017, cash used by continuing operations was $5.7 million, primarily driven by amortization of deferred revenue from customer deposits received in Q4 2016 for first half 2017 deployments.

Cash used in investing activities from continuing operations was $5.6 million for the 6 months ended June 30, 2017, versus cash use of $3.2 million for the 6 months ended June 30, 2016.

In the 6 months ended June 30, 2017, our capital expenditures of $3.5 million were primarily related to the implementation of our enterprise resource planning system and capital improvements made to our owned and leased properties. We capitalized $2.1 million in costs associated with investments in our restaurant/retail segments and software platforms.

Cash provided by financing activities from continuing operations was $5.6 million for the 6 months ended June 30, 2017, primarily driven by receipt of the final installment related to the 2015 sale of the hotel business unit, in addition to borrowings under our line of credit and proceeds from stock options.

As of June 30, 2017, the inventory balance was $28.8 million, an increase of $2.6 million compared to December 30, 2016. The increase was primarily due to timing of certain customer deployment schedules expected to continue in the second half of the year, in addition to residuals from first half Tier 1 projects.

Inventory turns were 6x for our domestic and international operations. The team is actively working the supply chain in regards to changes in demand in support of managing the balance down in the second half of the year.

Accounts receivable increased $3.1 million compared to December 31, 2016. This is reflecting the increase in revenue versus Q4 2016 in addition to an increasing days sales outstanding within the restaurant retail segment. Restaurant retail segment days sales outstanding were 53 days as of June 30 -- as of June 2017. The Government day sales outstanding were 37 days as of June 30, 2017.

This concludes my formal remarks. Now I'd like to turn it back to Don.

Thanks, Bryan. Now to add more color and insight behind the financials.

Starting with our Government business. As I mentioned on our last call, we were in the midst of transitioning our contract base away from high revenue, low margin, cash order awards associated with our program management office line of business to a more value-added contracts within our intelligence, surveillance, reconnaissance, ISR, and mission systems lines of business. Through the execution of our strategy, we continued to see positive results of this transition, as the ISR portion of our Government segment grew by over 20% in the quarter versus the same quarter in 2016. This increase in ISR also contributed to margin improvement, and as Bryan previously mentioned, our contract margins in the quarter were 11.2% compared with 7.6% a year ago.

Two leading indicators shed light on our Government business. Our multi-year contract backlog at the end of the second quarter, as Bryan mentioned, is over $111 million. Secondly, our submitted proposals awaiting award at the end of Q2 totaled over $110 million. We will continue to focus on growing our ISR revenue base, while competing for all appropriate lines of business.

Now turning to parts, restaurant and retail segment. As previously mentioned, revenues in the quarter were up 43.5% year-over-year. The segment recorded accelerated revenues from specific Tier 1 customers, primarily McDonald's. These revenues were associated with hardware deployments and system integration projects in the first half of the year that had originally been planned over the full course of 2017.

Since these accelerated hardware revenues somewhat mask the progress we are making in our diversification strategy, I will now add some color. Our strategy broadens the customer base outside of Tier 1 through increased subscription revenues, both hardware and software, that provide consistency -- that will provide consistency and predictability and lessen the impact of our traditional cyclical hardware business.

PAR's cloud platforms, Brink and SureCheck, contributed to our success in the quarter, as our Software as a Service revenues more than doubled from last year's second quarter. Brink added 446 new customer sites in the quarter, a 54% increase from the second quarter 2016, and Brink now has an installed base that totals 3,260 restaurant sites. We fully expect a busier second half of the year for both bookings and deployments of new Brink customers. Our pipeline is strong. Our current backlog of scheduled to be installed customers current backlog totals well over 2,000 sites. We are focusing on accelerating the [bill-to-book] process and to closely manage the deployments and schedules of our customers.

I am extremely pleased to report that we have signed PAR's first master services agreement with a Tier 1 restaurant organization for the deployment of Brink to a network that has over 3,000 restaurants in North America. My previously quoted bookings number only takes credit for 15%. We expect deployment to begin toward the end of the third quarter. I want to emphasize that this is a major accomplishment for our company, the execution of our strategy. And this hopefully the first of what we expect to be several Tier 1 wins for Brink.

We continue to be selected by restaurants in the emerging fast casual sector. And since our last call, we've announced Brink wins with Uncle Maddio's, CC's Coffee House and Crazy Bowls & Wraps. Brink's emphasis on multiunit, corporate and franchise operators that require scalability, data security, lower infrastructure cost provided by cloud solutions continues to set us apart from our competition and will present even new opportunities for our company. We believe our prudent R&D investment, our growing installed base and our cost-effective approach to providing real customer success positions us well for extending our market leadership and to deliver on our mission of being the leading choice of cloud POS for restaurants.

Now regarding our SureCheck solution. We continued to expand our market reach across several verticals, including restaurants, contract food, convenience stores and grocery. We have begun the process of deploying SureCheck with our major U.S.-based retail customer in Japan, South Africa and Brazil, as this customer moves toward a global rollout of SureCheck. We have signed on new pilots, and our pipeline is expanding, as SureCheck garners increased market interest, as food safety issues have heightened awareness for consumer safety and brand protection, especially within the quick serve restaurant segment.

During the second quarter, we released the newest version of SureCheck's software, SureCheck 7.1. Key features of this latest release include enhanced capabilities, and traceability and documentation. We also recently launched PAR's Internet of Thing sensor solution for SureCheck to enable 24/7 remote monitoring. Taken in combination, these solutions maximize operational efficiency, compliance and quality control. SureCheck ensures critical temperatures are consistently captured and monitored in kitchens, serving areas, holding areas and distribution centers.

Our PAR SureCheck Advantage, the all-in-one platform, is generating significant interest with current and prospective customers. SureCheck Advantage provides increased operational efficiencies with integrated Temperature Pro, barcode scanner, RFID reader and infrared temperature scanner, all contained on an intuitive easy to use 5-inch handheld tablet.

Our strategy with Brink and SureCheck is to address customer requirements through the management of business data and provide a unique cloud solution for the expansion of Internet of Things and data management in restaurant and retail markets. These capabilities will help our customers blend real-world and digital data to provide them with new and valuable insights like asset monitoring, security alerts, marketing campaigns, loyalty programs, and all in real time. By doing so, we are creating fast, secure and scalable solutions that allow our customers to answer their most complex business questions today.

All of us at PAR appreciate your participation in today's call. And we look forward to providing updates to you throughout the coming quarters as we continue to successfully implement our diversification strategy. As always, I want to thank our employees for their dedication, their insight and their hard work.

Now I would like to proceed to the question-and-answer portion of the call.

(Operator Instructions) Our first question comes from Howard Brous of Wunderlich Securities.

I have a couple of questions on Brink and SureCheck. Let me start with, of the $5.7 million SaaS revenues in the quarter, how much was SureCheck, how much was Brink?

It is predominantly related to Brink, as the SureCheck will be have coming right from the license and also from the hosting that we're receiving. And as we transition the strategy for SureCheck, we're looking to transition that where we'll actually be seeing more recurring coming out of the SureCheck.

Yes. So that's correct. So Howard, as we've talked about, the transition, we made the intentional decision to move to Software as a Service with SureCheck in the beginning of 2016, so clients are coming on or moving to that model. The software maintenance and hosting that we get from SureCheck reside on products.

Yes. And I didn't mention, Howard, but we are well -- we have been investing in a SureCheck next-generation hosting platform, which makes it -- it has many more features, it's more scalable, and I think will be attractive. And although there are absolutely no guarantees, we hope to move some of our traditional on-premise software clients over to Software as a Service on SureCheck. It is work in progress, and we'll no doubt be reporting on it in future quarters.

So when I look at Brink, you tell us how many bookings you had for the quarter. Can we have the same analysis on SureCheck? So we can see how we've made progress in both instances because the transformation clearly and the margins clearly in software versus hardware, we all know the difference? But is that possible on a going forward basis?

Yes, Howard, this is Karen. We're going to start providing that information to you all in the 2018 time frame when we've moved our platforms over. We've looked at SureCheck a little differently than we've looked at Brink. Brink, we assess by location, by store. With SureCheck, we look at it by device. And we sell 2 primary devices: our SureCheck Advantage or the temperature measuring device and then we sell IoT. There's a different SaaS model in terms of dollars associated with those. So we're putting it together. We're reviewing it, and we're planning on bringing those metrics to the investment community in '18. So you have -- we have another 2 quarters.

Right, I understand that. So when we look at getting a Tier 1 customer for Brink of 3,000 units, it's the same measurement for SureCheck? Are there customers out there for SureCheck that would provide us with 1,000, 2,000, 3,000 units like a Tier 1 customer in Brink?

We are working with at least one Tier 1 customer, as the QSR industry recognizes the need for food safety. And hopefully, we'll have more to report on that in later quarters.

Howard, in our public -- if you look on the web and you look at our public presentation, we have a slide that shows the number of units. And you see a big spike in the 2012, '13 period where one of our big retail clients came on and then some steady growth. So right now, we have about 15,000 units -- I'm sorry, devices that are leveraging SureCheck. The reason that we are fine-tuning it is because there's a dollar difference between the types of devices between our SureCheck Advantage and the IoT, and also the number of devices that are used on a site. So one of the customers, a grocery chain, Wegmans, has about 10 devices per site, another one of our major retailers has 2 devices per site. So we're focusing on the number of devices used.

And we've added -- regarding the Internet of Things, we've added to what we offer our customers and have integrated into our software the ability to sense temperatures, as I mentioned, which really adds another device. So we are working as to how to in 2018 to better provide you with data. It's a work in progress.

Fair enough. Bryan, I have some questions on the balance sheet and income statement. We'll do this offline at the end of the week? Is that okay with you?

Yes.

(Operator Instructions) The next question comes from Gregory Hillman with (inaudible) Securities.

Just real quick. At the end of Q1, I think you showed, again, a $5.7 million recurring annual revenue, I think. I guess it was for Brink, but you showed the same figure at the end of Q2. Does that mean there wasn't that much growth and progress at Brink in the interim?

The end of Q1, it was $5 million and recurring. At the end of Q4, it was $4.5 million. And now it's $5.7 million.

$5.7 million? Okay.

It's annualized, yes.

Okay. And then just for SG&A, I believe that your spend on the investigation went down from, I don't know, $1 million to $600,000 here from Q1 to Q2. What would you expect that to be on a go-forward basis, excluding any settlement costs?

Right. So we've changed our phase of where we are in this, right, in regards to the investigation into more of now the kind of the data collection and the review from the subpoena that we have. So as expected, a direct cost associated has come down, right? We do expect that to moderate, and that's excluding any potential financial fees, which we're unaware of at this point in time.

So it would trend down or the level at this -- on a go forward basis, the trend on the ongoing legal consulting fees? Is that what you are saying?

That is correct.

Okay. On a whole question of SG&A. What percentage is variable, and what percentage is fixed, say, excluding the investigation costs? What will be your answer to that question?

So in that, the increase that we talked about here, the year-over-year, (inaudible) a quarter out there, about a $1.8 million increase versus last Q2 2016. 50% of that is variable related because of the financial performance that we had in the first half of this year versus last year. So we're talking basically your cash bonus accrual and commissions related to that.

As well as the stock accrual. So this is an area in which we really expect to see -- this is really good for our employees and our management team. 2016 was not a good year for cash bonuses and for equity awards. This is starting out in the first half to be a very good year.

Okay. And then would you -- just besides a bonus accrued, just get back to the question in terms of -- let's say, what percentage of SG&A is fixed, and do you think on a go-forward basis?

I don't have a specific percent number for you right now. I can definitely get back to you on that. But it's predominantly the fixed side of it, fixed, the amount that [you get] for the commissions and also the bonus, the increase last year, there really was no bonus in the beginning of the first half of last year because of the fact that we were actually, I think, flat for net income for the first half as we quoted out here. But I'll get you for -- I can get you back to the exact percentage. I don't have it really available right now.

Okay. And then finally, from the customer standpoint, what would be the return on investment or the payback period for SureCheck, for adopting SureCheck?

It varies by customer. We're seeing in one of our recent implementations that they were showing that between the food safety, food quality, operational efficiency, and labor savings that an ROI is happening between 3 to 4 months.

You mean a 3 to 4-month payback period, is that what you are saying?

Correct. As they expect the expense of the assessment, and the hardware and as they move forward in the implementation.

And I'm not showing any further questions at this time, I'd like to turn the call back over to our host.

Okay. Thank you very much for joining us today. So we'll be available for additional calls throughout the day. And again, have a good day, everyone.

Ladies and gentlemen, that does conclude today's presentation. You may now disconnect, and have a wonderful day.