PAR Technology Corporation (PAR) Q3 2014 Earnings Report, Transcript and Summary

Welcome, ladies and gentlemen, and thanks for joining the Third Quarter 2014 PAR Technology's Earnings Call. My name is Ryan. I'll be the operator on the event. [Operator Instructions] And as a reminder, we are recording the event for replay. And I'll now turn the call over to your host, Mr. Chris Byrnes, Vice President for Business and Financial Relations.

Thank you, Ryan, and good morning, everyone. I'd like to take this opportunity to welcome you to the call this morning for PAR's Third Quarter 2014 Financial Results Review. If I can, I'd like to take care of certain issues at this time regarding the call. Participants on the call should be aware that we are recording the call this morning and it will available for playback. Also, we are broadcasting the conference call via the World Wide Web as well. So please be advised if you ask a question, it will be included in both our live conference and any future use of the recording. Joining me on the call today is PAR's CEO and President, Ron Casciano; and Steve Malone, the company's Chief Accounting Officer. At this time, I'd like to tell you that this conference call includes forward-looking statements that reflect management's expectation based on currently available data. However, actual results are subject to future events and uncertainties. The information on this call related to projections or other forward-looking statements may be relied upon and subject to the Safe Harbor statement included in our earnings release this morning and in our annual and quarterly filings with the SEC. I'd now like to turn the call over to Ron Casciano for the formal remarks portion of our call, which will be followed by general Q&A.

Thanks, Chris. Good morning, everyone, and thank you for joining us today on our third quarter 2014 conference call. During this call, I will review our results for the quarter, Steve Malone will give the financial details, I will give a brief summary and then we will open the call up for Q&A. Now to address our results for the third quarter. This morning, we announced that the company reported third quarter revenues of $56.3 million compared to $55.5 million in the third quarter last year. On a non-GAAP basis, PAR reported net income of $284,000 and earnings per diluted share of $0.02 in the quarter. This compares to non-GAAP net income of $571,000 or $0.04 per diluted share last year. I would like to point that operating income for the third quarter of 2014 was $405,000 on a non-GAAP basis, which is an improvement from the $221,000 in 2013. I'll begin my comments by addressing our acquisition of Brink POS. Brink represents a significant pillar in our strategy of diversifying our business toward a broader range of customers in the restaurant industry. Brink is differentiated by its cloud-based POS software with integrated features, including loyalty at its core, mobile online ordering, mobile dashboard and much more. Brink also brings to the company a SaaS revenue model, which will contribute to our goal of growing recurring revenue. Brink's core customer concentration is in QSR and fast casual, the fastest-growing segments in the restaurant market. Let me address some other highlights in the quarter for our restaurant business. As we have stated previously, the company is focused on growing the software portion of our revenue. In the third quarter of 2014, the company recorded the highest software revenue since the first quarter of 2012. We continue to have success in growing our channel business, as another part of our diversification strategy. Revenues in this area grew nearly 50%, as we expand our market reach with our dedicated partners. We saw positive news coming from certain international markets. Notable progress was made in Europe, where revenues grew by 75% over the same period in 2013, and in the Middle East, where our business grew by 20% from the previous year's third quarter. On the new customer front. Yesterday we announced a very exciting win for PAR, Bowlmor AMF, who selected our complete solution of our Pixel software, hardware and services for their 340 bowling centers. This new customer win is significant due to its number of locations and represents another success in diversifying our customer base. As for SureCheck. We earned additional customers in the quarter and are presently conducting several field trials in various markets, including restaurants and colleges and universities. We are advancing an expanded relationship in numerous international markets with Walmart, the largest SureCheck user, with over 5,000 locations. The focus on food safety and automation of Checklist is being driven in part by pending U.S. legislation and the recent issues affecting many major brands in China and other emerging markets. On the technology and new product innovation front. This quarter we announced the release of the newest member of our mobility family, the PAR Tablet 10. The PAR Tablet 10 offers the same mobility and functionality as the previously announced PAR Tablet 8, with a 10-inch display screen, while remaining lightweight and offering the reliability that PAR is known for. All of our tablets offer features designed for the rugged needs of the restaurant and retail markets and provide a low total cost of ownership in a lifecycle of 4 years. Now turning to our Hotel business. ATRIO, our next-gen guest management software portfolio, had its strongest quarter to date as we signed on several new properties. Recently, we signed our first customers in Asia, in Kuala Lumpur, and in the United Kingdom. There is a real sense that momentum is being gained for the company's true cloud product in the marketplace. We signed additional customers for PAR's stand-alone SpaSoft software. We also added properties for our legacy host product, including a substantial domestic resort, reconfirming our strength in the large resort marketplace. Now turning to our Government segment. Our Government business had another solid quarter as we continue to outperform our peer group. We reported revenues of $20.1 million, an increase of nearly 11% from the third quarter last year. This increase is primarily attributable to task orders associated with our Eagle Intel-X ISR integration contract. In the quarter, we secured a $23.5 million U.S. Navy contract for satellite facility management in Chesapeake and Norfolk, Virginia. In addition, the company appointed a new director of Dayton, Ohio, operations to focus on programs within the Air Force research laboratory in Dayton and the National Air and Space Intelligence Center at Wright-Patterson Air Force Base. I would now like to turn the call over to Steven Malone, our Chief Accounting Officer, for further details on our financial performance. Steve?

Thanks, Ron, and good morning, everyone. Product revenue in the quarter was $22 million, a decrease of 3% compared to the third quarter of 2013. While the decrease of product revenue is mainly due to lower revenues generated from PAR's tier 1 account, the company has made significant progress expanding its worldwide dealer network. Sales generated through this network have increased nearly 50% on a year-over-year basis. The third quarter was also successful with respect to software revenue, which has increased 52% over the same quarter in 2013, driven by an increase in software sales to both new and existing customers. Service revenue declined 4% to $14.1 million, compared to $14.7 million during the prior year. The decrease is mostly the result of a decline in field service revenue as certain customers transitioned to alternative PAR support delivery models. Partially offsetting this trend was the addition of new field service contracts with certain tier 1 customers. Additionally, software-related services have increased on a year-over-year basis, tied to the growth in software license revenue noted above. The company's recurring revenue base remains strong with 68% in service revenue from the quarter being recurring in nature. In the Government business, contract revenue was $20.1 million, an 11% increase from the $18.2 million from last year. Contract volume with the Eagle Intel-X contract continues to be strong, up significantly year-over-year as volume and magnitude of related task orders increases. Although the Government business continues to add new fixed price technical services contracts with the U.S. Department of Defense, its overall technical service revenue is down year-over-year resulting from the completion of contracts earlier this year. However, contract backlog continues to grow as a result of the aforementioned new contract wins as well as through the creation of task orders on our existing Eagle Intel-X contract. As of September 30, total contract backlog was $120 million, a significant increase from the $106 million at the end of June. Product margin for the quarter was 35.7%, an increase of 400 basis points from the 31.7% from last year. During the quarter, product margin was favorably impacted by the increase in software revenue. Service margin for the quarter was 28.7%, an increase of 380 basis points from the 24.9% reported in the third quarter of last year. During the quarter, PAR continued to increase contract volume of advanced exchange service contracts with certain tier 1 customers, contributing to this improvement. Additionally, the company was able to reduce costs in this area. Government contract margin was 6.7% in the quarter, a decrease from the 8.4% reported during the third quarter of last year. This variance is the result of an unfavorable contract mix, noting [ph] a high volume of revenue earned by lower-margin Intel-X contract. In addition, during fiscal year 2013, the company realized significant margin on certain fixed-price technical services contracts that were modified during that year. Non-GAAP SG&A was $8.8 million, a slight increase from $8.4 million recorded during Q3 of 2013. The increase was in part due to sales and marketing investments made within the company's hospitality businesses. R&D expense was $4 million, up from the $3.7 million recorded in Q3 of 2013. During the period, the company increased its hardware development investments as it continues to expand its portfolio of hardware products. In addition, ATRIO software R&D has increased as the company continues to expand the functionality and feature set of this product. Now balance sheet and cash flow updates. During the quarter, the company incurred $5 million in paid [ph] debt under its credit facility for the acquisition of Brink POS as well as an additional mix of $10 million in short-term and long-term debt payable through fiscal year 2019. At the end of September, operating working capital, which excludes external debt, decreased slightly to $29 million from $30 million at June 30. Inventory has increased as of September 30 in anticipation of hardware demands in Q4, while receivables have increased due to sales lines late in the quarter. Day sales outstanding for our Hospitality and Government businesses were 59 days and 55 days, respectively, during the quarter. During the quarter cash flow used in operations was $2.8 million mostly due to the aforementioned growth in inventory. However year-to-date operating cash flow has generated $3 million for the company. Depreciation and amortization were $870,000. Capital expenditures and capitalized software were $462,000 and $731,000, respectively. This concludes my formal remarks, and I'd like to turn it back to Ron for his closing comments.

Thank you, Steve. In summary, we are optimistic about the opportunities within new markets and channels that we have with the Brink product line. During the quarter, we continued to progress our diversification strategy with our Bowlmor win and growth in our Channel business. And our next-gen ATRIO product is gaining momentum. As we look ahead, we expect to further leverage our core technology platforms to additional markets and continue our new product momentum. We anticipate that our Government business will continue to perform well to due to their existing contacts and the opportunities to win additional awards from federal agencies. PAR is making steady progress in becoming a much more consistent and predictable performer. That consistency and predictability will enhance shareholder value. As always, I want to thank the employees of PAR for their continued support and dedication to executing against our growth plans. That concludes my remarks, and I would now like to open the call for any questions. Thank you.

[Operator Instructions] Our first question comes through from Sam Bergman with Avery Asset (sic) [Bayberry Asset].

Couple of questions, on the AMF contract, can you tell me what the rollout is -- over quarters and who the incumbent was?

Sure, Sam. We began to roll out that customer in the third quarter. It will continue into 2015.

So should it end in the first quarter?

It will.

It will. You did mention in the press release about future contracts helping the quarterly profitability into 2015. You didn't mention any of those future contracts other than of course the AMF that was listed on the press release yesterday. Are there any others that you can talk about or any pilots that you can talk about, whether it's in ATRIO or SureCheck or even restaurants?

We certainly expect in the next quarter or 2 to be able to have some more announcements in different areas of our business, but we're not able to announce any of them at this time, Sam. But the pipeline is continuing to grow both in Hospitality and Government, and we certainly hope to have some more announcements in the next couple of quarters to come.

And the Marriott International contract you're working on, I guess you were b-engineering [ph] for the cloud in Marriott spas. I asked a question last quarter, is that development done? And has that been awarded to you or not?

No, that's an ongoing effort. Let me clarify that, Sam. That's with Marriott spas. We are currently have our PAR product in most of the Marriott spas, and we're working with them on our next-generation ATRIO spa product.

Is that complete or [indiscernible]...

No, not yet, it's in progress, Sam.

Next question comes through from Anthony Hammill with Broadview Capital.

Couple of quick questions. You mentioned on ATRIO that you have signed on several new customers. You mentioned someone in Malaysia. Are these paying customers or are these trials?

No, these are firm orders, paying customers.

Okay. And any sense of the either the number of rooms that these resorts represent, or obviously you're not in a position to name the resorts because I imagine you would have already. Like, is this something that -- like is ATRIO going to be a contributor that we will be able to see either directly or indirectly in the numbers at any point in the next couple of quarters?

Anthony, the properties continue to be on the smaller side. We are seeing a couple of orders now where they own more than one property, which is a good sign, good momentum. As we have said before, under the SaaS model, it will take several quarters before the SaaS revenue for ATRIO builds up to have a significant impact on the bottom line. But as I said in my remarks, we're happy with the progress. We're seeing improved momentum in that area, and it's the biggest quarter to date, and we hope --certainly expect to keep going.

Okay. And then in terms of adding the last bit of functionality to that product, that some of the prospective clients have asked for, how many more quarters of elevated ATRIO R&D are we going to see before it's -- obviously there's going to be continual work done, but when it's at the point where it's fully sort of spec'd out to where you wanted to be to go to market with the big clients.

Well, as you know, software is never done, and we continue to make our investments there. And different -- larger customers will have some different requirements. So we expect the investment in ATRIO to continue for several more quarters.

Okay. And you mentioned or it was mentioned that the inventories were up on the hardware side because of the expectation of more sales. Is that related specifically to AMF? Or is that to other rollouts that you're expecting [indiscernible]...

That's other restaurant customer demands that we're expecting in Q4.

Okay. And we're a month into Q4. Is the -- are you happy with the decision to have built inventory going into the quarter so far?

Yes, we are.

Okay. Well, that's good to hear. And then the contract backlog on the government side, nice increase there. Given the -- I guess it was 11% top line growth we saw in Q3. Is it -- order of magnitude, is that something we can expect in the next little while given the backlog that you reported?

We certainly expect the growth trend to continue with the Government business, but not at the same rate in the near term, but certainly next year and beyond. We're growing our pipeline in that business as well and with some new investments we've made in business development, I mentioned the Dayton area. There's lot of programs we're chasing out there. So maybe not so much of a large increase in Q4, but certainly next year in 2015.

Right. But again, likely growing to the same extent?

We expect it to, yes.

Okay. And then my last question. There was some new wording in the release, which I just wanted to ask you about and maybe lead into a dialogue about the new board and what they've been tasked with. But the -- let me just figure exactly what the -- yes, the wording was, "There is still more to be done and we continue to evaluate our businesses in order to identify opportunities and implement initiatives to enhance the overall value of PAR." Can you expand upon that a little bit? And again, with the board now in place, what their role will be in this initiative?

Well, at a high level let me answer that, Anthony. The new board has been very engaged since they came on board, they've been reviewing our strategy, and certainly as we go along I expect some suggestions to be made, but we are staying the course with our stated strategy. And as we continue, we're all working to increase shareholder value, and that's the main mission of the board, and hopefully we'll find complements to our strategy to do that and continue on the direction they we're headed so.

[Operator Instructions] And our next question looks like we have some follow-up coming from Sam Bergman.

Ron, do you have any information regarding larger properties in the ATRIO asking for advance modules at this time?

Nothing to share at this time, Sam, although we continue to talk with several larger customers in that area, and we expect to continue those discussions and -- but nothing immediate right this moment.

And in the Brink acquisition, did everybody come over from Brink to PAR?

Yes, they did, Sam.

And is the sales channel that you have right now sufficient to develop and add their products to new customers?

It is, Sam. We'll be selling their products through our direct channels as well as our indirect channel partner. So we feel we're off to a good start, and one of the things we're excited about, Brink was a small company and with our infrastructure and our sales force and our internal resources, we certainly expect to help them grow their business as their new relationships continue to evolve there.

The last question, in terms of investors' conferences, are you going to any or are you doing any nondeal roadshows coming up?

I'll let Chris speak to that, Sam.

Sam, yes, there's 1 or 2 coming up, probably before the holidays, and as for a nondeal roadshow, hard to kind of predict right now, but certainly we're open and available to meet with people, and will do so as necessary.

Okay, it looks like we have no other questions, so I'll pass it back for any closing comments.

Okay. Well, thank you for joining our call, and have a good day. Chris and I will be available if there's any follow-up questions. Thank you. Have a good one. Bye-bye.