PAR Technology Corporation (PAR) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the FY 2012 Second Quarter Financial Results Conference Call. My name is Towanda, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Paul Domorski, President and CEO. Please proceed, sir.

Thank you, Towanda. Good morning, everyone. I would like to welcome you to the PAR Technology Second 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 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, 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 will continue this public call as needed to discuss and respond to appropriate questions. As is customary, after I provide my views of the quarter, I will turn it over to Ron for his comments. From there, we would be happy to take any questions you might have. Thank you for your continued interest in PAR Technology. Well, let me begin. We announced this morning that we reported second quarter revenues of $62.1 million and a net loss of $511,000 or $0.03 loss per diluted share. This compares to the prior-year second quarter results from continuing operations on a non-GAAP basis of $56.4 million in revenue and net earnings of $1.3 million, or $0.09 per diluted share. $0.02 of the $0.03 net loss per share was a non-operating loss associated with the sale of common stock received its consideration as part of the company's divestiture of its Logistics Management business in January. As stated in today's press release, our results were impacted by the slowdown in our business with our largest hospitality customer, McDonald's, due to the completion of their large in-store technology initiative. We still have a very good relationship with McDonald’s. They continue to buy from us. We anticipate future revenue growth in the quarters that follow. It's just at a lower level presently than it was when we were doing the large U.S. rollout. Although in this quarter we were able to make up the difference and actually post an overall 10% gain in revenues for the quarter, our product mix for the quarter was not able to bridge the short-term GAAP for profits as we continue to fill the business lines with new customers across all of our Hospitality and Government segment business lines. We certainly view this situation as temporary and are quite confident with the opportunities before us in Hospitality and the Government segments. With the completion of the McDonald’s initiative, we continue to seek out other avenues of revenue. We are expanding our reach. Product revenues with YUM! Brands increased 69% with larger sales to all 3 of their concepts, Taco Bell, KFC and Pizza Hut. We also continue to pick our market share with the Subway account as they continue their aggressive new store expansion plans. Product revenues grew by 33% in the quarter and the plan is for continued strong sales. Overall, international sales were up despite challenging economic conditions and we had good growth in China, often in a minimally small base. Restaurant software was a solid contributor. On the technology and product innovation front, we announced last week our new EverServ 7000 hardware platform. If you want to see it or understand more about it, you can go on our webpage. You won't be able to miss it. The 7000 offers high performance with increased processing speed, enhanced graphics and serviceability by ensuring the terminal's easy-to-service, including remote diagnostics. The new design enhances the ability to remotely manage the terminal and to make it scalable from multiple component options such as CPU, memory, touch-screen, disk drives, customers’ input displays, et cetera. The EverServ 7000 supports various multi-touch options or gesture based applications on supporting operating systems and finally the flexibility and capability to be mounted almost anywhere, whether it would be on the wall, a low profile or on a kiosk. We believe we have a very good opportunity to deploy our new 7000 product in many of the largest quick service chains. At last week's Subway National Convention, the EverServ 7000 was prominently displayed and we were very pleased with the reaction. Last quarter we announced that the largest retailer in the world, Walmart, would be deploying our SureCheck product. They are a terrific launch partner. We are in the process of deploying the solution in their domestic locations. Par EverServ SureCheck is a powerful web-based tool for managing hazards analysis in critical control points, or HACCP, and inspection programs for the retail and food service organizations. 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. While we announced the Walmart transaction just last quarter, I can assure that we were in discussions with them well before that. We are presently engaged in substantive discussions with other major retailers about SureCheck, and I believe that will lead over time to new announcements. We are standardizing and adding new feature functionality to the product that we will be announcing shortly. That will speed our time to market. Food safety continues to be an important concern to retailers and restaurants. The Food Safety Modernization Act was signed into law late last year. Focus on food safety and the role technology will play in that will only increase. Focusing on additional strategic accounts will only enhance our credentials in this exciting emerging market. On February 14, last quarter, we announced Personality Hotels would be deploying our ATRIO hotel management solution. You can go on our webpage or go on YouTube, and see them talking about their experience with ATRIO. On June, 26, we named Pegasus Solutions as a Preferred Central Reservations Provider in the ATRIO platform partner exchange, enabling a tightly coupled integration between Pegasus' central reservation system and the ATRIO platform. On July 11, we announced our stronger partnership with Windows Azure to take advantage of Microsoft's advanced technology, resources and domain experience. Again, you can look at our website to see the video we did in conjunction with Microsoft. Our restaurant software will be deployed as the food and beverage module on the ATRIO service bus. We are buying or building best-of-breed modules of functionality to add to the ATRIO enterprise bus. Building on the back of these announcements and the success we have had with the individual deployments, we have been working on scaling the product, enabling it to be deployed to much larger organizations. We have already demonstrated that ATRIO delivers compelling functionality and economics in a property. Soon we will demonstrate that it is replicable across multiple property and that it scales. Just as we did with SureCheck with Walmart, we want a world-class launch partner to demonstrate our capability. I think you will see the results of our efforts in that area shortly. From there, we think we will be well positioned to address the aging hotel industry technology we saw when we made the decision to build ATRIO. Both ATRIO and SureCheck are cloud-based products sold primarily as SaaS, or software-as-a-service. We are building long-term value. In the quarter, we had several new international customer installs of our standalone SpaSoft software package to 5-star properties in Panama, Japan, the Philippines, Germany and Austria. In the past quarter, we also had additional complete Heritage property management systems installed in 2 big international resorts in Michigan and the British Virgin Islands. Our Government segment delivered record revenues in the second quarter. Revenue increased by 60% over the same period in 2011, and operating income grew by 45% from the second quarter 2011. Growth continues to be driven by the contract to support the U.S. Army and the U.S. Air Force with intelligent surveillance and reconnaissance technologies and services called the Eagle Intel-X contract. Even with a strong second quarter for this segment, market conditions dictate lengthened product procurement cycles to the federal budget to make the timing of new awards difficult to predict. We are noticing consistent funding programs and attention being focused upon intelligent surveillance and reconnaissance again like the Eagle Intel-X, and see growth opportunities in the future, but don't yet see the kind of growth numbers that we are able to predict. We are continuing to explore commercial opportunities associated with full motion video products related to the large DOD integrations of the ISR contracts and have also identified several U.S. military communication sites that are up for bid. Contract margins were 5.2%, down from the 5.7% reported in the second quarter of 2011, and well within our historical range of 5% to 6%. Our Government business ended the quarter with a healthy $103 million backlog. So in summary, despite lower expenses and unfavorable shift in product mix, coupled with higher revenues from our Government business at a lower gross margin percentage diluted our consolidated total resulting in a loss for the quarter. Despite this, the management of the company is encouraged about PAR's prospects. Our 2 new cloud based products, ATRIO and EverServ's SureCheck continue to draw increasing interest in the marketplace and we are engaged in numerous discussions with large potential customers. Our momentum in restaurants hardware received a major boost with last week's introduction of our new EverServ 7000 point-of-sale platform. Our Government business had a record quarter. Last, but certainly not least, our financial strength remains strong with more than $17 million of cash and investments on the balance sheet and virtually no debt. I would now like to turn the call over to our CFO, Ron Casciano for his remarks on the financials.

Thank you, Paul, and good morning, everyone. Let's look at some of the second quarter details from continuing operations. For comparison purposes, the 2011 amounts are non-GAAP and that they exclude the one-time charges reported in Q2 of last year. Product revenue for the quarter was $21.1 million, a decrease of 11%, compared to the same quarter of 2011. This decline was due to the completion of the large technology upgrade program in 2011, associated with domestic McDonald's restaurants. The company was able to partially offset this drop with increase in sales to YUM! Brands and Subway. Additionally, international revenues grew 7% and sales to McDonald's and several smaller concepts. Service revenue for the quarter was $16 million, a decrease of 8% compared to the second quarter of 2011, which is due to fewer deployments related to the decline in product revenue. Contract revenue was a record $25.9 million for the quarter, an increase of 60% from 2011, reflecting the ISR integration contract that was awarded last year. Product margins for the quarter were 30.3% versus 38.6% in 2011. This change was due to the unfavorable hardware and peripheral product mix as the company sold fewer systems in 2012. Service margins for the quarter were 28.4%, slightly higher than 28% in last year's quarter. Contract margins were 5.2% compared to 5.7% last year, and this is within our normal historical range of 5% to 6%. SG&A for the quarter was $9.3 million, compared to $9.1 million in 2011, an increase of 3%, which was due to marketing activities associated with the McDonald's Bi-Annual Worldwide Convention. R&D expense declined 7% to $3.1 million in the quarter. This was due to our completion of the initial deployment phase associated with our next-gen cloud-based ATRIO property management solution. PAR's financial condition remained strong. We now have $17.1 million of cash and investments on the balance sheet. The company continues to maintain an excellent debt-to-equity ratio and we further reduced our debt level during the quarter to $1.8 million. Cash flow from continuing operations was $3.7 million for the quarter and the company expects to continue to fund any future working capital requirements from cash flow from operations. I am pleased to report that day sales outstanding for our Hospitality business were at 52 days, and DSOs for our Government business were at 50 days. Depreciation and amortization for the quarter was $919,000, capital expenditures for equipment was $1 million in the second quarter, and capitalized software for this quarter was $943,000. That concludes my remarks, and I'd now like to open up the call for questions. Thank you.

[Operator Instructions] Your first question comes from the line of Sam Bergman with Bayberry Asset Management.

A couple of questions. Can you give us a comparison at all, of the ATRIO versus the OPERA 9 from MICROS?

Well, ATRIO is a product which is built for the cloud. It is typically sold as SaaS model as opposed to an enterprise model. ATRIO is a product which was developed 2 years ago. OPERA has been developed many years before that. While certainly OPERA has lots of functionality, it doesn't have the architectural benefits of a purpose-built cloud-based product that we built.

I thought that 9 had some cloud-based technology and it was also a SaaS model.

ATRIO was purpose-built cloud-based. It's got Azure as its core technology taking existing product and adding some functionality for the cloud does not have the same benefits that a cloud-based product has.

Okay. Can you give us some better timeline on when you think there will be a significant partner in the hotel space with the ATRIO?

I think in my prepared comments, Sam, when I said that we are working on, and I think I used the world shortly. I mean, I know that's not specific, but we believe that we will, in a reasonable period of time, have a more key customer. Much like what we did in SureCheck.

SureCheck, on that product line, do you have a devoted sales force for that?

We have sales reps who are focused on that product as well as some of our restaurant software business.

Could you tell me what's the biggest reason Walmart would buy the product versus, let's say, a retail food chain, or restaurant chain?

Sorry. I misunderstood your question.

Would there be any difference in the purpose of them buying that technology?

Some, I mean I think there are scenarios that make a lot of sense for the food chain industry as well as for the retailers. In the case of Walmart, it is a combination of temperature monitoring. You would be amazed by the number of temperature monitoring that occurs in a store. In some instances we have looked at some retailers that have had 60,000 or 70,000 chains and they are doing millions and millions of temperature monitoring in a year on those properties. So part of it is temperature monitoring. The other part of it is being able to assimilate the data across all of the different Walmart properties, more than 4,000 into a consistent format. The second thing is being able to do the test management, ensuring that there is consistent implementation across all their properties of all of the tasks that occur. So I think we had a conversation on one of our first earlier calls where we talked about the beauty of the product is we are replacing logs and paper. I mean there literally are 3-ring binders that people use to track or what happens in these stores. As a result of that, when you compare that to the SureCheck application, the economics are very compelling and again, that's why we are optimistic about the product.

Do you presently have a pretty good pipeline of customers looking at it?

The answer is yes, but I want to caution you and everyone that in order to get a large retailer to adopt it across their entire chain, it takes some time. So we built the solution that was adopted by Walmart and we are productizing it, and that will speed our adoption in the market and we believe that there will be other subsequent, more key retailers who will adopt it and we believe we will have traction in the food service market as well with the product.

The last question. If you EverServ 7000, I think it's a really nice product for the company. I think you will go places with that, but I wanted to ask you in terms of software and software for the QSI market. It seems that in the past it was lacking, and I am not really seeing any software or new software releases that can drive those revenues and grow the bottom line.

We have had releases of our product. We announced version 11 of our Pixel in fall of last year. We announced EverServ QSR 1.4, I believe maybe those who are nodding their head early this year, I don't remember again the specific dates in that area. We are continuing to enhance the value of the product itself. I mentioned before that it's likely to go in as a module on our hotel management system as well. So those are the applications in places that we are putting it.

But if you look at the size you are with MICROS. You are 1/5 the size of MICROS, yet you spend more money on the R&D side, and I don't see the R&D effort on the software doing as well as MICROS, and I am just wondering if too much is being spent there, or we are attacking the wrong avenue of technology.

Well, I would give you this example, Sam, which is if you look at for example our SureCheck product today, we have one major customer and some other smaller customers for the R&D that we put into the product, and all that exist today. Large or the same situation with ATRIO. We have a certain number of customers for the R&D that we put into the product today. So as we deploy that product in the market, those numbers will get better.

Where do you feel R&D is going to remain for the rest of the year?

Ron?

Sam, R&D will remain flat pretty much over the rest of the year.

Your next question comes from the line of Lee Matheson with Broadview Capital Management.

So just as you guys sit here given the cash keeps growing and you mentioned either buying or building modules for I presume both hospitality and on the restaurant side and the software component. What do you guys think you need to add in terms of functionality or specific items and what can be bought and what can be built and how big should we be thinking about in terms of capital deployment into this area?

Let me make sure I answer your question. In the context of ATRIO, we have what we call an Enterprise Service Bus, and there are various modules of functionality that are built into that bus. As I said in my prepared comments, Lee, some of those we will develop internally, some of them we will buy because we are best-in-breed provider, and if the internal solution is not the best then we will buy a module for the enterprise bus and as we do that it expands the revenue potential of the ATRIO product that we have today, because it has certainly you could add a module for example on golf for example and it would be an example or a spa module. Those things are modules that will add to the revenue stream that is associated with the ATRIO product. So that's part of what we are seeking to do, which we are adding out the functionality. The prior caller Sam touched on this as well, which is comparing us against our competitors. They have some functionality there, and we have been adding some functionality in these area strategically to what our existing product is. Beyond that, we continue to look at how best to reposition the company and that effort is underway and I really don't have much more to comment on that other than we continue to seek to build long-term shareholder value.

Sure. I guess, what I am trying to get at is in terms of adding these modules can you do it through in-licensing from third-party developers or do any specific modules involve you laying out millions of dollars to do an acquisition or will these all be kind of incremental little tie in deals?

I would describe that probably more of your categorization of the last one. It is more of us partnering with people and/or by deciding to augment our existing capability or work on our existing products to make them suitable for the product.

Is there area in particular do you think that your product is lacking in terms of, an area that is preventing you from generating sales or interest in the product, because you just don't have the module?

No.

On the Government side, I’m just curious, I think you mentioned backlog of $103 million. My notes indicate that we are at 134 of contract backlog at the end of the year. I know that number can be volatile, but I guess can you just comment on sort of how confident you are in the backlog number?

Yes. Lee, this is Ron. The backlog has trended down as we started to work on that large Intel-X contract that we've talked about, which was a big driver for the revenue in the second quarter. Certainly, the pipeline for the Government business looks promising. We hope to have some new wins later in the year that will grow the backlog back up somewhat, but the $100 million that we have now is solid and of course the caveat is every contract with the government has the wonderful clause that they can cancel at any time.

Right.

I have to mention that.

Fair enough. You mentioned creating shareholder value. Is the divestiture of the Government business still something that's discussed at the board level?

We have no plans to divest our Government business at present.

Your next question comes from the line of Vincent Colicchio with Noble Financial.

You mentioned in your prepared statements that China picked up. I am wondering if we should expect to see an improvement there. Or Paul, in your opinion if we need more investments before we can see meaningful traction?

I think in the international world, we will continue to. There are some significant areas that we are very optimistic about in that region. There are some large bids we are engaged in, in that space as well, so I think we are reasonably optimistic. In fact, some of the opportunities there than in the U.S. because of the growth in the fast-food restaurants.

Will that require some incremental investment of meaningful size in your opinion?

Vince, we don't think it will be anything meaningful.

Okay. Do you expect, Paul, the growth from the EverServ software product in restaurants in upcoming quarters, and in particular I am wondering about the ramp of Subway and Baskin-Robbins if that continues?

The ramp-up is certainly going as evidenced by the numbers that I talked about in my earlier comments. In regards to EverServ’s QSR, I think we will have opportunities in the restaurant market as well as, as I mentioned earlier the Hotel segment as it becomes part of the ATRIO product.

I guess at this point you are not ready to say that you'll see growth sequentially going forward?

We will see some growth going forward. Although as you know, Vince, the basis is the modest base. So we should see growth in our overall restaurant's software going forward in the second half of the year.

As it relates to SureCheck, could you give us a little bit of color in terms of, are there a lot of competitive products out there? What does that sort of look like? And if so, what do you think gets you into these accounts?

Well, you can go out onto the web and sort of put the keywords in and do a search and you will get a bunch of sort of products that might at the face value look similar, but when you look at the product itself, and I can assure you that the customers that have looked at it, go through that process. There is no product that we believe has anywhere near the feature functionality and benefits associated with the Walmart product or the SureCheck product which is at Walmart.

[Operator Instructions] Your next question is a follow-up from the line of Lee Matheson with Broadview Capital Management.

Just quickly, I know it's going to come out with the Q, but can you guys kind of disclose this revenue concentration with McDonald's and YUM! in the quarter?

Sure, Lee. For the quarter, McDonald's revenue was 19% of the total company revenue and YUM! was 14%.

Your next question comes from the line of Sam Bergman with Bayberry Asset Management.

Just a follow-up question. On the McDonald's business, was there less business this quarter, because the other partner Panasonic took away some business or your percentage from the McDonald's Corporation?

No, Sam.

In terms of the next upgrade, when do you expect the beginnings of that or when it will be in full force.

I don't know when they are going to upgrade their U.S. equipment. I can tell you that there is more activity outside the U.S. than there is inside the U.S. at present.

With no further questions, I would now like to turn the conference over to Mr. Paul Domorski for closing remarks.

Great. Thank you, Towanda, and thank you everyone for coming on today's call. We look forward to talking to you next quarter. Bye, now.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.