PAR Technology Corporation (PAR) Q4 2014 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the PAR Technology Corporation Full Year 2014 Fourth Quarter and Year-End Financial Results Conference Call. My name is Denise and I’ll be the operator for today. And at this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I will now turn the conference over to Mr. Christopher Byrnes, Vice President for Business and Financial Relations. Please proceed sir.

Thank you Denise and good afternoon everyone. I’d like to welcome you to the call this afternoon for PAR’s fourth quarter and year-end 2014 financial results review. I'd like to take this opportunity if I can to take care of certain issues in regards to the call today. Participants on the call should be aware that we are recording the call this afternoon and it will available for playback. We're also broadcasting the conference call via the World Wide Web. 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. I’d like to tell you at this time that this conference call includes forward-looking statements that reflect management’s expectations based on currently available data. However, actual results are subject to future events and uncertainties. The information on this conference 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 afternoon 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 afternoon everyone, thank you for joining us today for our fourth quarter and year-end 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'll open the call for Q&A. So let me start with our results from the fourth quarter. This afternoon we announced the company reported fourth quarter revenues of $63.4 million compared to $59.7 million in the fourth quarter last year, a 6.2% increase. On a non-GAAP basis PAR reported operating income of 924,000, net income of 776,000 and earnings per diluted share of $0.05 in the quarter. This compares to non-GAAP operating income of 637,000, net income of 414,000 and $0.03 per diluted share last year. We recorded a GAAP net loss of 2 million and a loss per share of 13% in the quarter. This net loss included a one-time tax charge of 2.2 million associated with a repatriation of earnings from our wholly owned subsidiary in China. Over the past several years this subsidiary had accumulated excess cash primarily as a result of our success with McDonald's China. My comments from hereon will focus solely on non-GAAP results. First now to address the highlights for the quarter in our hospitality business. This past quarter, we're pleased to report that our hospitality business revenues increased 4.1% to 39 million from the previous year's fourth quarter reported at 37.5 million and an 8% increase from the previous sequential quarter. We continued to see success in growing our channel business as a key part of our diversification strategy, to market our products to smaller chains and independents. Revenues from our channels grew 13% in the quarter and 32% for the year, as we continued to expand our industry reach with our dedicated partners. As for our recent acquisition of Brink Software, we're encouraged by the robust pipeline of opportunities for the Brink Solution and look forward to announcing additional exciting wins in the near future. In the quarter, we announced a significant win for Brink POS. Tom + Chee restaurant, a fast growing fast casual concept and also recently signed several other new concepts that are in various stages of implementation. In the quarter we continued our deployment of our complete solution to Bowlmor AMF and their bowling centers with our PixelPoint platform. We're also pleased with the progress we are seeing in our cloud based food safety solution SureCheck, which is rolled out domestically and we expect to begin deployment internationally in 2015 with Wal-Mart. We recently announced our SureCheck Advantage, a mobile hardware device powered by Intel Atom Processor technology, endorsed by Intel's Internet of Things, IoT Group. SureCheck Advantage provides increased operational efficiencies with its integrated temperature probe, bar code scanner and RFID infrared temperature readers. New accounts are showing renewed interest in this solution and we are closely tracking the implementation of the new U.S. food safety laws, which we believe will stimulate the need for better systems, for tracking and monitoring food handling. In fact a recent restaurant study pointed out that in 2015, 24% of restaurants polled plan to roll out food safety management solutions, all positive signs for SureCheck's market opportunities and demand. We're also encouraged by the early demand for our newly released mobility family of products. The PAR Tablet and Tablet POS solutions provide features designed for the rugged requirements, for the restaurant and retail markets and deliver a low total cost of ownership and a lifecycle of four years. Now to review our hotel business of our hospitality segment. ATRIO, our next generation guest management software portfolio added strongest quarter to date as we signed on 36 new customer properties. With every new customer signed there is a real momentum gained for the company's true cloud product in the marketplace. We successfully signed new customers in the quarter for PAR standalone SpaSoft software and for our hotel host legacy product including a large domestic resort and a five star hotel in Italy. This reconfirms our broad strength in resort markets. Now turning to our government segment. Our government business reported revenues of 23 million, an increase of 14.1% over Q4 of last year and a 22.3% increase from the previous sequential quarter. The revenue increase is primarily attributable to a higher volume of Eagle Intel-X ISR task orders. This past quarter, also we're successful in securing increased funding to develop and sustain a mobile android application supporting situational awareness for the Department of Defense. We have expanded our efforts in new business development specifically surrounding the Dayton, Ohio and Wright Patterson Air Force Base. I would now like to turn the call over to Steve Malone for further details of our financial performance and then we'll open the call for Q&A. Steve?

Thanks Ron. Good afternoon. Product revenue in the quarter was 23.7 million, an increase of 7.6% compared to the fourth quarter of 2013. The most significant driver of the increase was a growth in hardware sales to SUBWAY, as they continue with a large hardware refresh program. In addition, as the company has been reporting for much of fiscal 2014 product sales executed through a network of dealer partners have been strong noting a 13% increase year-over-year. Software license revenue is also up significantly growing 23% year-over-year as higher content of the company's Pixel product were sold during the quarter. Service revenue was down slightly during the quarter 15.4 million versus 15.5 million in 2013. However the mix of service revenue has improved from 2013 mostly driven by two factors, a significant increase in software related services revenue from higher sales of the company's PixelPoint software application as well as software sold as a service associated with the company's Brink Software products. In addition to the growth in software related services, service revenue generated by the company's hardware repair center increased mostly due to our higher volume of new contract as well as higher time and material revenue. The company's recurring revenue base remains strong with 65% of service revenue from the quarter being recurring in nature. Revenue from our government businesses increased almost 10% year-over-year to 24.3 million up from 22.2 million in the fourth quarter of last year. Contract volume with the Eagle Intel-X contract continues to be strong up 3.5 million year-over-year as the volume and magnitude of related task orders increases. Partially offsetting this increase was a decrease in revenue from certain fixed price technical services contracts that were completed earlier this year. Contract backlog continues to be strong noting total backlog of over 100 million as of December 31, 2014. Product margin for the quarter was up slightly at 29.7% versus 29.5% in Q4 2013. While the margin has improved due to increase in software sales this improvement was partially offset by an unfavorable hardware mix during the period. Service margin for the quarter was 35.2% an increase of 80 basis points from the 34.4% reported in the fourth quarter of last year. Service margins have been favorably impacted by an increasing software related services during the period which includes professional services, maintenance contracts and software as a service revenue. Government contract margins were 5.5% a decrease from 9.1% reported during the fourth quarter of 2013. This variance is the result of an unfavorable contract mix noting a high volume revenue earned through 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 8.5 million, a decrease from 9.3 million recorded during Q4 2013. This decrease is due to cost reduction activities within our hospitality businesses. R&D expense was 4.3 million up from the 4 million recorded during Q4 of 2013. Most of this increase is due to an increase in hardware R&D associated with the next generation hardware products as well as an increase in software R&D tied to the company's Brink Software application. Now to provide some information on our balance sheet and cash flow. At the end of December working capital was 20.3 million, inventory has increased slightly from September in anticipation of hardware demand in Q1 while receivables were flat quarter-over-quarter and are up from prior year due to sales volume late in Q4 of 2014. Day sales outstanding for hospitality and government businesses were 57 days and 53 days respectively during the quarter. Cash flow generated from operations was 3.2 million mostly due to the timing of vendor payment. Full year 2014 operating cash flow was 6.3 million. Depreciation and amortization were 1.1 million, capital expenditures and capitalized software were 475,000 and 637,000 respectively. This concludes my formal remarks and I'd like to turn it back to Ron for his closing comments.

Thanks Steve in summary we have made progress executing to our strategy of diversifying our hospitality customer base through extending our software sales in the segment. Evidence of that progress is the increase in hospitality software revenues of 23% in the quarter and 34% for the year. Although steady progress is being made we continue to face challenging conditions surrounding our largest restaurant customers resulting from a lower number of new store openings and a reduced product demand due to previously satisfied technology upgrades. In the first quarter of 2015 we expect to continue to be impacted by the slower order cycle in addition to the normal seasonality issues we are confronted with. This ongoing volatility with our largest customers is a principal reason why the diversification of our hospitality segment revenue is so important to our long-term success. Our acquisition of Brink Software in 2014 is an important element of the strategy and we are encouraged by Brink's early success and large pipeline of opportunities with our SaaS product. A recently conducted restaurant technology study stated that 60% of restaurant technology budgets will transition to an operating expense from a CapEx where software is utilized as a service in the cloud with a monthly subscription fee. Our Brink POS and SureCheck software solutions are well positioned to benefit from this shift. In 2015 we will continue financial discipline round our operations and we remain committed to investing in key programs that will enhance our market reach and allow our company to provide next generation solutions and services to diverse hospitality markets. We expect to have a eventful months ahead and I look forward to providing you more insight on our business success as they take shape. As always I want to thank the employees of PAR for their continued support and dedications to executing against our growth plan. That concludes my formal remarks, and I would now like to open up the call for any questions you may have.

[Operator Instructions]. And our first question comes from Sam Bergman with Asset Management. Please proceed.

Couple of questions. Can you talk about ATRIO and field trials and what type of hotels you are actually executing in that story for the ATRIO? Is it larger than the ones you have announced in the past? Are you finally getting to the medium size hotels, with field trials or beta sites?

Sam, we are continuing to sell primarily to the smaller independent hotels. Although recently we have been able to win some, what we call collection or group hotels that have multiple properties and we expect wins in that area to increase throughout 2015, and also the size of properties per win should increase as we go into 2015.

Do you have all the correct modules for larger properties at this time?

Sam that would be on a customer-by-customer basis. We feel we have the core modules that every single hotel would need. Each hotel may have certain custom features that they want and we'll deal with them on a case-by-case basis.

You had mentioned we should expect -- did you say an eventful month in March?

An eventful year ahead. We have several new accounts in the pipeline and we hope to have some earnings -- some new wins announcements in the near future.

Well those announcements mitigate the slowness of your large accounts?

Not in the short-term Sam but certainly over the long-term as we build our recurring revenue with the smaller accounts both in software and hardware through our channel customers, that is our plan to be able to mitigate the cycles that we go through with our large customers.

Can you define long-term? Are we talking nine months to 12 months, talking longer than that?

Sam, I am not going to get that specific but as you know the first half of our years are usually due to the cycles that we go through are slower than the second half of the year. So we'll expect a pickup overall in the second half of '15.

And about a year-ago, 1.5 years ago you got an $85 million defense contract. I haven’t seen that in the backlog. Is that given to you piecemeal or how is that funded by the government over to you guys.

Sam that is funded via what we call task orders and until we receive a task order under that contract we don’t count it in the backlog. So a lot of that contract you won’t see in the backlog unless we have a task order in hand. And by the way as I mentioned in my remarks and as had Steve that contract contributed to the growth in the government revenue in the fourth quarter.

So part of that growth was from that contract?

Correct. The major reason was that contract for the growth in the fourth quarter of our government revenues.

Last question, you mentioned that software revenues were up. Can you give us any idea what Brink sales were for the quarter?

Sam, they're still relatively small at this time and we expect them to grow as 2015 continues as the power of SaaS builds up as we have more wins but we are not disclosing the revenues at this time.

So are you moving sales people from other areas of hospitality to the Brink side?

We are.

Are you adding sales people at this time?

We are adding some sales people specifically dedicated to the Brink product.

Our next question comes from Gary Siperstein with Eliot Rose Asset Management. Please proceed.

First of all I want to say thank you for breaking it out on a non-GAAP basis, so we can get apples-versus-apples. That was very helpful. And congratulations on the improvement from Q4 over Q3 sequentially and the non-GAAP EPS year-over-year, so it's showing some good progress. Ron you did a real great job during the year on SG&A. Can you give us a little more color on that in terms of what you see or think you can do going forward. I guess Sam just asked you're continuing to hire sales people but can we look for SG&A as a percentage of sales to continue to trail down, is there more things you can do there to continue that good progress.

Gary, there are some more things that we will continue to work on in 2015 to continue to control the SG&A costs. We want to make sure we're doing the right things and making the right investments. But where there is areas we can cut back I think as we have said before we are always actively looking to reduce our cost overall wherever we can. And our activity in 2015 won't just be limited to SG&A, we'll look at everything -- all the expenses in the organization and continue to address them and modify them as appropriate.

Okay, because you seem to be able to get it down by about 0.5 million in Q4 and it was down maybe 600,000 for the year? So on 38 million I think you can do a better job than just 600,000. So can we sort of look at the fourth quarter expense as an annualized run rate so you can dig into that 38 million or was that aberrational?

Sorry to say, Gary, as we noted we did acquire Brink and we are investing in their sales organization and we'll be ramping that up modestly throughout 2015. At the same time we'll be looking at reductions in other areas. So don’t want to say specifically of how much more we think it can down in '15.

And on the R&D side Ron that was roughly flat for the year. Do you feel that’s a good number for the New Year in light of what's on your plate?

Gary that will go up specifically related to Brink in 2015, they were relatively small organization when we acquired them and our plan is to increase the R&D investment in the Brink software during 2015. And we're confident that’s going to pay off especially with the early interest we're seeing with that product and the pipeline is building rapidly. So we're very excited about it and we need to invest at the right level to make sure it has a long-term success.

You mentioned the robust pipeline of Brink. And I think you used the words others have been signed, contracts have been signed and some are rolling out. And yet we've only seen one announcement. What's the company policy on getting announcements out most of the companies I follow and I have for the last 20 years. When the deal is signed it gets announced. Are you prohibited from some customers to not announce things until they are like three months or six months or nine months rolled out even though if you've won the contract already?

That is the case with some customers we're working very diligently to try to come out with more timely releases as we win new business. Every customer has a different view of it and certainly our goal is to do mutual releases with the customers approval.

So the other ones that have been signed for Brink and you're shipping on when you get customer approval you'll get those out?

Yes.

And you mentioned Bowlmor AMF started shipping in Q4. What percentage of that contract completed in Q4 and was there any left over to come into Q1?

More than half was completed in 2014 there is little more in 2015. But on the upside they seem to have a strategy to acquire other bowling concepts as they do that we're optimistic that we'll be fulfilling the requirements of those new properties as they acquire.

And moving on to SureCheck. You mentioned a new food safety laws domestically, you mentioned after the successful launch of the product with Wal-Mart domestically and I guess Wegmans too with that Wal-Mart is going to be employing it internationally. So I guess my question is two parts, first of all what kind of increase in light of the Wal-Mart substantiation and collaboration and the new food safety laws in terms of your pipeline, is it up 30%, 50%, 200% now that SureCheck is out there and Wal-Mart and Wegmans in these safety laws.

Gary I'm not going get specific but Wal-Mart has a big presence internationally. And we fully expect to start rolling with them in 2015. As far as the food safety laws one of the main requirements there is for everybody to keep two years of historical records of how they monitor their food temperature and our products if it's right very nice into that sweet spot. So we expect to see a lot more expansion of our pipeline.

So the pipeline is moving in the right direction with the food laws in the Wal-Mart rollout. Did the Wal-Mart international rollout -- are you expecting any revenues in Q1 or is that back-half weighted?

That will be in the second half of the year Gary.

And then to the hotel on the ATRIO side. You mentioned ATRIO had its best year ever in 2014 or I guess [quarter] over and you had also the best quarter of 36 properties. And I guess Sam had asked about moving to larger hotel chains instead of onesies and twosies maybe chains with fives and 10s or 20s. Have we won anything with more than two or three units thus far? Has anything shipped on that?

Yes we have Gary, we have won several concepts with greater than five properties and we are in discussion with someone double-digit properties as well. I also should add that at the end of the year we had around our 50 property backlog with the new ATRIO product, meaning we had the order signed with delivery scheduled for some time in 2015. So, it's a good sign should be off to a good start with ATRIO in 2015 with that backlog.

And you mentioned also that the product sales were helped by the subway refresh. Is that 80% done or 100% done? Is there any future revenue from that or is that all lion share?

It’s about 90% done the balance will most likely complete in Q1.

And there haven’t been any other announcements, do you have the same dynamics in restaurants as you do with that you mentioned recently on Brink that there maybe are some new restaurants or old restaurants but new business that you have gotten and you are rolling out and Q1 to Q2 whatever, but you haven’t been able to announce yet. Is any of that dynamic going on?

There are some new wins with our restaurant products other than Brink that we hope to announce sometime in the near future. Let me just add Gary if you go back to the subway comment, I was referring to the domestic requirement we also do sell to them internationally. And that is going to be ongoing throughout 2015.

So the refresh is 90% done domestically but we could get some tailwind internationally throughout the year.

Yes, we've already started with that in '14.

And then on the mobility side, the tablet it seems that more restaurants I go out to I see more tablets and table top ordering and doing your credit card right there. How is our tablet different than the competitions and can you give us some examples of how some restaurant chains are going to use this to augment what they are doing already or to replace what they might be doing already.

Well we believe our tablet is more rugged than most other tablets on the marketplace and our customers will use it either as a stationary device or a mobile device to lock around the restaurant. And we also as far as the reliability we are estimating a four year life cycle for the thing which I believe is longer than just about anything out there.

What is a price competitively, so the ROI is much better with the four year cycle?

Absolutely. And we hope when we have new announcements that some of those announcements will include the PAR tablet along with the other PAR product family.

And then moving over to defense. So you mentioned that task order, so the year-end backlog was a 100 million you get the task orders and they seem to ship within the quarter you get on, so it seem to affect backlog much. Has that backlog increased since year-end? Have you got any task orders so far this year yet?

We gotten some Gary. I think that the backlog will stay steady or maybe just down a little bit in the short-term but we have some nice contracts that we're tracking in and we expect decisions later in 2015 that should grow the backlog back over 100 million.

Just on clear, so that’s in addition to the task orders from the previously won contract?

Yes.

So this could be new pieces of business. So I guess what Sam has mentioned was 85 million or something on the task order 1 that you get per task order. So you are saying there is other decisions pending that would involve bidding on that could add to the backlog.

Yes, part of our growth strategy, I mentioned we are investing in business development in the Dayton area. That’s a new area for us, and we have already own some work there and we expect to win some more work as the year goes on.

And then you mentioned the tax implication of the repatriation of the Chinese cash. How much cash were we able to bring onshore?

We were able to bring out let me say $7 million Gary of cash. Just from a timing standpoint the cash was received in the first quarter of 2015. So it’s not reflected in the 2014 results as far as being moved or anything else.

So the 10 million in cash on the Q4 balance sheet.

It's included in there Gary but for example we may use it to pay down our line in the first quarter.

So it’s a on a GAAP basis, it was included in but you actually got the cash in Q1, is that what you're saying?

Yes.

And you had -- I guess you have the line of credit in short-term liabilities and you had long-term debt reduced to 2.5 million, so you can use that cash to clean one or the other up?

That's correct.

So most the balance sheet is almost back to where it was before you bought Brink. Alright and cash flow for the year were 6.3 million but it was exceptionally high in the fourth quarter at 3.2, was that just really a function of better receivables or government contract payments?

Well it's a combination of good collections and timing of vendor payments as well; we had some inventory come in late in the year that we'll pay the bill in 2015.

And then, I know you make projections but can we look for at least cash flow EBITDA to move in the right direction in 2015?

It's earlier plan.

And then, lastly is the Board with the valuation of the stock trading pretty much at book or below book, and having an enterprise value of like 77 some odd million versus 230 million at sales. We went out and we spent strategically 10 million bucks on Brink. How about a $10 million buyback program? It seems like inordinately undervalued for a company that's now showing non-GAAP EPS and positive cash flow and all these things seem to be pretty exciting across the portfolio.

The Board has always discussed this issue and we feel this, its first of all we agree with you that we're undervalued but the board in the discussion of this issue, we have decided to reinvest the cash that we have in our new products for the time being, so that's our current strategy with our cash.

And Ron the last question. So it seems to be only negative, if you can find a negative is McDonalds has had its own troubles worldwide and then some China specific troubles. So, if McDonalds slows down or does a bit of high [aides] before they get that together again, in that business declines was -- certainly the headwind but isn't it true that's probably not our highest margin business and over time as you mentioned I one of your answers earlier. A lot of new cloud software as a service SaaS model business has much higher margins. So I know it's going to take a while for those revenues to offset the McDonald revenue decline. But it seems like there should be at some point and we should see that maybe at some point starting this year a tremendous improvement in the company's overall margins. I think you have mentioned software up by I think you said 23%. I think you said whether that is the year or the quarter and which was significant, so it's met the dynamic that could take place over time.

Yeah, certainly I'm not going to comment on margins by a specific customer Gary but certainly your promise is correct as we grow our software revenue including our SaaS revenue and the product mix changes to a more richer or mix certainly we expect the margins to trend upwards.

[Operator Instructions]. Our next question comes from Lee Matheson with Broadview Capital Management. Please proceed.

So higher level, I mean when are we going to get a picture on sort of what PAR is going to be five years outer, what the vision of this newly reconstituted board is for the company. I would have expected by now, you guys have done an acquisition which presumably was approved by in the members of the board. So I would have to assume there is some thought to why that acquisition was executed and what is was going to achieve. So when are we going to hear from look the company, specifically about what the game plan is that going forward?

Well, Lee as I have stated in my remarks, our strategy is to diversify our customer base increased the software content of our revenue to grow the margins and I was just talking about with Gary. And so we're less dependent on the majors, so that we have less volatility, when we fulfill the current requirements for the majors and we're making good strives towards that. As we said those areas grew significantly in 2014, we plan to grow them in '15 and beyond. The strategy is to transition from what has been a predominantly hardware and services organization and to a full solutions company where software services are major component of our revenue mix.

And I guess in the grand scheme of things where does the defense business fit into that few. I guess to some degree you use that's bit of crotch as we've gone through the down cycle with McDonalds and what you have you and has the R&D investment on the software side. But at what point as we start to think of that or what point does the Board start to see the defense business is being superfluous in a source of cash to fund the growing part of the business is clearly or sort of go forward priority.

Right now Lee the Board's view of the government business has obviously has been very successful, it's always made money, it’s a constant source of cash. We have some very interesting opportunities in that business where we hope to accelerate the growth down the road of that business. So our plans are to continue to grow that business and provide a source of profit and cash flow for the organization.

We have no further questions. I will now turn the call back over to management for any closing remarks. Please proceed.

Well thank you everyone for listening to our call and thank you for your interest in PAR. Chris and I will be available afterwards if anyone has any follow-up questions. Have a good evening.

This concludes today's conference. You may now disconnect. Have a great day everyone.