Good day, ladies and gentlemen, and welcome to the PAR Technology Fiscal Year 2018 First Quarter Financial Conference Call. [Operator Instructions] As a reminder today's conference is being recorded. I would now like to turn the call over to Chris Byrnes, Vice President of Business and Financial Relations. You may begin.

Thank you, Mark, and good afternoon. I'd also like to welcome you today to the call for PAR's 2018 First Quarter Financial Results review. The complete disclosure of our results can be found in our press release issued today at 4:00 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 website at www.partech.com. At this time, I'd like to take care of certain details in regards to the call today. Participants on the call should be aware that we are 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 also 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, 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, and good afternoon to each of you. Before I begin, I'd like to take this opportunity to welcome Savneet Singh, who, on April 20, was appointed to our Board of Directors. Savneet's experience in scaling and investing in software companies, Savneet's deep domain knowledge of the Software as a Service industry will add and has added immediate value to PAR and will complement and add balance to our existing board. Turning to our normal routine. I'll highlight our financial results for the first quarter and then provide an overview of the business. I'll then turn the call over to Bryan, who'll take a closer look at the financials. And as usual, we'll conclude the call by taking your questions. Now to review the first quarter. First quarter revenues were $55.7 million, a decrease of 15.5% compared to the first quarter of last year. This decrease is attributed to the lapping of the large hardware projects for a specific Tier 1 restaurant customer in the first quarter of 2017. These projects were completed in the first half of 2017, and will not be duplicated in 2018. On a GAAP basis, we reported net income of $68,000, 0 earnings per share in the first quarter compared to net income of $1.2 million and earnings of $0.08 per share in Q1 2017. On a non-GAAP basis, we reported net income of 614,000 in the quarter and an earnings per diluted share of $0.04. Bryan will add additional detail later on the call. Now to review this quarter's business highlights. Starting with an update on Brink. In the first quarter, we activated 962 new customer sites, a 147% increase from the first quarter of last year. At the end of the quarter, we had over 5,200 restaurants operating with PAR's Brink…

Thank you, Don, and good afternoon, everyone. Product revenue for the quarter was $26.3 million, down $10.9 million, a 29.2% decrease compared to Q1 2017. The decrease in product revenue was primarily driven by the lapping of major project installations in Q1 2017 for our hardware solutions with our Tier 1 customers in our Restaurant/Retail segment. Q1 2018 results did include a $0.9 million increase in hardware associated with deployments of Brink versus Q1 2017. Service revenue for the quarter was $13.2 million, down $1.1 million, an 8% decrease compared to Q1 2017. The decrease was primarily driven by hardware-related services, down $1.8 million offset by Software as a Service, up $0.7 million. Recurring revenue for the quarter was $9.3 million, up approximately $0.1 million, a 1% increase compared to Q1 2017. Due to software, up $0.7 million, offset by hardware support contracts, down $0.6 million. Momentum continued with our deployments of Brink, noting a 48% increase of Software as a Service compared to prior year. We exited the quarter with $8.5 million of annual recurring revenue from Software as a Service contracts compared to $7.5 million as of December 2017. Contract revenue from our Government business was $16.1 million, up $1.8 million, a 12.7% increase compared to Q1 2017. This increase was driven by a $1.1 million increase in our Intelligence Surveillance and Reconnaissance business line and a $0.7 million increase in our Mission Systems business line. As Don mentioned, the contract backlog continues to be healthy, noting total backlog of over $118 million as of March 31, 2018. In regards to margin performance for the quarter. Product margin for the quarter was 26.2% compared to 25.9% in Q1 2017. With a favorable product mix, partially offset by margin rate compression. Service margin for the quarter was 27.7% compared…

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

First of all, congratulations on the significant increase in bookings. A question for Bryan. When is the Q coming out?

The Q will be out -- expect it early tomorrow before the opening.

I have just a global question, what's the ROE and ROIC of the company?

So the -- it's -- for this quarter, right, it's just at 0.1%, right, after two -- the past two quarters being negative.

And ROIC?

Well, it's basically flat as well to what you have in here.

Have you have broken it down division by division?

We do not have that broken down by segment, as we do not hold our capital in the segments. It's consolidated up.

No, I realize that. But just looking at the capital allocation, where would one look to spend the most amount of focus, certainly not in defense, and that's why I was asking the question?

Sure. Well, correct. So when you look at the contract, right, portion of the business, which is our Government business, right, it's primarily, the investments being made there are directly for the contracts that are in place at that point in time to be able to service those. In regards to all our investments around CapEx and, also, R&D, they're all directly to our Restaurant/Retail segment. Minimal CapEx and Government immaterial and all R&D, as I mentioned, is Restaurant/Retail.

Howard, you're right. I mean, most of the capital is in the restaurant side, I would note that I believe last year that we did invest in a new ERP system for the Government system. It was a Deltek system, which is the, yes.

Could you understand why I'm focusing on capital allocation, because how many goods do you have working on Brink currently? Karen?

On our development teams, we now are close to 100 in that organization. Our services organization that support Brink around 70 to 80 and our sales organization is holding steady around 40 to 50. So most of our capital allocation is with Brink.

[Operator Instructions] Our next question comes from the line of Adam Wyden from ADU Capital. Your line is now open.

Hey, guys, just a couple of questions here. So I think, historically, you guys had kind of targeted 10,000 booked or 10,000 installed by the end of 2018. You said you were at 5,200 installed as of March 31, and you've got another 950 booked. And I think, previously, you'd said your conversion from booked to installed is somewhere between 60 and 90 days. Do you still think it's realistic to have kind of 10,000 booked or installed by the end of this year, what's your confidence level around that?

The way that we're looking at it, Adam, is that, the backlog is growing, the bookings are strong. They're extended out a little longer than the 60 to 90 days with some of these big customers. We're looking toward that goal of 10,000 in bookings for the end of the year. And I think that we'll be pretty close.

So, so what you're saying is the implementation of larger clients takes longer, which makes sense. But you're saying, you feel pretty confident, you'll be either 10,000 booked or 10,000 installed, and whether it's off 60 to 90 days, 10,000 is a good number to kind of work with.

Yes, Adam, we won't be -- and we will not -- we won't be at 10,000 installed by the end of the year.

No, I understand. But you think you could have 10,000 booked by the end of the year?

We'll be within the range of 10,000 -- 9,000 to 10,000.

So just on that. So just kind of doing some back of the envelope math, I mean, you're implementing new modules, payments, which is my follow-up question. But I mean, if I'm working backwards, 10,000 booked is roughly $20 million of SaaS revenue, not including certain installation and support and all the rest. But, I mean, this company hasn't lost a single customer since it started and you're closest competitor is raising money out there, raising money at 30x revenue. So a company that has no logo churn and your competitor -- closest competitor is raising money at 30x revenue. I mean, it's pretty fair to assume that even at -- at 30x revenue on Brink's kind of business at the end of this year, that would be a $600 million valuation, yet your company trades for $200 million. You've got money in real estate, you've got money in your working capital in your hardware business, you've got large value for Government business. What efforts are being made internally to kind of get Brink properly valued inside of PAR? Because, I think, our biggest concern is that the market doesn't have a great appreciation for what the kind of the value of the assets are. And we saw last year, the stock sold off in like 14 to 7 and whatever it was. And I think, my personal concern is that someone is going to get a lot of stock in this company and -- either that and we're going to be pushed in some sort of direction that isn't going to maximize value for shareholders and/or you're not going to have the proper value as it relates to your cost of capital. And so, to the extent that you want more capital to invest in SureCheck or Brink, you're not accessing the capital markets efficiently. So I'd be curious to kind of see what your thoughts are internally as to kind of getting it property valued inside of the SaaS because there is a huge divergence between the public market value and the private market value of these assets.

Yes, as you highlight, we're not a pure play versus the valuation that you brought up there with one of our competitors, okay. What I can say is, we continue to evaluate our position of where we are in regards to access to the capital and how we best use that. And yes, we continue to believe in just the opportunities that we have in Brink and SureCheck and continue to defend -- to find ways to increase the investment that we can make in those areas to actually execute on that. So yes, you're hitting the question, and the same thing following up with what Howard did, right. The importance for us -- the priority for us is how we continue to invest in the Brink and SureCheck to grow those business areas, and how do we continue to find additional forms of capital, and we continue to discuss that internally ourselves.

Yes. I mean, I think if you can segment out the financials, l mean I don't think anyone cares internally if you're losing money at Brink. But I think, to the extent that you can break out SaaS revenue and break out losses and profits, I think, you'd be surprised what people will value the company at. I know you say it's not a pure play, but neither is Toast, for that matter. I mean, they make money selling hardware, they make money on payments. I mean, it's not -- Toast is not a pure play either. So I think the more granular the information you give and the more transparent and kind of communicative you are as to what this product can be, you'd be surprised what the public market will give you. But my second question is, Toast has about a 100% capture rate on payments, it's our understanding. And they make, from our understanding they may close to 50 basis points per revenue dollar. What do you expect your capture rate to be on payments? I mean, if I do back of the envelope math, 10,000 booked at $1.5 million per box or something I mean $15 billion. 50 bps that's an enormous opportunity. And now, clearly, you're not going to get 100%, but I mean, how do you think about kind of the scaling of that payments business and what the margin generation can be?

Yes, I think, we're protecting -- well, first of all, PAR Pay is our transaction processing solution, and you're followed up by merchant services. And so we are expecting that there'll be a pickup in the mid-Tier 2 and below. So we are not really anticipating the Tier 1s necessarily to pick up PAR Pay, but we will be positioning it with them. So I would say that our capture rate would be in the neighborhood of 50%. But, again, we're not --it's just being launched at the end of this quarter. We'll start to see the pickup by customers as we bring it to market. As our margins, we believe that it could add in the neighborhood of -- well, not from margins, from a revenue perspective, $30 to $45 per MRR.

So you guys look at it kind of as a module. So basically -- so $30 to $45, let me get this right, this is important. So $30 to $45 per month per box. So let's just call it $40 to make the math simple. You're saying each box would generate $500 -- $500-plus or minus per year. So if you have 10,000 boxes, right, that's $5 million, and that's a royal -- that's a SaaS dollar. So you're saying that, that's $5 million incrementally EBITDA potential or $5 million -- or $4.5 million in gross margin. You guys don't think about on like a -- as a net basis points type thing. I mean, it's not like, oh, we do -- we're going to do $15 billion at the store, and we're going to do 50 basis points on it, and so that's $75 million. Am I thinking about it the wrong way?

Yes. So I think you're thinking about two different things. So when we talk about launching PAR Pay, it's transaction processing, it's a SaaS-based solution...

It's a module...

It's the module that does the credit card, debit, store value card transactions. The merchant services that we already capture -- we are already capturing and we're working towards augmenting that piece, which is what you're describing right now. So there's two pieces of it.

That's the 50 basis points. Yes. So there's the module, and then we are already doing the merchants' transaction services, I guess, I mean, I doesn't seem to -- I don't know where that's reflected in the financial statements. Or is that still kind of a nascent opportunity that we're building out?

It's been around for a while. We are negotiating better rates. So we will be launching that in the second half of the year.

Okay. Last question...

We'll be increasing it.

Last question. Can you kind of -- I mean, within the retail and hardware -- I mean, between -- I know you combine the hardware in the Brink, but is there any more color you can provide as kind of the mix as -- has hardware improved? I mean, I'm not afraid of burning -- I don't think anyone on this call at this point who owns the stock is afraid of burning cash on Brink if you're getting a positive ROI. And I think I'm interpreting what Howard's comment is. But, I mean, are you seeing meaningful improvement in the hardware EBITDA contribution? Is there any kind of color you can give as it relates to kind of the break outs within Retail Restaurant of Brink losses and hardware gains, just to kind of help people out in their thinking?

Yes. So we also look at, Adam, like in regards to what's our attachment rate on the hardware in our businesses. So we've historically trended at a 70% hardware rate.

No, I'm not -- that's not the question I'm asking. What I'm asking is, you consolidate operating income between Brink and hardware. And so if Brink is losing money, that's fine. I guess, my question is, you consolidate them, so you can't really see what the EBITDA contribution is from hardware at -- restaurant hardware versus Brink SaaS. And so I'm just trying to kind of understand are you making inroads as it relates to kind of hardware EBITDA kind of contribution relative to whatever you're doing at Brink to kind of -- sales and marketing, R&D and all the rest. Do you understand the question, Karen?

Yes.

Correct. So Adam, there is -- it's -- the hardware is profitable, and it's actually helping to support the additional investment that we have in the SG&A and R&D space.

Okay, that's what I'm asking. Exactly.

Yes, exactly. And that's where it's been allocated out, right. So it's taking that margin contribution and allocating it to the investment.

So on a -- I guess, my question is, sequentially, do you feel like the margin generation in hardware is improving such that it's allowing you to invest more resources into Brink? I mean, that's -- directionally, is hardware becoming more profitable? Because that -- I mean you've had headwinds on the revenue side, I'm just kind of curious, are we making better margins on it? Are we cutting costs and kind of getting better margin generation out of it?

So we continue to look, right, at -- so one of the other -- as Don had mentioned, actually, earlier in his comments about the EverServ 600. So we continue to find better ways of becoming more cost efficient, better products for our customers. The EverServ 600 is addressing that. So in general, yes, hardware is, in general, something that has become more and more of a commodity. But as it's part of the solution that we provide and a better way of being more efficient in what we provide to the customer, it's actually a very good opportunity for us. We are not walking away from it, it is margin [Indiscernible].

It's a very important part of our solution, the software-led solution. And when we look at the Brink solution and the contribution of hardware with Brink, it is better than what we see when we have the margins from our Tier 1s, who can compress the margins through pricing negotiation. So when we look at the total store, it's the PAR hardware, all the peripherals that go with it and then all the services that are designed to support the store. And so when you're dealing with the average -- today's average Brink customer, then you do see improved margins. But remember that a lot of over hardware is still coming from our Tier 1s. And so you're not going to be able to pull that apart to see what the positive impact is. But we do expect that, as we grow, the hardware foundation with Brink that we will see our hardware margins continue to improve.

Right. No, yes, I think, to the extent -- I mean, I don't know about the other people on the call, but I can just tell you that it's okay in my mind to invest resources in the cloud software business. I think we're all kind of -- at least I am scratching my head to make sure that the hardware business is moving in the right direction because, I think, as you've seen with other companies, hardware has kind of been the black eye. Blackberry licensed their name to Huawei and they do software and support. And so I think a lot of people are probably closely watching and saying, look, how do we know that we're getting a good return on our investment, I think Howard mentioned, on the Government, but also just the hardware. I mean, if PAR has a great brand, and you guys can license the brand to someone else and be the software solution and support provider and not have to worry about when hardware changes, that may be a good solution, too. So anything you can give to kind of show people the breakout of the segments I think would be helpful. But that's it from me. I appreciate it.

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

I'd like to reemphasize Karen's point, our hardware margins when we bring software along are much better than when we refer to our core business, which was, basically, we just supplied hardware and no software to a number of very large Tier 1 customers. And it really makes a difference when you supply the software or the hardware and the services. And we've got to do more than just add modules for the PAR Pay. We really have to work on getting our share on the transaction basis. And it's something we've discussed with our new board member, Savneet Singh, and hopefully, you'll be hearing more about it later. Thank you for your insight and your advice. We do listen. And thank you for your time.

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.