PAR Technology Corporation (PAR) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the PAR Technology Corporation 2017 Fourth Quarter and Year End Financial Results. 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 turn the call over to Mr. Chris Byrnes, Vice President of Business and Financial Relations. Sir, you may begin.

Thank you, Victor, and good afternoon, everyone. I'd like to take this opportunity to welcome you today to the call for PAR's 2017 fourth quarter and year-end financial results review. The complete disclosure of our results can be found in our press release issued today at 4 p.m., 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 Web site at www.partech.com. At this time, I’d like to take care of certain issues in regards to the call today. Participants on the call should be aware that we’re recording the call this afternoon 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. 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 afternoon to each of you. I will begin today by highlighting our financial results for the fourth quarter, providing an overview of our business, and by discussing our strategy for 2018. I will then turn the call over to our CFO, Bryan, who will take a closer look at the numbers. We will conclude the call as usual by taking your questions. Fourth quarter revenues were $55.5 million, a decrease of 7.8% compared to the fourth quarter of last year. This decrease is attributed to the large hardware projects for a specific tier one restaurant customer in the fourth quarter 2016. These projects were completed in the first half of 2017. I am pleased to report that sequentially revenues rose $6.6 million, a 13.5% increase from the third quarter primarily due to the higher adoption of our EverServ terminals by both our tier one and Brink customers. On a GAAP basis, we recorded a net loss of $5.3 million and $0.33 loss per share in the fourth quarter compared to net income of $1.9 million and $0.12 earnings per share in Q4 2016. Our GAAP results included a total of $5.2 million of non-operating charges dominated by a non-cash deferred tax asset adjustment of $4.5 million associated with the recently passed Tax Cuts and Jobs Act. Bryan will add additional details later on the call. On a non-GAAP basis, we reported a net loss of $59,000 in the quarter and an earnings per share of zero. We remain focused on execution while balancing expense management and simultaneously making important and necessary investments in our strategic initiatives, especially or software solutions. Brink is the cornerstone of the strategy and by far our most important initiative. In the fourth quarter, we added 522 new Brink customers and for 2017 a total of 1922 new stores were activated. We ended the year with approximately 4,200 clients, an increase of 70% -- let me repeat that, an increase of 70% over 2016. New Brink bookings in the fourth quarter totaled 1467 restaurants as comp with only 426 restaurants in Q3. I will repeat that. New bookings in the fourth quarter were 1467 restaurants. We started 2018 with a backlog of 1317 stores. As a software led solutions company, it is important to note that our Brink business includes significant attachment of hardware and service revenues. In 2017, our Brink hardware attachment was approximately 70%. Brink's recurring software revenue model with pull through hardware as a service in our strategy to annuitize our business creating stickiness with our customers. Now turning to SureCheck. Monetizing SureCheck, PAR's food safety and digital task management solution remains a strategic initiative. In 2017, market adoption was slower than we had anticipated and several new competitors entered the market space. While we remain confident in the value of our SureCheck platform, we have reduced our investment in SureCheck to concentrate our resources on Brink opportunities. That said, SureCheck has two large anchor customers that contribute significant recurring revenues through annual hosting and software maintenance fees. Other customers in grocery, casinos, restaurants subscribe to our software platform on a monthly software as a service basis. As well as our committed to our hardware devices. In the fourth quarter we announced that United Nations turning stone Resort Casino, a premier four season destination resort, had deployed PAR's SureCheck food safety and task management system. SureCheck is being implemented in their onsite restaurants, catering kitchens, with plans to expand into other commercial properties owned by the United Nation. Now to review our government segment performance. I am pleased to report that we have now left our deliberate transition away from our low margin program management office, primarily pass through revenue by focusing on our intel solutions in our mission systems business line. This quarter's government contract revenues grew 6% when compared to the same period last year even with a 52% decline in PMO associated revenues. Our intel solution revenues grew by 79% in the quarter and was a key driver of our contract margin expansion. Our margin was 12.8% for the quarter, a 55% increase from a year ago. We do not expect to maintain this margin level in 2018, we should return to the more normal range of 8% to 10%. Our government closed 2017 with a multiyear contract backlog of over $111 million. We are confident that our government segment will continue to drive success as they continue to secure additional value added contracts. Before turning the call over to Bryan for a closer look at the numbers, I would like to recap some general observations and reiterate our priorities for the coming year. Having been CEO now for 11 months, it is clear that our greatest opportunity for increasing shareholder value is through investment in our future. Ensuring that our strategic initiatives in cloud based software solution continue to have the necessary resources to succeed. These investments include increasing R&D spend for our market leading cloud PoS restaurant platform, building the customer success organization to ensure that our valued customers are maximizing our solutions for their operation and by investing in our internal IT systems infrastructure to enable process improvement and cost efficient automation of workflows. Along with these necessary investments, we are taking steps required for our transition with enhanced focus on execution. In the fourth quarter, as part of that transition strategy, we announced a reduction in our domestic and international workforce. The estimated annual operating savings of $3.5 million will be reinvested in the initiatives previously described. Our company is in a solid position to deliver upon our strategy of accelerated customer adoption and in growing our monthly recurring revenue rates with our software offerings. I want to reiterate to important leading indicators. First, PAR's government segment returned to revenue growth in the quarter while continuing to increase profits. Second -- I will repeat this number, our Brink bookings increased from 426 in Q3, to over 1400 in Q4. Secondly, 70% of those bookings in the fourth quarter were tied to major accounts captured in 2017. This is evidence of the success of our Brink's strategy to invest in the development of our solution for multi-unit operators. In closing, I would like to thank the men and women of PAR for their commitment, their hard work and their sacrifices during this period of our company's transition. Our people are our most important asset and it is because of them and only them, and the opportunities that they have created that I am bullish about PAR's future. I will now like to ask Bryan to give some details on the financials.

Thank you, Don, and good afternoon everyone. Product revenue for the quarter was $24.5 million, down $6.5 million, a 20.8% decrease compared to Q4 2016. During the quarter, the decrease in product revenue was primarily driven by the lapping of major project inflations in Q4 2016 for our hardware solutions with our tier one customers and our restaurant retail segment. Additionally, the hardware associated with deployment of Brink PoS, decreased approximately 800,000 versus Q4 2016 as we [lapped] [ph] an active installation period with Five Guys. Service revenue for the quarter was $13.8 million, up $0.8 million, a 6.4% increase compared to Q4 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 $0.6 million, a 7.1% increase compared to Q4 2016 due to an increase in software of $1 million, offset by hardware support contracts down $0.4 million. Momentum continued with our deployments of Brink and SureCheck, noting a 90% increase of software as a service compared to prior year. We exited the quarter with approximately $7.5 million of annual recurring revenue from software as a service contracts. Contract revenue from our government business was $17.2 million, up $1 million, a 5.9% increase compared to Q4 2016. This increase was driven by a $3.5 million increase in our intelligence surveillance and reconnaissance, ISR business line, partially offset by a $2.4 million decrease in our PMO business line, as we wound down a large multiyear contract earlier in 2017. Contract backlog continues to be healthy as Don noted, total backlog of over $111 million, as of December 31, 2017. In regards to margin performance for the quarter, product margins for the quarter was 26.5% compared to 25.9% in Q4 2016 as the product mix and the respective margin rates for the underlying products was relatively consistent year-over-year. Service margin for the quarter was 28.3% compared to 23.8% in Q4 2016. The favorable improvement in margin rates year-over-year are driven by product mix shifting with the growth of Brink SaaS outpacing the other service offerings. Government contract margin for the quarter was 12.8% compared to 8.9% in Q4 2016. The favorable variance is a result of a shift, as Don noted, in our revenue based from the PMO to higher value added product offering of ISR and mission systems. In addition to improved margin rates in both ISR and mission systems. Now to review operating expenses. GAAP SG&A was $10.6 million, up $2.4 million versus Q4 2016. The increase was primarily due to investment in personnel to support the current and future growth in our Brink and SureCheck products, in addition to corporate investments to support the improvements and compliance in financial controls. Non-GAAP SG&A was $9.1 million, up $2.5 million versus Q4 2016. Non-GAAP SG&A adjustments for Q4 2017 included $0.7 million related to the China Singapore investigation, $0.5 million for severance, and $0.3 million for equity based compensation. Research and development expenses were $4.2 million, up $1 million versus Q4 2016, primarily driven by investment to support the current and future growth in Brink. Now to provide information on the company's cash flow and balance sheet position. For the year ended December 31, 2017, cash provided by operations was $0.3 million and included $6.9 million of net amortization of deferred revenue primarily driven by customer deposits received in Q4 2016 related to 2017 deployments. Cash to use in investing activities was $8.9 million for the 12 months ended December 31, 2017, versus cash used of $7.1 million for the 12 months ended December 31, 2016. In the 12 months ended December 31, 2017, our capital expenditures of $5.1 million were primarily related to the implementation of our enterprise resource planning system, information systems infrastructure and capital improvements made to our owned and leased properties. We capitalized $3.8 million in costs associated with investments in our restaurant retail segment software platforms. Cash provided by financing activities was $6.1 million for the 12 months ended December 31, 2017, primarily driven by receipt of the final installment related to the 2015 sale of the hotel business unit, proceeds from exercised employee stock options and borrowings under our line of credit. As of December 31, 2017, the inventory balance was $21.7 million, a decrease of $4.5 million for the 12 months ended December 31, 2017. Inventory turns were 4x for the quarter. Accounts receivable decreased $0.6 million or 2% compared to December 31, 2016, restaurant retail DSO increased to 57 days as of December 2017 versus 55 days as of December 2016. Government DSO was 37 days versus 44 days as of December 2016. This concludes by formal remarks and we would now like to open the call for your questions.

[Operator Instructions] Our first question comes from the line of Joe Vidich from Manalapan Oracle. You may begin.

Congratulations on the great progress with Brink. My first question has to do with SureCheck and just if you could perhaps elaborate a little bit on whether you are going to just -- what you are going to do with that business, whether you are looking to sell it or just keep it in sort of an as is mode.

Well, we are looking at all options. Obviously, we want to monetize it for our shareholders. We do have our two anchor customers provide a lot of revenue. We are still investing and I said we were reducing the investments, does not mean we are abandoning the investment. It has potential. We are seeing new competitors which is in one sense a bad time but in other sense a good time. As the market matures, there is still some real opportunity for us and we are going to use 2018 to judge what that opportunity is.

Okay. I guess, just diving a little deeper into it, my assumption is that you have got limited resources and you have got this mass of opportunity with Brink and it seems like what you are saying is that you are really -- you want to take advantage of that and in the mean time is that sort of how you look at it?

I think you nailed it.

Okay. That’s great. The other question I had is just with regard -- this quarter you guys had the professional service charges of $2.7 million, and I was wondering if you had any idea if those charges are going to start to diminish going forward or if you are able to talk a little bit more about what the status of that investigation is.

Sure. What we saw during last year, we saw the phasing of those charges during last year diminish or be reduced as each quarter progressed. Obviously, we are in farther along stages within that to be able to predict exactly where we are going to come out in regards to the go forward phasing. We are not predicting -- we are kind of predicting to be consistent what we have seen play out '17 into '18 as we get to later stages and hopefully get through this within this first half of the year. But we are not having definitive deadlines on that.

Do you think that those type of charges will continue to that level or would you expect some sort of moderation?

As I said, where we are in the process is in the latter stages, so there was heavier activity earlier last year as we did a lot of the work and using outside advisors and doing the internal investigation that we are doing for our self reporting purposes. We have gone through that phase and now we are in the latter phases. So the activity has diminished and that’s what we project as we finish out through this year.

Thank you. [Operator Instructions] And our next question comes from the line of Walter Schenker from Maz Partners. You may begin.

A couple of questions on Brink. At what point will there be more information as to which laws would change your doing business with -- if I understood the release for the fourth quarter, about two-thirds of the new orders came from laws change, is that correct?

Karen, you want to take that one?

Sure, hi, Walter. So, yes, the large number of bookings in the fourth quarter were largely related to three of our major customers. We have mentioned them in the past in the call, however, we are looking to do a formal release with each of these customers. One customer in particular is in the process of doing a rollout over the next seven months and they contributed about 70% of those bookings for the fourth quarter.

Okay. So there will be, as you continue to install through these customers further information identifying, I actually only remember one being identified. Being identified as to how they maybe?

That’s correct.

Okay. And since I have got you, historically in talking about Brink, the company has not forecast but has set targets, multiyear targets going out a number of years for what they would hope or expect, whatever the right term is, the potential for Brink installations to be. Have you changed materially those expectations?

I don’t think that -- let me handle. We grew 70% the number of new stores last year. That is something to be really proud of. Our bookings that are outstanding that have yet to be activated is at our largest number. We are really proud of the growth. I believe, Bryan, you mentioned our software as a service revenue increased almost 90%.

Correct, and AR increasing 70%

So we are very proud of those numbers and we are going to stick with giving you numbers like that as we go forward in the future.

Thank you. [Operator Instructions] Our next question comes from the line of Edward Wedbush from Wedbush Securities. You may begin.

Yes. Are you able to give any economic forecasts for the current quarter and for the current annual 2018 year?

I will repeat the policy of our board. We do not give guidance.

All right. Second question I have, is I got acquainted with the founder of your company, and I have momentarily forgotten his name. Can you bring me any update as to how he stands?

You mean Dr. John W. Sammon Jr.?

Yes.

How he stands -- help me just to what you are looking for?

Well, I am looking for his health condition and any other information about him?

He is well. He remains active on the board. He is engaged with the business and the health and growth of the business and the investments in our software as we work through our transformation. So thank you for asking. He is doing well.

I got it.

And I can tell you two things, Ed, that we have a very active board, who is Dr. Sammon, who is Dr. Dr. James Stoffel, who is Cynthia Russo, includes Doug Rauch. They are all extremely active. They all give me and our whole management team here, extraordinarily useful guidance and advise and support. And I think as a management team, including all of our board members. And Dr. John Sammon, who was my [indiscernible] advisor many years ago, I have great respect for him. It's a very active board, including Dr. John.

Well, Dr. Sammon and I got involved long time ago, a couple of decades ago perhaps, when the net worth of PAR was below $50 million. It was I think approximately $38 million and our firm and myself, we bought stock from the PAR treasury to get it up to $50 million so the company would not be suspended from listing on the New York Exchange. And that’s where the relationship between him and ourselves got started, just as an information.

Well, thank you. Thank you very much.

And I am showing no further questions at this time. I would now like to turn the call back to Mr. Don Foley for closing remarks.

Just one more time I really thank you for your time and as we go through this transition I will repeat, I have great faith in our people and I am bullish on the future. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.