PAR Technology Corporation (PAR) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the PAR Technology FY 2018 Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Chris Byrnes, Vice President of Business and Financial Relations. Please go ahead.

Thank you, Rusty, and good afternoon, everyone. I'd also like to welcome you today to the call for PAR's 2018 third 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. 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; and Bryan Menar, PAR's Chief Financial Officer. All the participants during the call will be into listen only throughout the duration of the conference call today. There will be no Q&A on today's call. As a reminder, this conference is being recorded. I now would like to turn the call over to PAR's President and CEO, Don Foley.

Thank you, Chris. Good afternoon, and thanks to each one of you for joining us on the call today. As usual, I will begin by highlighting our financial results for the third quarter by providing an overview and update of our business. I will then turn the call over to Bryan Menar, our CFO, who will take a closer look at our financials and cash flow. To review the quarter, third quarter revenues were $46.4 million, a decrease of 5.3% compared to the third quarter 2017. On a GAAP basis, we reported a net loss of $16.7 million and loss per share of $1.04 in the third quarter compared to a net loss of $1.5 million and $0.10 loss per share in Q3 2017. Our GAAP loss was impacted by a onetime non-cash $14.9 million valuation allowance recorded to reduce the carrying value of deferred tax assets recorded to our income tax expense for the quarter. Our CFO will provide further color later in the call. On a non-GAAP basis, we reported a net loss of $1 million in the quarter or a loss of $0.06 per share. The results for the quarter reflect the difficult-to-predict purchasing patterns of our traditional hardware and services only Tier 1 customers. This decline was partially offset by higher revenues from our Brink POS SaaS business, our Brink hardware business and our associated Brink service revenues and finally, our Government segment contract revenues. Now to review the third quarter business highlights. Starting with an update on Brink. In the third quarter, we activated 651 new customer sites, a 35% increase from the third quarter last year. Total monthly recurring revenue exiting the month of September was approximately $892,000, a 76% increase from the same period in 2017. Our average annual revenue per unit, ARPU, for Brink now totals $1,926. The way we report annual revenue per unit ARPU, we are including both the SaaS -- the Brink SaaS revenue and the Brink call center revenue. In addition, the annual recurring SaaS revenues, Brink SaaS revenues, at the end of Q3 is now $10.7 million, a similar 76% increase from Q3 2017. At the end of the third quarter, we had approximately 7,000 restaurants using Brink, an increase of 99% compared to the same period last year. New bookings in the third quarter totaled 886 restaurants, representing 151% increase from the same quarter in 2017 and, I might add, a 26% increase from this year's second quarter. We continue to be pleased with the progress of our Brink initiatives and are confident that the investments we are making in our Brink restaurant management solutions and the addition of merchant services revenue will produce solid returns, while strengthening our competitive position. In the quarter, we announced a significant new customer win as Charleys Philly Steaks selected the complete Brink solution, and by complete, I mean our Brink SaaS, our Brink hardware and our Brink services, and we are currently deploying to nearly 600 stores. Our hardware offerings continue to be an important part of our overall integrated software-led solutions strategy. Cloud POS for the multi-unit restaurant segment of the industry is currently in the early adoption phase, and PAR is clearly the leader, reflected by our installed base, coupled with increasing new customers. Again, I'm referring to the multi-unit restaurant segment of the industry. Now turning to PAR's food safety and digital task management solution, SureCheck. SureCheck now currently has three distinct components that can be sold independently or as an integrated solution. So our food safety solution, our digital task management solution and our IoT solution. These solutions are deployed in the everyday operations of restaurants and other food outlets, providing stores with the ability to lower labor cost and to increase efficiencies. Over the last several quarters, our SureCheck focus has been on assisting our sales and account management teams as we continue to successfully validate the new version, that is version 10.0, of our SureCheck SaaS solution. Now to review our Government segment performance. I am again pleased to report a strong quarter as revenues grew 17% in the third quarter versus the third quarter last year. Our intel solutions grew 20.8% in the quarter, while our mission systems business line grew at 12.9% versus the third quarter 2017. Contract margins remained strong at 10.6%, an increase of over 200 basis points from a year ago. PAR Government closed Q3 2018 with a multi-year contract backlog that grew to $135 million, a $25 million increase from the $111 million reported at the end of Q2. Several new significant contracts were awarded in the quarter, resulting in significant increased backlog. At the end of the quarter, our trailing 12-month book-to-bill was 1.4. I'd just like to repeat that number, the trailing 12-month book-to-bill was 1.4. Before turning the call over to Bryan, I would like to reiterate that we continue to be confident in the long-term market opportunities for our cloud-based solutions. We are poised to continue to grow our customer base as the restaurant industry moves toward the broader adoption of cloud-based point of sales and restaurant management systems. It is important to point out that our total revenues associated with our total Brink business on a trailing 12-month basis reached $24.3 million. In Q3 2018, revenues attributed to our total Brink business represented 22% of the Restaurant/Retail revenue total. As we move through the remainder of 2018, our focus remains on meeting the needs of customers and growing our industry leadership position to capitalize on current and future market opportunities within both business segments. Once again, I wanted to thank our employees, our partners and investors for their support as we pursue our mission of building the dominant restaurant technology organization in the food service industry. Now I will turn the call over to our CFO, Bryan Menar, to walk us through our financial details and key performance indicators, including cash flow, for the third quarter of 2018. Bryan?

Thank you, Don, and good afternoon, everyone. I would now like to take this opportunity to provide some additional details surrounding our third quarter results. As Don stated earlier, GAAP net loss was impacted by a onetime 14.9 million valuation allowance to reduce the carrying value of deferred tax assets recorded on our income tax expense for the quarter. FASB ASC 740 indicates that the main negative factor in determining and establishment of the valuation allowance is experiencing cumulative losses in the most recent three years. Such objective evidence limits the ability to consider other subjective evidence, such as projections of future growth. The Company has incurred losses for two of the three past years and is in a loss status during this year for nine months ended September 30, 2018. A significant factor of the losses has been the Company's strategic investment in operating expenses to fund the growth of the Brink business line. The increase in investments had outpaced operating performance from the Company's various lines of businesses. The Company plans to continue to fund the Brink business line growth for the foreseeable future. Based on its evaluation of its deferred tax assets as of September 30, 2018, the Company established a full valuation allowance for the carrying value of these deferred tax assets. The valuation allowance can be reversed if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our projection of future growth. Now on to revenue for the quarter. Product revenue for the quarter was 15.5 million, down 5.3 million, a 25.4% decrease compared to Q3 2017. Our hardware sales in the Restaurant/Retail reporting segment were down versus prior year due to unfavorable domestic and international sales with our traditional Tier 1 customers. Hardware sales related to Brink were 2.5 million, up 0.4 million, a 21% increase versus Q3 2017. Service revenue for the quarter was 13.5 million, up 0.2 million, a 1.2% increase compared to Q3 2017. The increase was primarily due to a 61% increase in SaaS and service support revenue related to Brink, offset by a decrease in hardware support services. The increase in Brink related revenue was driven by an increase in installment base of 87% from September 30, 2017 to September 30, 2018. We exit the quarter with 10.7 million of Brink annual recurring revenue from SaaS contracts compared to 7.5 million as of December 2017. Contract revenue from our Government operating segment was 17.4 million, up 2.5 million, a 16.9% increase compared to Q3 2017. This increase was driven by a $1.6 million increase in our intelligence, surveillance and reconnaissance business line and a $0.9 million increase in our mission systems business line. As Don mentioned, the contract backlog continues to be healthy, noting a total backlog of over $135 million as of September 30, 2018, and a trailing 12-month book-to-bill of 1.4. In regards to margin performance for the quarter, product margin for the quarter was 21.9% compared to 23.4% in Q3 2017. The decrease in product margin is primarily due to increases in reserves for SureCheck product inventory. Service margin for the quarter was 23.9% compared to 23.1% in Q3 2017. The increase in year-over-year margin rates are due to favorable product mix, driven by growth in the SaaS revenue. Government contract margin for the quarter was 11% compared to 8.8% in Q3 2017. The increase in margin is primarily due to increase in revenue related to the ISR product sales. Now to revenue operating expenses. GAAP SG&A was $8 million, down $1.1 million versus Q3 2017. The Company was able to reduce total SG&A cost, while increasing Brink sales and marketing by $0.6 million. Non-GAAP SG&A was $7.2 million, down $1.1 million versus Q3 2017. Non-GAAP SG&A adjustments for Q3 2018 include $0.3 million related to the investigation of conduct in our China and Singapore offices, $0.3 million for equity-based compensation and $0.2 million for severance costs. Research and development expenses were $3 million, up $0.5 million versus Q3 2017, driven by an increase in investments to support current and future growth in the Brink business line. Now to provide information on the Company's cash flow and balance sheet position. For the 9 months ended September 30, 2018, cash used by operations was $2 million, primarily driven by a net operating loss, partially offset by a decrease in net working capital requirements. Cash used in investing activities was $4.9 million for the 9 months ended September 30, 2018, versus cash used of $7.2 million for the 9 months ended September 30, 2017. In the 9 months ended September 30, 2018, we capitalized $3.1 million in costs associated with investments in our Restaurant/Retail segment software platforms, in line with the same period in 2017. Non-software CapEx was $3 million for the 9 months ended September 30, 2018, down $0.9 million versus the same period in 2017. The decrease was primarily related to a decrease in capitalized costs associated with the implementation of our enterprise resource planning system and information systems infrastructure versus the same period in 2017. Cash provided by financing activities was $6.6 million for the 9 months ended September 30, 2018, with $6 million of borrowings from our line of credit and $0.7 million of proceeds from exercised employee stock options. As of September 30, 2018, the inventory balance was $24.3 million, an increase of $2.6 million from December 31, 2017, and a decrease of $2.4 million from June 30, 2018. Inventory turns were 3x for our domestic and international operations. Accounts receivable of $27.7 million decreased $2.9 million or 11% compared to December 31, 2017. The receivable balance was broken down between the Government segment of $8 million and Restaurant/Retail segment of $19.2 million. The Restaurant/Retail segment days sales outstanding decreased from 57 days as of December 2017 to 50 days as of September 2018. Government days sales outstanding increased from 37 days as of December 2017 to 41 days as of September 2018. This concludes our prepared remarks. If you have any questions about our third quarter 2018 results, please contact the Company directly. Chris' contact information can be found on the earnings release issued earlier today. I just want to thank you for your continued interest in PAR.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may now all disconnect.