PAR Technology Corporation (PAR) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the PAR Technology's Fiscal Year 2017 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to introduce your host for this conference call Mr. Chris Byrnes. You may begin, sir.

Thank you, Cloven and good morning, everyone. I'd also like to welcome you today to the call for PAR's second quarter 2017 results review. The complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please see the Investor Relations and News section of our website at www.partech.com. At this time, I’d like to take care of certain issues in regards to the call today. Participants on this call should be aware that we’re recording the call this morning and it will be available for playback. Also, we are 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. I’d like to remind participants 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. Joining me on the call today is PAR’s President and CEO, Dr. Donald Foley; Bryan Menar; PAR’s Chief Financial Officer; and Karen Sammon, the company’s Chief of Staff and Strategy. I’d now like to turn the call over to Don for the formal remarks portion of the call which will be followed by general Q&A. Don?

Thank you, Chris. Good morning everyone and thank you for joining us today for PAR's second quarter 2017 earnings call. First, our consolidated financial highlights. Our second quarter revenue was 62.3 million, up 18.2% from the second quarter in 2016. Our second quarter GAAP net income was 2 million, compared to 100,000 in the same period last year. Earnings per share were $0.12 per diluted share versus $0.01 per diluted share in last year’s second quarter. Our non-GAAP net income was 2.6 million an increase of 2 million versus the 600K in 2016. Our non-GAAP earnings per share were $0.16 per diluted share versus $0.04 per diluted share in the same period last year. As usual, I know that our press release has a full reconciliation of our GAAP and non-GAAP results. Turning to our segment highlights. Our restaurant retail segment, second quarter revenues increased 43.5% year-over-year. As our Tier 1 customers accelerated hardware deployments and one-time system integration projects. These first half hardware deployments and system integration projects wound down this quarter, while we fully expect our business will achieve our annual goals, we do not anticipate the same pace of business in the second half of 2017 as what we achieved in the first half of the year. Our government segment revenues declined 25.1% year-over-year as we continue to execute our strategy and consciously transition to contracts with higher value-added components especially within our high technology, intelligence, surveillance and reconnaissance line of business. This is important, while our revenues declined in the quarter, we were able to modestly increase our year-over-year government profitability due to our contract mix which focused on our higher value-added lines of business. As a company, we continue to make steady progress on our goals, on executing our strategic plan of being a true solution company led by cloud software offerings and fully supportive by our industry leading hardware and services. I would now like to turn the call over to our CFO, Bryan Menar, to give further details on our financial performance for the quarter.

Thank you, Don and good morning, everyone. Product revenue for the quarter was $32.7 million, up $11.2 million, a 52.4% increase compared to Q2 2016. During the quarter, increase in product revenue was primary driven by demand for our hardware solutions due to the timing of major project installations with our Tier 1 customers, primarily McDonald's which represented a 36% of total revenue in Q2 2017 versus 24% in Q2 2016. Additionally, the hardware associated with deployments of Brink increased approximately $400,000 versus Q2 2016. Service revenue for the quarter was $15 million, up $3.2 million, a 27.4% increase compared to Q2 2016. We continued to expand our recurring revenue base which includes both software-related services and hardware support contracts. Recurring revenue for the quarter was $9.4 million up approximately $1.2 million a 13.9% increase compared to Q2 2016. Due to software, up $0.8 million and hardware support contracts up $0.4 million. Momentum continued with our deployments of Brink and SureCheck, noting a 106% increase of Software as a Service compared to prior year. We exited the quarter with approximately $5.7 million of annual recurring revenue from Software as a Service contracts. Contract revenue from our Government business was $14.5 million, down $4.9 million, a 25.1% decrease compared to Q2 2016. This decrease was driven by the wind down of a large multi-year contract within our program management product offering. Contract backlog continues to be healthy, noting total contract backlog of over $111 million as of June 30, 2017. In regards to margin performance for the quarter, product margin was 25.4%, relatively flat versus the 24.7% in Q2 2016. Service margin for the quarter was 35% compared to 30.4% in Q2 2016. The service margin rate increase was primarily driven by favorable fixed cost absorption on increased volume and continued revenue mix shift to software and service platforms. Government contract margin for the quarter was 11.2% compared to 8% in Q2 2016. The favorable variance is a result of a shift in revenue mix from PMO to higher value-added product offerings of intelligence, surveillance, reconnaissance and mission systems lines of businesses. Now let's review operating expenses. GAAP SG&A was 8.9 million, up 1.8 million versus Q2 2016, primarily due to variable costs related to favorable year-over-year financial performance and investments in personnel to support the current and future growth in our Brink and SureCheck products. Non-GAAP SG&A was 8.2 million, up 1.7 million versus Q2 2016. Research and development expenses were 3.3 million, up 0.5 million versus Q2 2016, primarily driven by software investments made to support acceleration of our Brink and SureCheck product lines. Now to provide information on the company’s cash flow and balance sheet position. For the six months ended June 30, 2017, cash used by continuing operations was 5.7 million, primarily driven by amortization of deferred revenue from customer deposits received in Q4 2016 for first half of 2017 deployments. Cash used in investing activities from continuing operations was 5.6 million for the six months ended June 30, 2017, versus cash used of $3.2 million for the six months ended June 30, 2016. In the six months ended June 30, 2017, our capital expenditures of 3.5 million were primarily related to the implementation of our enterprise resource planning system and capital improvements made to our owned and leased properties. We capitalized $2.1 million in cost associated with investments and our restaurant/retail segment software platforms. Cash provided by financing activities from continuing operations was $5.6 million for the six months ended June 30, 2017, primarily driven by receipt of the final installment related to the 2015 sale of the hotel business unit in addition to borrowings under a line of credit and proceeds from stock options. As of June 30, 2017, inventory balance was $28.8 million, an increase of $2.6 million compared to December 30, 2016. The increase is primarily due to timing of certain customer deployment schedules expected to continue in the second half of the year in addition to residuals in the first half Tier 1 projects. Inventory turns were 6x for domestic and international operations, the team is actively working in supply chain in regards to changes in demand and support of management to balance down in the second half of the year. Accounts receivable increased $3.1 million compared to December 31, 2016, this is reflecting the increase in revenue versus Q4 2016 and in addition to an increase in days sales outstanding within the restaurant/retail segment. Restaurant/retail segment days sales outstanding were 53 days as of June 2017. Government days sales outstanding were 37 days as of June 30, 2017. This concludes my formal remarks and I would like to turn it back to Don.

Thanks, Bryan. Now to add more color and insight behind the financials. Starting with our government business. As I mentioned on our last call, we are in the midst of transitioning our contract base away from high revenue, low margin cash quarter awards associated with our program management office line of business. Two more value added contracts within our intelligence, surveillance, reconnaissance ISR and mission systems lines of business. Through the execution of our strategy we continue to see positive results of this transition as the ISR portion of our government segment grew by over 20% in the quarter versus the same quarter in 2016. This increase in ISR also contributed to margin improvement and as Brian previously mentioned, our contract margins in the quarter were 11.2% compared with 7.6% a year ago. Two leading indicators shed light on our government business. Our multi-year contract backlog at the end of the second quarter as Brian mentioned is over a $111 million. Secondly, our submitted proposals awaiting award at the end of Q2 totaled over a $110 million. We will continue to focus on growing our ISR revenue base while competing for all appropriate lines of business. Now turning to PAR's restaurant and retail segment. As previously mentioned, revenues in the quarter were up 43.5% year-over-year, the segment reported accelerated revenues from specific Tier 1 customers primarily McDonald's. These revenues were associated with hardware deployments and system integration projects in the first half of the year that had originally been planned over the full course of 2017. Since these accelerated hardware revenues somewhat masked the progress we're making in our diversification strategy, I'll now add some color. Our strategy broadens the customer base outside of Tier 1 through increased subscription revenues both hardware and software that provide consistency, that will provide consistency and predictability and lessen the impact of our traditional, cyclical, hardware business. PAR's cloud platforms Brink and SureCheck contributed to our success in the quarter as our Software as a Service revenues more than doubled from last year's second quarter. Brink added 446 new customer sites in the quarter a 54% increase from the second quarter 2016 and Brink now has an installed base that totals 3,260 restaurant sites. We fully expect a busier second half of the year for both bookings and deployments of new Brink customers, our pipeline is strong, our current backlog of schedule to be installed customers current backlog totals well over 2,000 sites. We're focusing on accelerating the process and to closely manage the deployments and schedules of our customers. I am extremely pleased to report that we have signed PAR's first master services agreement with a Tier 1 restaurant organization for deployment of Brink to add network that has over 3,000 restaurants in North America. My previously record bookings number only takes credit for 15%. We expect deployment to begin towards the end of the third quarter. I want to emphasize that this is a major accomplishment for our company, the execution of our strategy and is hopefully the first that what we expect to be several Tier 1 wins for Brink. We continue to be selected by restaurants in the emerging fast casual sector and since our last call announced Brink wins with Uncle Maddio's, CC’s Coffee House and Crazy Bowls & Wraps. Brink's emphasis on multi-unit, corporate and franchise operators that require scalability, data security, lower infrastructure costs provided by cloud solutions continues to set us apart from our competition and we’ll present even new opportunities for our company. We believe our prudent R&D investment, our growing install based and our cost-effective approach to providing real customers success, positions us well for extending our market leadership and to deliver on our mission of being the leading choice, a cloud POS for restaurants. Now regarding our SureCheck solution. We continue to expand our market reach across several verticals including restaurants, contract foods, convenience stores and grocery. We have begun the process of deploying SureCheck with our major U.S. based retail customer in Japan, South Africa and Brazil as this customer moves towards the global rollout of SureCheck. We have signed on our new pilots and our pipeline is expanding. As SureCheck garners increased market interest as food safety issues have heightened awareness for consumer safety and brand protection especially within the quick serve restaurant segment. During the second quarter, we released the newest version of SureCheck software, SureCheck 7.1. Key features of this latest release include enhance capabilities and traceability and documentation. We also recently launched PAR’s Internet of Things Spencer solution for SureCheck to enable 24X7 remove monitoring. Taken in combination, these solutions maximize operational efficiency, compliance and quality control. SureCheck ensures critical temperatures are consistently captured in monitored in kitchens, serving areas, holding areas and distribution centers. Our PAR SureCheck advantage, the all-in-one platform is generating significant interest with current and prospective customers. SureCheck advantage provides increased operational efficiencies with integrated temperature probe, bar code scanner, RFID reader and infrared temperature scanner all contained on an intuitive easy to use five-inch hand held tablet. Our strategy with Brink and SureCheck is to address customer requirements to the management of business data and provide a unique cloud solution for the expansion of internet of Things and data management in restaurant and retail markets. These capabilities will help our customers blend real world and digital data to provide them with new and valuable insights like asset monitoring, security alerts, marketing campaigns, loyalty programs and all in real time. By doing so we're creating fast, secure and scalable solutions that allow our customers to answer their most complex business questions today. All of us at PAR appreciate your participation in today's call and we look forward to providing updates to you throughout the coming quarters as we continue to successfully implement our diversification strategy. As always, I want to thank our employees for their dedication, their insight and their hard work. Now, I would like to proceed to the question and answer portion of the call.

[Operator Instructions]. Our first question comes from Howard Brous of Wunderlich Securities.

First of all, Don, Karen and Bryan congratulations on a great quarter and congratulations on the transformation of the company in the last year or so. I have a couple of questions on Brink and SureCheck, let me start with of the $5.7 million SaaS revenues in the quarter, how much was SureCheck how much was Brink?

It is predominantly related to Brink as the SureCheck that we had [indiscernible] from the license and also from the costing that are receiving. And as we transition the strategy for SureCheck we're looking to transition that where we're actually seeing more recurring coming out of the SureCheck.

Yeah, as we talked about, we've transitioned, we've made the intentional decision to move to Software as a Service for SureCheck in the beginning of 2016 so clients are coming or moving to that model. The software maintenance and hosting that we get from SureCheck recycling products.

I didn’t mention how we are investing in a SureCheck next generation hosting platform which makes it, has many more features, is more scalable and I think will be attractive and although there are absolutely no guarantees, we hope to move some of our traditional on-premise software clients over to Software as a Service in SureCheck, it is work in progress and we'll no doubt be reporting on it in future quarters.

So, when I look at Brink you tell us how many bookings you had for the quarter? Can we have the same analysis done on SureCheck so we can see how we've made progress in both instances because the transformation clearly and the margins clearly in software versus hardware, we all know the difference, but is that possible on a going forward basis?

Yes. Howard, this is Karen. We’re going to start providing that information to you all. In the 2018 timeframe, it has moved our platform several. We look at SureCheck little differently than we look at Brink. Brink is we assess by location, by store. With SureCheck, we look at it by device and we sell two primary devices, our SureCheck advantage or the temperature measuring devices and then we sell IoT. There is a different SaaS model in terms of dollars associated with those. So, we’re putting it together, we’re reviewing it and we’re planning on bringing back those metrics to the investment community in ’18. So, you get another two quarters.

So, when we look at getting a Tier 1 customer for Brink of 3,000 units. Is the same measurement for SureCheck? Are there customers out there for SureCheck that would provide us with 1,000, 2,000, 3,000 units like a Tier 1 customer in Brink?

We are working with at least one Tier 1 customer as the QSR industry recognizes the need for food safety and hopefully we’ll have more to report on that in later quarters.

Howard in our public, if you go on the web and you look at our public presentation, we have a slide that shows the number of units and you see a big spike in the 2012-13 period, where one of our big retail clients came on and then some study growth. So right now, we have about 15,000 units, I’m sorry devices that are leveraging SureCheck. The reason that we are fine tuning it is because there is a dollar difference between the types of devices, between our SureCheck advantage and the IoT and also the number of devices that are used on a site. So, one of our customers, a grocery chain, Wegmans has about 10 devices per site, another one of our major retailers has two devices per site. So, we’re focusing on the number of devices used.

And we’ve added regarding the Internet of Things. We’ve added to what we offer our customers and have integrated into our software, the ability to sense temperatures as I mentioned, which where we have another device. So, we are working as to how to in 2018 to better provide you with data, it’s a work-in-progress.

Fair enough. Bryan, I have some questions on the balance sheet income statement. We’ll do this offline at the end of the week? Is that okay with you?

Yes.

[Operator Instructions]. Our next question comes from Greg Hillman [ph] with [indiscernible] Securities.

Just real quick. At the end of Q1, I think you showed in the 5.7 million or recurring annual revenue, I think, I guess it was for Brink. But you show the same figure at the end of Q2. Does that mean, there wasn’t that much growth in progress in Brink in the interim?

The end of Q1, it was 5 million and recurring at the end of Q4, it was 4.5 and now it's 5.7.

5.7 okay. Okay. And then just for SG&A, I believe that your spend on the investigation went down from I don't know $1 million to $600,000 here from Q1 to Q2. What would you expect that to be on a go forward basis excluding any settlement costs?

Correct, so we've changed our phase to where we are in this right in regards to the investigation into more of now the kind of the data collection and the review from the subpoena that we have. So, I expected a direct cost associated has come down, right. We do expect that to moderate and then that's excluding any potential financial fees which we're unaware of at this point in time.

So, would trend down or the level on a go forward basis or the ongoing legal consulting fees, is that what you're saying?

Correct.

Okay. I have a question on SG&A, what percentage is variable and what percentage is fixed, let us say excluding the investigation costs. What would be your answer to that question?

In that, the increase that we talked about year-over-year as we know I quoted out there about a $1.8 million increase versus last 2Q 2016, 50% of that is variable related because of the financial performance that we had in the first half of this year versus last year. So, we're talking basically your cash bonus accrual and commissions related to that.

As well as stock accrual, so this is an area in which we really expect to see -- this is really good for our employees and our management team 2016 was not a good year for cash bonuses and for equity awards. This is starting out in the first half to be a very good year.

Okay. And then just besides a bonus and accrual just get back to question in terms of let's say what percentage of that G&A is fixed do you think on a go forward basis?

I don't have a specific percent number for you right now. I can definitely get back to you on that, but it's predominantly the fixed side of it, the amount that [indiscernible] for the commissions and also the bonus the increase last year there really was no bonus in the beginning of the first half of last year because of the fact that we were actually I think flat to net income for the first half as we quarter out here, but I can get you back to these exact percent, I don’t have it readily available right now.

Okay. And then finally, from the customer standpoint what would be the return on investment or the payback period for SureCheck for adopting SureCheck?

It varies by customer, we're seeing in one of our recent implementations that is that they were showing that between the food safety, food quality, operational efficiency and labor savings that a ROI is happening between three to four months.

A three to four-month payback period, is that what you're saying?

Correct, as they expect the expense of the investment in the hardware and as they move forward in the implementation.

And I am not showing any further questions at this time I'd like to turn the call back over to our hosts.

Okay. Thank you very much for joining us today. So, we’ll be available for additional calls throughout the day. And again, have a good day everyone.