PAR Technology Corporation (PAR) Q1 2012 Earnings Report, Transcript and Summary

A very good day to you ladies and gentlemen, and welcome to our Q1 2012 PAR Technology Earnings Conference Call hosted by Paul Domorski, President and CEO. My name is Chris, and I’ll be your conference coordinator for today. Throughout today’s presentation, your lines will remain on listen-only. [Operator Instructions] Thank you. At this stage, I would like to turn the call over to Mr. Domorski to start. Please go ahead.

Good morning, everyone. I’d like to welcome you to the PAR Technology first quarter 2012 conference call. Joining me is Ron Casciano, PAR’s Chief Financial Officer. Before we begin, I want you to know that any statements made during the course of this call regarding product expectations, program opportunity schedules, and future financial results are forward-looking statements. Actual events or results could of course differ materially. I’ll refer you to the statement of risk factors and our Annual Report on the Form 10-K for the year ended December 31, 2011 and to our press release. These are documents that identify important factors that could cause such a variance. During the course of this call, we will take questions from participants. Under SEC rules, we cannot provide material information in subsequent private settings, but we’ll continue this public call as needed to discuss and respond to appropriate questions. As is customary, after I provide my views on the quarter, 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. This morning PAR Technology reported net sales from continuing operations of $55.6 million and net earnings of $1 million or $0.07 per diluted share, compared with a year comparable of $54.2 million in revenue and net earnings of $741,000 or $0.05 per diluted share. EBITDA improved 36% over the first quarter of 2011 to $2.6 million from $1.9 million. We have $18 million of cash and investments on the balance sheet, which is an all-time high. Looking first at our Hospitality segment. Revenues are lower than the prior year quarter by $1.8 million, but operating income improved by $200,000. As we’ve talked about previously, 2010 and early 2011 results were bolstered by a large deployment from McDonald's in the U.S. We have a few more quarters of unfavorable comparisons due to that issue. Offsetting some of that increase is an increase of 83% in domestic product revenues with Yum! Brands and also international product revenue grew 13% over the same period in 2011. Subway continues to be a great partner with deployments of nearly 100 stores per week in recent months. Dunkin' Brands, Baskin-Robbins continues to deploy our hardware and software. Looking at the year and the timing of events the second quarter does not look as strong as the back half of the year does. Notably in the quarter, we announced Walmart will deploy PAR cloud based EverServ, SureCheck and temperature measuring devices, for food safety measurement and check list management in the stores. This sale confirms the compelling value proposition of SureCheck. Although future revenue from other SureCheck deployments likely will be more representative of the software as a service model we are utilizing as the magnitude of this revenue recognized during the quarter reflects the scale of this particular deployment. The SureCheck solution combines a PDA-based mobile application, cloud-based enterprise server, and a fully integrated temperature-measuring device to automate the monitoring of quality risk factors while enhancing associate accuracy. We are aggressively leveraging this new customer win to drive new dialogues with big box retailers and large grocery organizations. Many are names you’ve heard off. This is an important solution that demonstrates PAR’s ability to think out-of-the-box and craft a compelling value proposition in the high-growth area of cloud computing. Shortly, we will announce the productization of this innovative solution, which will haste in deployment. We continue to make progress with our ATRIO cloud-based solution for hotels. In this past quarter, we announced the initial deployment of our solution and market interest remains strong. Six properties either are deployed or in the process of being deployed. We recently signed an alliance agreement with Microsoft. They will significantly assist PAR in our marking of ATRIO, along with technical support and [indiscernible] cloud computing and hosting capability. Besides small and mid-sized properties, we now have the basis for new conversations of change that see the technology moving our way and the compelling benefits of the products. This quarter, we had a new international customer installs of our SpaSoft software package in several five-star properties around the world. Our government segment continues to perform well, as evidenced by the 19% increase in revenues from the same period in 2011. Growth continues to be driven by the contract to support the U.S. Army with Intelligence, Surveillance and Reconnaissance technologies and services. Market conditions make the timing of new wars difficult to predict. While we face pressures on our communication system services business, we see opportunity to be able to continue in Intelligence Surveillance and Reconnaissance programs and believe we are well placed for future awards. Contract margins were 5.3% down from the 6% reported in Q1 2011, and within our historical range of 5% to 6%. Our government business ended the quarter with a healthy backlog of $121.3 million. Before I turn the call over to Ron, let me make a few comments regarding our evolving hospitality business model. PAR has long been a leader in advanced technology and highly reliable POS, point-of-sale hardware systems. Over the past 6 months we’ve been working hard to amplify the technical and designed differentiation to improve the TCO, Total Cost of Ownership and to add new products. The results of that effort will begin to be realized in the second half of the year. PAR will continue to have a strong point-of-sale hardware business. Given the early indicators that we’ve seen with our restaurant EverServ software, SureCheck and ATRIO we’ve seen opportunity to make in-roads addressing the growing market demand for cloud computing enabled concept configurable solutions. Solutions must address the change in global demand for customer facing order management, expanded back of house administrative requirements and be able to seamlessly integrate external technology. The business model for these solutions is software-as-a-service rather than enterprise license or large upfront payments. To go along with the world-class hardware and innovative software you must have excellent services. PAR has professional services men and women, who know the hospitality market. We are expanding our service offerings adding project management and professional services capability, which are necessary to do large deployments while at the same time increasing our efficiency. If you are a hospitality customer, you know how important it is to have someone who understands your environment and knows every moment of downtime is money lost. Early this week I was at one of our largest customers’ national conferences. And I heard from many franchisees while they love our equipment, services is what makes the difference. Last but certainly not least is execution. Anybody can do something once, what makes the difference is building an organization that give its best every time it’s in front of the customer and has a business model that will deliver to shareholders, steady returns and growth. So our intention is to transition our business overtime to a recurring revenue model, largely based on software-as-a-service and high-evaluated service contracts and knows small part enabled by our superior hardware. Today a preponderance of our business is hardware sales, which invariably has ups and downs based on our customers’ deployment plans. As I said a few minutes ago, we will strengthen our position in the market. We have new and innovative hardware announcements in the second half of the year. Beyond that we want to build the recurring stream in both software and services. What this will mean is in some instances we will have to give up some upfront license fees in exchange for a long-term annuity. While that may have some short-term downside it will enable us to go into the successive years with an increasingly growing annuity base. We think the result will be a much more valuable company for the business model that will deliver to shareholders consistent growth So with that, I will turn the call over to Ron.

Thanks, Paul and good morning, everyone. Just to recap, net income from continuing operations in the quarter was $1 million versus $741,000 for Q1 of 2011. Earnings per share from continuing operations was $0.07 compared to $0.05 for the first quarter a year ago. And now let’s look at some first quarter details from continuing operations. Product revenue for the quarter was $20.2 million, a decrease of 7% compared to the same quarter of 2011. This decline was due to the completion in 2011 of the large technology upgrade program associated with domestic McDonald’s restaurants. Partially offsetting this decline was the sale of our SureCheck software to Walmart and increase in sales to Yum! Brands and Subway restaurants. Additionally, international revenues grew on the strength of several major customers. Service revenue for the quarter was $15.4 million a minor decrease of 2% compared to a year ago. This is due to lower repair revenues as all the systems are being replaced in the field. Contract revenue was $20 million for the quarter an increase of 19.2%, which reflects the ISR integration contract that was awarded to us in the fourth quarter of 2011. Product margins for the quarter were 45.6% versus 39.3% a year ago. This reflects the increase in software sales. Service margins in the quarter were 31.3% versus 31.6% for the first quarter of 2011. And contract margins were 5.3% compared to 6% last year. SG&A for the quarter was $10.1 million compared to $9.3 million in 2011. This increase was due to sales costs associated with its SureCheck sale and the company’s investments in its hotel technology, sales and marketing assets related to its ATRIO product. R&D expenses decreased 5% to $3.5 million in the quarter. This was due to the completion of the initial development phase associated with our next-gen cloud-based ATRIO property management solutions. PAR’s financial condition remained strong and we continue to improve. As Paul mentioned, we have $18 million in cash and investments on the balance sheet. The company continues to maintain an excellent debt equity ratio as we further reduced our debt levels in the quarter to $2.3 million. Cash flow from continuing operations was $6.7 million in the quarter and we received $6.1 million in cash and stock from the sale of LMS. The company expects to continue to fund future working capital requirements from cash flow from operations. Days sales outstanding for our hospitality business was 55 days and for our government business it was 54 days. Depreciation and amortization in the quarter was $825,000. Capital expenditures for equipment was $500,000 and capitalized software this quarter was $700,000. That concludes my remarks and I would now like to open the call up for questions.

Okay. Chris, if you would help us with that please?

[Operator Instructions] We do have one immediate question and it is from the line of Sam Bergman from Bayberry Asset Management.

Several questions, the McDonald spend that occurred last year, do you feel you’ve got the correct percentage of business that PAR was looking at in the beginning of that spend in terms of you sharing it with Panasonic?

Yes, Sam well, we predicted from the beginning that we would get over 50% of the share and we believe we have succeeded in doing that.

Okay, going on to another or an issue that the [indiscernible] I guess over China, what - Paul what’s your take on spend that took place in China and what’s your initiative going forward there?

Sam, are you asking the contest McDonald’s or just in general?

McDonald’s and also in general, because I wouldn’t think that the just a spend for McDonald’s in China there would be other restaurant chains that you’d be interested in.

That’s correct, I mean we continue to have a good results in China particularly with McDonald’s that we today. We’re also working with a number of other Yum! Brand kind of customers and some opportunities over there as well. So that the business over there becomes very encouraging to us and it’s a market that we are - we see as a growth market for us, and one that we think we can realize real dividends not just in the hardware area, but also in some of the software areas.

Now going back to the hospitality suite of products, the ATRIO, you had mentioned you are almost in 6 properties or roughly installing 6 properties. Here we are almost at May 1, is that below plans, above plans, can you give us a little bit more color on that?

Well, we don’t provide guidance in this particular area, Sam, but I think that we are as I said in really one of the first conversations that we talked about this, we’re introducing something, which is totally different than the market has today. And we are - we’ve launched it very successfully and we are going through a process right now of working with some mid-sign change on deployment of that, and as I said in my earlier comments we are also having interesting conversations with some of the larger chains, now if in fact that were to lead to a some announcement it will likely be a year or more for deployment because the large chains require that kind of thing to occur before they are able to introduce it to such a large number of properties. So the market demand is exceeding our expectations, it’s a situation today that we are working with our clients on how best to deploy in their environments.

Competition has that product or do you know them working on R&D to get that product up and running.

There is no one that we believe that has a product similar and has the technical skill and capability of our product.

Going on to the restaurant side, restaurant business many companies have reported terrific earnings, I’m just wondering what’s your pipeline, I know you can’t make forward-looking statements. But what’s your pipeline of activity in that area? There hasn’t been any announcements other than probably the last Baskin-Robbins announcement or Subway announcement; can you give us a little bit color on that?

Sure, Sam. I did say in my earlier comments that we see more market demand in the back half of the year continuing to occur. Some of our large customers are going to go through deployments. As we’ve discussed before, some of them do not like doing technology press releases in this area. Some we talk about in the earnings call after the fact as opposed to doing a press release just because that’s their preference. But we see good demand in the back half of the year.

And the good demand you see in the back half of the year, are they deployments of hardware only or hardware and software?

Predominantly, hardware that is occur, there are software deployments. But as I said in my introductory comments, largely those will be SaaS. We’re trying to build a SaaS revenue stream in that area. So…

In the restaurant business?

In the restaurant business and in the hotel business. And for that reason, you will not see as much of the large upfront payments, but we think we will build a much more valuable and frankly predictable business stream going forward.

And the last 2 questions, the Walmart SureCheck announcement, was there any license fee - upfront license fees paid to you guys on that?

Again I really can’t get into the specifics on that, but I can tell you that there was an upfront fee paid and there are some recurring fees that will go on over some period of time.

So is that part of the reason the balance sheet has more cash in it, because of that license fee on that?

That contributed to the cash position for sure. That is not the sole factor, but that contributed also the proceeds, the cash proceeds we received from the sale of LMS also contributed.

Have you sold the shares of the - part of the agreement that you had with ORBCOMM on LMS?

We have not at this point, Sam.

When do you feel you’ll be in the market to sell those shares?

Well, we are evaluating that as we speak.

And that amount of shares is, what $1.6 million?

The current value at the end of March was about that, Sam. Actually, I'm sorry, it was over $2 million. The market value of the stock was about $2.4 million at the end of March.

So the amount of shares you have equals a market value of over $2 million?

At the end of March, that's correct.

So has something sold?

None has been sold and the price has come down. So the market value is lower as we speak compared to March.

Our next question is from the line of Justin Ruiss from Sidoti & Company.

I just had a quick question on just like I guess, with the sales force in terms of the ATRIO and the EverServ. Are you adding to that sales force or is that what you currently are using now?

No. We are augmenting our sales force in specifically the software renew business.

All right, that's all I needed.

Our next question is from the line of Lee Matheson from Broadview Capital Management.

Just a couple of things, as you guys look to transition to a recurring SaaS model, when you going to start breaking out revenue streams coming from even just to break it out between license and maintenance or recurring license and what have you try and kind of so we can get a sense of the growth in that income stream?

Lee, that’s something that we’re going to continue to evaluate, we need to get to a point where it’s a larger component of our total revenue and when it becomes at that point where we think it’s meaningful we will begin the breakout.

Okay and the, are you going to continue to sell sort of the legacy Springer-Miller and other hospitality software on an upfront license and maintenance basis, or are you try and switch everything to a SaaS model?

No, the legacy stuff will continue to sell on an upfront license basis.

Yes, okay. And given the LMS proceeds and obviously the what you guys have done in reducing the absolute level of inventory, the balance sheet is in great shape, curious on what you’re looking to do with it, can you provide any color?

Well, the only thing I would say is that in my view, in my assessment this company does not had sufficient cash on balance sheet in the past. We will continue to look at opportunities to deploy it in new ways that will accelerate our growth, but there is nothing that I have at present to tell you more than that.

Okay, and then in terms of what the appropriate amount of cash on the balance sheet is, I would have to assume for - you’re going to run with $16 million of net cash at all times. What’s the number that you feel comfortable sort of maintaining?

Well, Lee I don’t have specific projections for you. But certainly as you said, we hope to look for opportunities to deploy that cash in a way that’s going to give us a good return.

Okay. And I guess the other one was recently Burger King is back in the news with Burger King is taking a stake in, and obviously under 3G ownership there is some increased emphasize on repairing relationships with the franchisees and investing in the stores, and in the technology. Any sense on whether this present an opportunity for you, and I’m wondering if you could - what the pipeline looks like in terms of from a multiyear basis on some of the other large QSR chains that you don’t currently have as customers?

Well, I really can’t comment on prospective business. I think that’s - again, I can generally say to you that what I said earlier that in the back half of the year there are a number of large franchisees that are looking through deployments. We would not be sole source generally in those transactions. But nonetheless, we would have a - we believe a healthy share of that market. So, we see that beginning at that point in time. I mean in verbally these things can slip, but based on what we know right now we see that that continuing to occur. So, I don’t have any specific comments because again, we tried to respect the wishes of our customers and if there is.

Sure, yes. Last question, given the NCR acquisition of Radiant, are you seeing - I think somewhat central to that, the thesis on that investment was the ability to scale transaction processing business from POS. Is that something that you guys are considering I mean, obviously be another recurring revenue stream?

Well, I think right now we’re trying to get our - we see as I said in my earlier comments, we see that the market is moving into a cloud-based SaaS model, and we’ve had some success with our SureCheck product. We’ve had some beginnings and success with our ATRIO product. We’re having some success in our restaurant software area. So, we want to be able to be in a position to be able to capture more of that market, because if you look at us versus our competitors, we see some competitive opportunity in that market. And that’s where we’re likely to be investing our funds in the foreseeable future.

Okay. Last question on the ATRIO, I think the initial deployment was that hotel and Hotel Diva in San Francisco, which had a ownership group that owned a number of, I think four or five other hotels. Of the ATRIO hotels that you have now, how many of them are under common ownership with Hotel Diva?

Well, I think again, our customers today hotel and Diva announced that I mean Personality Hotels announced that they were deploying our product. That process is underway and some instances have occurred. Beyond that other customers have not. Only some customers want to be launch customers. So, we’re not publicly announcing who those customers are at present.

Okay, but there are customers for ATRIO that are not Personality Hotel?

Correct, correct.

Our next question is from the line of Robert Henderson from Rutabaga Capital Management.

Could you tell me the - what was the other income and where did that come from, and also you’re including the other income in that EBITDA number you gave us for the quarter, is that correct?

Yes, Robert. It is included in the EBITDA number and the driver was the appreciation on the ORBCOMM stock from the date that we acquired it versus the fair market value at the end of March. They performed quite well in the first quarter.

All right, okay. And then just one more thing, the level of SG&A in the quarter, is that likely to continue for the rest of 2012 at that level or might - is it more likely to go higher or lower?

We expect the total dollar spend to decline slightly over the balance of the year in that area.

We have another question from the line of Sam Bergman.

Just a couple of follow-up questions on R&D. Where do you expect the R&D number to be the next 3 quarters, is it similar to the first quarter or higher?

That will run pretty similar throughout the balance of the quarters for this year, Sam pretty similar to first quarter.

And on your hardware products, the up and coming ones that you’re going to announce latter half of the year, are they capable of accepting PayPal and also Google Wallet?

You’re going to have to wait for the announcement, Sam.

We have no further questions in the queue at this time.

Okay, everyone, again, thank you for your interest in PAR Technology. We look forward to speaking to you at the end of the second quarter. Have a great day. Bye.

Thank you very much. Okay, so ladies and gentlemen, that does now conclude your conference call for today and you may now disconnect your lines. Have a great day. Thank you very much for joining.