PAR Technology Corporation (PAR) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Q3 2012 PAR Technology Earnings Conference Call. My name is Jasmine. I’ll 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 presentation over to your host for today’s conference, to Mr. Paul Domorski, Chairman and CEO of PAR Technology Corporation. You may proceed.

Thank you, Jasmine. Good morning, everyone. I would like to welcome you to the PAR Technology third 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 31st, 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 will continue this public call as needed to discuss and respond to appropriate questions. After I provide my summary on the quarter’s performance, I will then 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 third quarter revenues of $61 million, a 4% increase over the third quarter in 2011. Net income from continuing operations was $1.3 million and earnings per diluted share were $0.09 compared to $1.6 million over our earnings per diluted share of $0.11 for the third quarter of 2011. Overall, net income was $1.4 million, a 13% rise from the $1.2 million reported a year ago and earnings per diluted share were $0.09 versus $0.08 per share reported in the same period in 2011. Overall hospitality technology revenues for the third quarter were 64% of PAR’s total and were reported at $39.1 million, a 9% decline from the same period in 2011. As you’ve heard me say before, 2012 comparisons to 2011 are adversely impacted by the 2010 and 2011 domestic rollout of McDonald’s. Despite this, we saw sequential growth in hospitality revenues from the second quarter to the third quarter of 8%. Part of our strategy is to diversify our business so that no one but company results. Over the past 3 quarters, we have made progress in that area. Product and services revenue with known brands increase 8%. We also continued to increase our market share within the SUBWAY account as they continue their aggressive new store expansion plans. Product revenues from SUBWAY grew by 17% in the quarter and the plan is for continued strong sales. Global economic uncertainty is a reality primarily in Europe and the Middle East. Despite that, international product revenues grew 8% in the third quarter with increases in Latin America at 65%, China at 51% and the Middle East with 26%. A few updates. We recently announced our EverServ 7000 hardware platform. Shipments have begun. The EverServ 7000 supports various multi-touch options where gesture-based application on supported operating system and the flexibility to be mounted almost anywhere be it walls, low profile or kiosk mount. The 7000 family of terminals has superior processing speed and the ergonomics customers’ want. We will be introducing new hardware products extending the line shortly. We will also be announcing in the next few days a press release regarding Carl Jr. and the Hardee’s Chain. SureCheck continues to be deployed on schedule into a high customer satisfaction with the world’s largest retailer. While the deployment has gone very well, it has taken a short term toll on our ability to scale the product to other concepts. While there have been some slower deployments, we anticipate most of our success for this product will be in 2013 and beyond. Given the clear benefits of the product, some retailers in pilot in evaluating a product are just beginning to understand what our launch partner already knows. Keep in mind most of our success for this product is likely to be software as a service or SAS revenue. This will, over time, build the recurring profitable revenue stream for the company. SureCheck was recently recognized with Microsoft’s Partner Excellence Award as part of their global retail initiative for our deployment on a Royal Caribbean cruise liner in a practical uses this allow the crew to better manage their point of sale and food safety operations. Progress continues with a ratio cloud-based solution for hotels. I said last quarter that we were close to signing a large hotel launch partner. That has not changed. It is just taking longer than anticipated. While there can be no guarantees, our hope is to have this included by year end. Like SureCheck, our goal is to build a base of recurring revenues that go along with the up and down hardware sales. In the past quarter we installed several One Oak properties, instantaneous deployments we continue to enhance the product with improved functionality and features that will improve its economics at its scales. Like SureCheck, we see most of the success with the product occurring in 2013 and beyond. In the quarter, we installed 11 new customer properties with their standalone SpaSoft Software package. These 5-star properties included the Four Seasons, Ritz Carlton, Mandarin Oriental and Rosewood Resorts located in Barbados, Morocco, United Arab Emirates, Saudi Arabia, along with several domestic locations. We continue to seek out additional channel partners for hotel, spa and restaurant products and condition distributors that primary channels for many of our international regions. We recently signed an agreement with Summit Technology Solutions and [indiscernible]. Both will focus on regional expansion of both ATRIO and SpaSoft of product lines. Further expansion of partners is an opportunity to cost effectively, get our products to market. Our government segment representing 36% of the company’s revenue, again delivered strong revenues in the third quarter. Revenues increased by 40% over the same period in 2011 and operating income grew by 27% from the third quarter of 2011. Growth continues to be driven by the contract to support the U.S. Army and U.S. Air Force with intelligence, surveillance and reconnaissance or ISR technology and services, which is called Eagle Intel-X. Even with a strong third quarter for the segment, procurement and U.S. budget deliberations make the timing of new awards difficult to predict. SoundCheck margins were 6.4% down slightly from 6.9% reported in the third quarter of 2011, but still above our historical range of 5% to 6%. Our government business continues the quarter with a healthy backlog of $108 million. At the same time, as we continue to build and invest in platforms for the future, we continue to find ways to streamline our company, lowering the breakeven point and focusing our resources on impact products and services. Overall, our financial stream remained strong with positive cash flow and more than $18 million of cash on the balance sheet and virtually no debt. I would now like to turn the call over to Ron for his remarks on our financials.

Thank you, Paul, and good morning everyone. Looking at the third quarter details, product revenue for the quarter was $22.3 million decrease of 8.5% compared to the same quarter of 2011. This decline was due completion in 2011 of a large technology upgrade program associated with domestic McDonalds restaurants. The company was able to partially offset this drop with an increase in sales to YUM! brands and sales of our SureCheck product. Additionally, international revenues grew 8% and sales to McDonalds and several smaller customers. Service revenue for the quarter was $16.7 million, a decline of 9.7%, which is due to fewer deployments related to the decline in product revenue. Contract revenue was $22 million for the quarter, an increase of 40% from 2011 reflecting the ISR integration contract that was awarded in the fourth quarter last year. Product margins for the quarter were 34.3% versus 35.5% in 2011. This change was due to product mix as the company sold fewer systems in 2012. Service margins for the quarter were 29.6% compared to 28.8% reported in last year’s quarter. This was due to favorable mix and service offerings. Regarding contract margins, they were 6.4% compared to 6.9% last year, which is slightly higher than our historical range of 5% to 6 %. SG&A for the quarter was $9.4 million compared to $8.7 million 2011, an increase of 7.6%. This was primarily due to sales and marketing activities associated with our new ATRIO product. R&D expenses were down slightly at $3.3 million, compared to $3.4 million a year ago. Regarding tax expense, the low tax rate in the quarter, primarily relates to true up to our fiscal 2011 tax return. Our financial condition remains strong. We now have over $18 million of cash on the balance sheet. The company continues to maintain an excellent debt-to-equity ratio as we further reduce our debt level during the quarter to $1.3 million. Cash flow from continuing operations was $2.5 million for the quarter and $13.7 million for the 9 months of 2012. The company expects to continue to fund future working capital requirements from cash flow from operations. And I’m pleased to report that day sales outstanding for our hospitality business were at 49 days and for our government business, were at 44 days. Depreciation and amortization for the quarter was $900,000. Capital expenditures for equipment was $200,000 and capitalize software this quarter was $871,000. That concludes my remarks and I now would like to open up the call for questions. Thank you.

[Operator Instructions] And your first question will come from the line from Sam Bergman [ph] with Bayberry Capital Management.

Much improved quarter. Good to see. A couple of questions I have. Can you give us the amount of beta for the ATRIO product right now versus prior quarters?

Well, let me answer you the best way that I can, Sam. The product is deployed in a numerous or a number of individual sites that we have been working on over the last, as I said, the last couple of quarters to be able to deploy it to a large launch partner. And that effort has been underway. I talked about it last quarter and I commented upon it in my earlier comments. So we anticipate that we will have that executed in the days and weeks to come.

Okay. And the McDonald’s revenue for the quarter, does Ron have that sort of -

Yes. Sam, for the quarter, McDonald’s revenue was 20% of the total consolidated revenue and was 31% of our hospitality revenue.

When you go into next year, 2013, what’s the normalized run rate of the McDonald’s revenue and when do you expect that to occur?

Well, I think Sam that the run rate next year will still be below historical levels due to the completion of the very large historic upgrade last year. So we’re going to be slightly below historic levels on the product side. There are opportunities on the service side to do a lot more projects for McDonald’s in the future.

I would add to what Ron said Sam by telling you that while the U.S. market has gone through a relatively short recent upgrade program, there are other opportunities that exist elsewhere around the world. And while I won’t comment on the specifics of where those locations are, we are actively engaged in those processes. And time will tell whether or not we’re successful or not.

In those areas overseas, are you bidding still against Panasonic on other projects with the same customers or are there multiple competitors.

Well, I won’t comment any one specific competitor, but I will tell you that in those processes, invariably, there are multiple companies that are being considered by McDonalds and our products are in evaluation mode, EverServ 7000 are in evaluation in those markets. So, as I said, time will tell whether or not we’re successful.

Now, the EverServ 7000, I guess it was announced in May. Was it released in May?

No, the EverServ 7000 was released just recently third quarter of the first shipment that we had. CK had a couple of shipments and Subway had a couple of shipments. I don’t believe it was -- Ron or Chris, maybe you can comment on that.

I think it was July, Paul and Sam.

Okay. I know it was announced in May, but the release date was perhaps in July?

Correct.

How would you compare the actual feedback from customers, and perhaps if you can mention any beta sites on that EverServ 7000 versus the prior product you have in some of those accounts.

Well, Sam [ph], between our 6000 product and 7000, it was about 3.5 years which is a long time for a product transition. And the product has gone through its beta phase that is now shipping into SUBWAYs, it’s now shipping into CKs, which are the parent of Carl Jr. and Hardees. So, it’s being deployed now. If you look at the product versus our 6000 product, while the 6000 product was beloved, and I don’t say that lightly, by many of our customers, many of the largest fast-food chains in the industry. When you look at the 7000 compared to the 6000, there is no competitor in that. I mean, at least internally. And what I mean is that if you look at the processor speed, you look at the ergonomics, you look at the fact that it has gesturing on the front of it. If you look at the fact that it has the ability to basically future proof your technology investment. And what I mean by that is that you can think about your PC, if you can only just simply slide in, slide out a new processor and the device would still continue to be the latest product. It has easy service ability features. It has great ergonomics. As I said, if you look at it online, you’ll see that -- what we find so attractive about it.

And last question, on the SG&A, you had an increase of $665,000. Can you tell me where that went to?

Sam, most of the increase was related to our hotel business as we’re trying to build up our sales force and marketing efforts for our ATRIO product. That’s what most of the increase came from.

Would you say 50% of the increase, 90% of the increase?

More than half.

More than half. And where did the other half go or the other 40%?

Nothing specific, specific over several smaller, smaller areas, Sam.

[Operator Instructions] Your next question will come from the line of Vincent Collicio with Noble Financial.

Yes. Paul, I’m curious on your government business. You said the timing of new contracts is tough to predict? I understand that. But having said that, do you expect business continue to grow sequentially in upcoming quarters?

Well, if you look at our press release, and I think you know that we won a $42 million contract and we won a $48 million contract in a relatively short period of time. And it was because of the deployment of the funds that runs with $42 million contract went quicker than what was originally anticipated in that contract period. So, it is tough for me given what’s happening with the sequestration process, given what’s happening with the federal budget deficit and all those reasons to want to predict what will happen in the future. But if you look at the past, it’s a precursor to what’s happened in the future, and if you look at the returns that we’ve had in the government business over the past few quarters, they’ve been very good. And so, we remain always optimistic but cautious, which I think is prudent given the state of the U.S. budget deficits and the process that will happen at the end of the year with the budget-cutting process.

You had mentioned a couple of growth accounts, SUBWAY, YUM!. I’m curious, what’s going on with Baskin Robbins? Is that still growing or did you complete deliveries there? What’s going on there?

Vince, we completed that last year essentially so right now we’re just providing the normal services to the Baskin account.

Okay. And Paul, you had mentioned scaling challenges with SureCheck, could you give us some more color on that?

Well, it’s just when you try to deploy a product that was in pilot with 4,000 stores with the largest retailer in the world, there are deployment issues. And what I mean by that is that again, these are not by any stretch of the imagine a negative issue, they’re just issues associated with getting the product out there and getting all the features and functionality deployed to all those different locations. And when you do that, particularly with something that was just being deployed, it prevents you from doing other things. And that was my only point is that those issues, which we anticipate largely coming to an end between now and the end of year have curtailed our ability to deploy other large locations. So our sale cycle remains active. We have a building pipeline. We remain very optimistic about the product but that’s just the reality of the last couple of quarters.

Your next question comes from the line of Craig Hoagland with Anderson, Hoagland & Company.

You mentioned that you have an objective of reducing McDonald’s size in your revenue stream. Do you have a goal in mind there at the current 20% level.

Well, I think that it’s just -- the reality is that in 2010 and 2011, there was a large deployment that occurred. And as a result of that, we have roughly 55% of the share of McDonald’s in domestic U.S. But the reality is that McDonald’s doesn’t go through deployment like that every year or every couple of years. So our comparisons suffer when we compare ourselves against that, and you saw that occur in the quarter. So what we’ve done is, we knew that and we anticipated that, which is why we divested our whole –we divested our resources into the various YUM! brands, Taco Bell, KFC, et cetera, as well as also in SUBWAY. And you’ve heard me talk about another call, the fact that we are deploying in some weeks, 100 SUBWAY locations. So our goal is to diversify our business and to take our product into markets that it has not in before. So hopefully, they’ll be what I would call creative tension in this area. Hopefully, we’ll win some more McDonald’s business. And hopefully, what will occur is that we’ll be successful in taking our product into some of the other chains that have occurred and that will enable us to diversify our product business so that no one customer can impact our overall company results.

And could you talk also a little bit about the strategic thoughts about SaaS revenue versus product and traditional service revenue going forward?

Well if you look at our hardware business, it is a – it has ups and downs based on issues, just like you and I just discussed a few minutes ago. That’s inherent in the business, not just us. It’s anyone that has a hardware business. And what we have sought to do is to build a base of profitable annuity revenue. So as you know, there are various paths and customer have opinions on us as well, which is you need to go kind of the [indiscernible] route, you can go the SaaS route. And many of our customers, given the attractiveness of cloud-based computing, particularly in our ATRIO product and particularly in SureCheck product have been very attracted to the SaaS model that enables them to avoid large capital expenses. It enables them to make their fixed-costs variable and to be able to have very, very clear paths to return on investment. So our goal is to over time, to build a recurring base that smoothes the ups and downs that are inherent in the hardware business. So that’s our strategic goal. It takes a little longer but we think results for shareholders will be better in the long run.

Yes. And it sounds like there has not been the opportunity to develop a SaaS module to serve the restaurant in the...

Well, we continue to evaluate all of our business areas and we continue to look at the model and we continue to see where we have our strengths and weaknesses and to seek to make them better. So, time will tell what we do in the future in that area.

At this time, we have no further question. I would like to turn the call back to Mr. Paul Domorski for closing remarks.

Okay. Well, thank you very much for your continued interest in PAR Technology. I look forward to speaking to you at the end of the fourth quarter. Have a great day. Bye now.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.