PAR Technology Corporation (PAR) Q4 2011 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to PAR Technology Fiscal Year 2011 Fourth Quarter and Yearend Financial Results Conference Call. [Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Paul Domorski, Chairman and Chief Executive Officer. You may proceed.

Good morning everyone. I would like to welcome you to the PAR Technology fourth quarter 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, 2010 and to our press release. These are documents that identify important factors that could cause such a variance. Our remarks will include certain non-GAAP measures of financial performance. Please refer to our press release, which is available on the company's website for discussion of any non-GAAP measures. Due to the sale of our LMS Logistics business, the LMS results are classified as discontinued operations. During the course of this call, we will take questions from participants. Under SEC rules, we cannot provide material information in subsequent private settings, but we'll continue this public call as needed to discuss and respond to appropriate questions. After I provide my views on the quarter, then I will turn it over to Ron for his comments. From there we will answer any questions you might have. Thank you for your continued interest in PAR Technology. Well, let me begin. The company reported revenues of $60.1 million and net earnings of $1.8 million or $0.12 per diluted share. This compared to the prior year fourth quarter results from continuing operations of $63.5 million in revenue and net earnings of $1.7 million or $0.11 per diluted share. For the year 2011, PAR reported total revenues from continuing operations of $229.4 million, down 2.4% from the $235 million reported for fiscal year 2010. On a GAAP basis, reflecting non-recurring charges incurred in the second quarter of 2011, net loss from continuing operations for 2011 was $13.4 million representing a loss per diluted share of $0.89. On a non-GAAP basis, excluding these charges adjusted net income from continuing operations for the year was $5.5 million or $0.36 earnings per diluted share. The results compare to the $5 million of net income and the $0.33 earnings per diluted share reported for fiscal year 2010. Operating cash flow from continuing operations as of 12/31/2011 was $13.6 million. Debt was halved, inventory is down significantly, SG&A is down, but sales are up and we are accumulating cash on our balance sheet. Over the past quarters, we continued to make consistent progress to position the company for growth and profitability. I have said on my first earnings call that some of my goals were to: one, streamline the company; two, to reduce the time to get products to market; three, to realize the value from investments made; and four, to improve consistency of performance; and five, to improve results. 2011 was a down payment on that. Reviewing the year, revenues from continuing operation increased sequentially every quarter fueled by growth in our hospitality business. While growth in the economy is always good, the 2010 comparison year had a large technology refresh in McDonalds and we still have a couple of more quarters of that to go. Earnings from continuing operations increased sequentially throughout the year and profit growth exceeded revenue growth. The last time the company earned $0.12 in a quarter was the second quarter of 2006. In the second quarter reviewing the year, we announced a $29.4 million write-off of goodwill and obsolete and excess inventory, only a $0.5 million of that was cash. In the fourth quarter, we announced a $42.5 million, 5-year U.S. Army ISR task order. Our government business reported revenues of $20.1 million this quarter, which represents a 21% increase over the fourth quarter of 2010 and a 28% sequential increase from the prior third quarter. Margins were 7.8%, significantly higher than the historical 5% and 6% run rate. We don't see these margins as the new normal going forward, but we are working on improving the historical rate and determining whether margin dollars or rate are best. The ISR contract gives us stability and at the same time the opportunity to grow, just as we did in the fourth quarter, during this uncertain government spending period. We also announced in the same quarter the sale of our logistics business, PAR LMS to ORBCOMM. The selling price was $10 million, comprised of $6 million in cash and a couple million dollars of ORBCOMM common stock up front with a potential earnout of $4 million. That transaction is closed. Other highlights in the year included Baskin-Robbins selecting PAR's complete solution, which is software, hardware and services. SUBWAY named us their Technology Provider of the Year. We released the latest version of EverServ PixelPoint Software to address the needs and requirements of the independent restaurant channel and launched a new webpage demonstrating our hospitality focus. There are many other wins, but some of our customers don't like to disclose technology upgrades for competitive reasons and we respect their wishes. Since the start of new year, we announced that Wal-Mart will deploy PAR EverServ SureCheck in temperature measuring devices for food safety measurement and checklist management. PAR EverServ SureCheck is a powerful web-based tool for managing Hazard Analysis & Critical Control Points, HACCP and inspection programs for retail and food service organizations. The SureCheck solution combines a PDA-based mobile application, a cloud-based enterprise server and a fully integrated temperature measuring device to automate the monitoring of quality risk factors while enhancing associate accuracy. SureCheck enables to capture tasks improving safety data wirelessly ensuring consistency chainwide. We replace paper. Telling you what you already know, Wal-Mart is the largest retailer in the world. This global rollout is a multi-year contract comprised of an enterprise license as well as subscription hosting services. I can't disclose further details on this transaction. I can tell you that having Wal-Mart as a launch customer is a great place to begin the introduction of this compelling product. Earlier this week we announced the identity of our ATRIO launch customer, Personality Hotels in San Francisco. ATRIO is the industry's only platform purpose built for true cloud computing, a highly innovative user experience, modular design and the use of an enterprise service bus. The installation at the Hotel Diva marks the culmination of a 22-month development effort that delivered an extraordinary advancement in the state-of-the-art technology in the hospitality industry. I've said all along that we wanted to able to demonstrate this product working in increasingly more complex environments and that is what we are doing. Our technology is supported by industry heavyweight Microsoft Azure to seize the strategic aspects of our application. The product has the potential to be a game changer, like our SureCheck product. Both have compelling, simple, financial and technological propositions in one of the hottest areas of computing, cloud. Customers we talk to, it is no longer a question of if, but when cloud is the right answer. No one else has what we have. I continue to work with our board on a strategic plan to better position the company. So what is different 2012, results then we will anticipate will include the benefits from an improving hospitality market, ATRIO's market adoption, SureCheck both in Wal-Mart and other retailers, stronger propositions, continued growth in our quick service and table service software, as well as our new hardware products that will begin to be launched around mid-year. Each has unique differentiators. We will continue the progress we made in 2011 to improve the efficiency of our operations and we will continue to blend the strategic and opportunistic mindset as we did in 2011. So with that I will turn the call over to Ron for his comments.

Thank you Paul, and good morning everyone. As Paul mentioned we divested our LMS business and as such, the LMS results are now classified as discontinued operations. So for the fourth quarter on a continuing operations basis, revenue was $60.1 million, a 5% decline from the same quarter a year ago. However, EPS was $0.12 versus $0.11 for the fourth quarter of 2010. Looking at some of the details, product revenue for the quarter was $22.1 million, a decline of 23%. This decline was due to domestic McDonalds, as their large technology upgrade program was completed this year. Partially offsetting this decline was an increase in sales to YUM! brands, SUBWAY and growth in international revenues on the strength of some second-tier customers. Service revenue for the quarter was $17.9 million, a minor decrease of 1% from last year. Contract revenue was $20.1 million in the quarter, an increase of 21% from 2010. This growth was driven by the company's new ISR technology contract. Product margins for the quarter were 32.2% versus 34.5% last year, reflecting an unfavorable shift in product mix during the quarter. Service margins for the quarter were 29.8% versus 34% last year. This is primarily due to a change in mix in service revenues. Contract margins were up to 7.8% compared to 7%. Both quarters reflect higher than normal margins for our government business. In the fourth quarter this year margins were driven in large part by the company's first license sale of its slow-motion video product. SG&A for the quarter was $8 million compared to $10.8 million in 2010, a decrease of 26%, as the company continues to focus on its spend levels. R&D expense decreased 18% to $3.4 million in the quarter, as the company's ATRIO product was released. For the year total revenue from continuing operations was $229.4 million, a decline of only 2% and as the drop in McDonalds revenues was offset by growth in YUM! channels and several other customers. Gross margin was 25.4% versus 26.3% a year ago. Operating expenses declined $5.2 million or 9%. Non-GAAP earnings from continuing operations, as Paul mentioned were $0.36 in 2011 compared to $0.33 in 2010. PAR's financial condition is strong. The company continues to maintain an excellent debt-to-equity ratio. We further reduced our debt level during the quarter and ended the year at $2.7 million. We have been able to finance our investments in new products through cash flow from continuing operations which was $13.6 million for this year. The company expects to continue to fund future working capital requirements from cash flow from operations. A few other metrics, day sales outstanding for our hospitality business were 54 days and for our government business, they were 57 days. Depreciation and amortization for the quarter was about $600,000. Capital expenditures were $200,000 and capitalized software this quarter was slightly over $300,000. This concludes my remarks and I would like to now open the call up for any questions. Thank you.

Okay, operator. We'll take questions if you would help us with that please.

[Operator Instructions] Our first question is from the line of Jusin Ruiss from Sidoti.

Just had a quick question on the McDonalds completion. That's only domestic. Is there any room for international or is there any exposure there or...

I think what's happening is, is the domestic rollout which occurred in 2010 has been through our results in the first -- in 2011 and it will be in our results for the first couple of quarters of 2012. So, it's mostly a domestic issue as opposed to a European issue.

Jusin, if we look at the year for McDonalds, while we had a significant decline in McDonalds' domestic revenue, our international McDonalds' revenue was actually up on the strength of Europe and China.

That's the international picture is different than a domestic picture.

[Operator Instructions] Our next question is from the line of Sam Bergman [ph] from Bayberry Asset Management.

Several questions. In terms of the McDonalds cycle, how much would you say is complete at this point and what's available to the revenue line in the first and second quarter of 2012?

Well, let me just be clear as to what this is, and you may already know this. It is a comparison issue as opposed to a current year issue. What I mean by that is, is that in 2010, the company was going through the domestic upgrade program. As a result of that, we had increasing revenues in that category. So, in 2011, unfortunately, all of our customers don't refresh their product every year. But that was not in the 2011 number. And it's not an insignificant number. So, and as it says in the press release, were that not to occur, the company would have experienced further growth than it did. So, we have 2 more quarters of that to work our way through, but again that's where we are focused on and we are aware of it.

And on the YUM! brand refresh I know it was a pretty good and healthy increase for this fourth quarter. Is that the very beginning of their upgrade?

Yes Sam, we expect probably more towards the second half of 2012 there will be continued opportunity with an upgrade for YUM! brands and we should experience some more growth next year.

Paul, I think when you were at the Noble's Conference, you mentioned somewhere in the near future there would be announcements regarding quick serve customers or new quick serve customers. Can you talk about any new beta sites for these quick serve customers or opportunities?

Well, we continue Sam, to work those things and there are things that occur -- I mean, I guess what I have learned is that many of our customers don't like us to announce their technology upgrades because of competitive reasons and they have their own reasons. So, we will announce significant upgrades as they occur, much like what we have done in our press releases. And you can go back and look at all we did in 2011 and I would anticipate that we would continue to release at that pace, if not greater.

And I have 2 remaining questions, one on the SureCheck solution. What other industries could that become available to, if at all?

We see it primarily in the retail and the food service industries being the primary area, but it's compelling, simple, it enables you in a simple world, to be able to collect data that occurs in those environments and you might say well, gee that happens today. But I think what its unique differentiator is, is the ability to assimilate data chainwide and be able to ensure consistency across the chain without having full scale enterprise adaption. So it replaces paper, it replaces logs, it replaces all the things that you see in those environments. So we are, I mean, having Wal-Mart as a launch customer is a great starting point. So I think long story, but food service and retail first but we have further ability to expand beyond that, certainly.

Can you give us any parameters of what that license fee was?

I can't, I'm sorry.

You can't, okay. And the last question is regarding ATRIO and the customer that you just went live with. I am kind of comparing that to and probably I shouldn't, but I know in the past you did the Mandarin in Boston and I guess you did hardware and software. And here we are doing hospitality with a new suite of products ATRIO, which is cloud-capable. Yet, it doesn't seem like you picked up a very significant reference customer.

Well, the first thing I would say is Hotel Diva is a great partner of ours and I would like to again thank them publicly for their help in this. The reason why they were a customer for us is that they are a great establishment and that they are a technological leader in a technologically savvy city, San Francisco. So I think I said on subsequent, or on prior earnings call that ATRIO represents and as I said earlier in my comments, a 22-month effort and it's not just cloud-capable, it's a cloud product. It is a clear cloud product. And we believe that it will be exciting, we believe it is best-in-class in that space. And I compared this to -- we want to roll it out in a logical way. And we will continue to roll it out in a logical way and we will gain momentum and we will -- I think you will see it pick up momentum as the year progresses.

Can you give us any time frame of when another launch customer would be on board?

I can't, but I would anticipate that you're going to see a number of announcements this year. And I will update you as we go forward.

[Operator Instructions] Our next question is from the line of Matthew Eber [ph].

Yes, we've heard some good news today here. But my question is, what plans do you folks have to improve communication, outreach and engagement to build on all the good things that are happening?

Well, I mean certainly we do these calls every quarter, beyond that I would urge you to go take a look at our webpage. We have a brand new webpage. We've put a lot more clear information regarding the company out there. We anticipate taking that base to be able build upon that. I think if you look at our press releases, we have had, I would prove kind of a summary of those on the call, I believe that an investor or an interested party in PAR can certainly go back to the webpage and look at what we've announced over the last 7 or 8 years and see the progress we've made. So if you have suggestions, I'm be interested in those.

Okay. I was concerned, because, there for example with the press release that came out the other day, there's barely any lead, and then there's, taking 400 words before it actually tells anybody what ATRIO does. And I understand there is a website but, it's February 2012, saying we got a website, not quite enough. So my question is, are there any additional plans, anything unique, anything remotely interesting or exciting that's on the horizon here?

I have said this on each one of my earnings calls, I mean, we believe ATRIO is unique and different. ATRIO is cloud-based product.

Well, I am sorry, I meant with regard to communications and taking all of the good stuff that you are doing and really getting the information out there. Anything on the communications front to support what the company is doing?

Have you gotten an opportunity to see our new webpage?

Yes, I have.

What would you suggest we do beyond that?

Well, I don't know how much time you've got.

Let me suggest, in deference of time, everybody's here, if you have a suggestion of what we should do with communications, send me a letter or email and I'd be happy to look at what you have.

Your next question is from the line of Bill Lauber from Sterling Capital.

Your comments concerning the government business, I think you said that the margins were 7.8% versus the historical 5% to 6%?

Yes, sir.

And you said that's, this is -- I assume the 7.8% is not the new normal. Is the new normal somewhere between 6% and 7.8%?

Bill, this is Ron. I would say, more towards the lower end of that it would be a going forward. It all depends on contract mix. We had a little rich mix in the fourth quarter and going forward, we hope it will exceed the lower end. We used to say to 5% to 6% and now I'd say it's closer to 6%. But not at this level unless, there is certainly an opportunity to grow the margins with some upside things. But right now, we're comfortable in the 6% range.

And as far as the bidding processes, how does it compare to recent years?

We were very successful this year in our government business, we had to -- a lot of re-competes due to the timing of some existing contracts coming up for rebid and we were pretty successful in that area and our government team did a great job there.

I guess, what I am saying that is, not necessarily a reflection on the climate in Washington in terms of government spending and so on. But are you seeing any meaningful change in opportunities, say in 2012 versus 2011, 2010?

No. not at this time Bill, we're not.

I have a question concerning the Wal-Mart contract, them being the launch customer. I guess, it's somewhat of a question earlier on the Hotel Diva launch customer. I assume that you folks worked with Wal-Mart for quite some time on this, prior to this launch?

Yes.

In terms of getting additional clients for this product, what are you anticipating? Are you expecting to sign on new clients for like you said, in terms of the hotel endeavor, are you looking for new clients within the -- announcements within 2012 with this product?

Absolutely. As I said in my earlier notes, I believe that we will -- since the beginning of the year we've signed up Wal-Mart, we've signed Hotel Diva, I believe that we will have significant announcements in both those products in 2012. And they will be a significant component of our 2012 results.

And one last question, concerning the other wins that you mentioned that you've had that your clients don't want you to disclose, are these typically large accounts, medium-sized, small?

All the above. I mean, we would obviously, there are names that I can think of that are major customers and that you see their results occur and you hear their names come up and when we talk about the results that are here, but they don't like us to go announce their, what they are doing in their technology environments. And we respect their views. So I tell you what I can tell you in these environments and we refer to their achievements in our numbers but we don't put out press releases to that effect.

It looks like we are at an inflection point, and we like the direction.

The next question is a follow-up from the line of Sam Bergman [ph] from Bayberry Asset Management.

Paul, can you tell me what the full motion video products regarding the ISR contract is?

What it is, is that we have the ability to collect what is called metadata. And metadata is, I mean, it's just like if you go back to the old days where there was photography taken in different environments and there are various statistics that capture all of the different climatic and other environmental conditions that are out there. And that data enables you to be able to look at video that's on the ground and not only just have the picture, but also have a lot of other facts related to that picture and its conditions and time and climate and etcetera, probably 15 different items. So with that ability and also the ability to take that data and then port it to a device, maybe an android device or something else like that, so that somebody could look at that data and be able to make some judgment on some action that needs to occur. Typically, you could imagine these are military situations, I can't go into a lot more detail on it, but it is the ability to -- PAR originally stood for pattern analysis and recognition and it is the ability to being able to take those various disparate pieces of data and correlate them into some conclusion, so that somebody can make an action decision.

And those contracts are up for bid first half of the year or more towards the latter half of 2012?

Well, we have today an overall contract which I mentioned before which is the $42.5 million contract, so certainly within that, that will last for the next 4 years, or 4.5 years. Besides that, we obviously go out and try to leverage our expertise in this area and to compete in other contractual situations. And so we're still optimistic that we will -- that our technology is value-add and again, the fourth quarter was a demonstration of that. I mean that was a customer looking to exploit some of that technology for another application and that enabled us to be able to improve our results in the quarter.

And the last question is in regard to software and software on the press release. Do you think sometime in 2012 you'll be able to give us a software number for quick serve hospitality or which we have not had in the past, because more of the effort is geared towards selling software and hardware and not just hardware?

I think we'll evaluate that as the year progresses. Good suggestion.

And at this time, there are no other questions in the queue. I would like to turn the call back to over Paul Domorski for closing remarks.

Okay everybody. Again, I sincerely appreciate your continued interest in PAR Technology. Thank you for taking the time and I look forward to updating you at the first quarter, if not sooner. Thank you.

And ladies and gentlemen, this concludes your presentation. You may now disconnect and have a good day.