PAR Technology Corporation
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Operator:]

Good day ladies and gentlemen and welcome to the Q2 2013 PAR Technology Earnings Conference Call. My name is Jason and I will be your operator for today. 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 would now like to turn the conference over to your host for today Mr. Chris Byrnes, Vice President of Business and Financial Relations. Please proceed.

[Chris Byrnes:]

Thank you, Jason and good afternoon to everyone. I’d like to welcome everyone to the call for PAR’s second quarter 2013 financial results review. At this time I’d like to take this opportunity if I can to take care of certain bookkeeping issues in regards to the call today. Participants on the call should be aware that we are recording the call this morning and it will be available for playback. Also we are broadcasting the conference call via the worldwide web as well. 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. At this time I’d like to tell you 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. And the information in this conference call related to projections or other forward-looking statements may be relied upon in subject to the safe harbor statement included in our earnings release this morning 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. Ron?

[Ron Casciano:]

Thanks Chris and good afternoon everyone. I’d also like to welcome you to our second quarter 2013 conference call. During this call, I will review our results for the quarter. Steve Malone will give the financial details and then we will open the call for Q&A. I’ll begin by summarizing our results from continuing operations. The company reported second quarter revenues of $59.5 million a 4% decrease over the $62.1 million reported in the second quarter in 2012. Net income from continuing operations in the quarter improved to $248,000 from the net loss of $511,000 reported a year ago. Diluted earnings per share from continuing operations were $0.02 versus a loss per share of $0.03 for the second quarter of 2012. Overall our Hospitality Technology segment reported revenues of $37.6 million for Q2 2013 representing 62% of PAR’s total revenue. Hospitality revenues grew 4% from the same period in 2012 driving the increase were continued solution deployments within Yum! brands due to the KFC corporate rollout as well as success with their Pizza Hut concept. Also contributing to the revenue growth with an increasing sales through our channel network which has been a strategic focus of the company’s operations. Worldwide McDonald’s revenue continues to increase mainly due to higher sales within their international restaurants. In the second quarter CKE continued their deployment of our premier EverServ 7700 hardware platform to their corporate restaurants and we expect this program to continue in the second half of the year. Our international markets continue to make meaningful progress as revenues in this area grew 31.5%. The company has a strategic focus to leverage our international infrastructure to help drive market expansion. As a result, growth in our international markets was due to increased business with McDonald’s and Yum! brands as well as stronger revenues attributed to our growing list of channel partners. In the second quarter we had some very encouraging news as we were selected by McDonald’s UK to be the approved vendor for their network of restaurants and began deploying in-store systems in the quarter. The UK is in the top 10 regions within McDonald’s and this is a significant win for PAR. Building upon the success we are using this as momentum as we continue our pursuit of other international regions. We were also recently named the sole provider to Yum! brand’s KFC stores in the UK as well. With respect to our SureCheck product we continue to have productive discussions with several national retailers and grocery chains and are beginning to see a pipeline of interested prospects in our traditional customer base of Quick Serve restaurants. The completely integrated SureCheck solution that includes temperature monitoring, secure and consistent data capture along with detailed task management has become a very compelling way to meet and exceed the requirements of food safety regulations prevents less spoilage of perishables and as a solid management tool for store operations. Now, taking a look at the hotel side of our Hospitality segment. In the second quarter we signed two five star customers with our Heritage host property management software product in the domestic U.S. We also signed nine new customer properties for PAR’s standalone SpaSoft software package. These were located in the U.S., Central Asia and the Bahamas. And as for ATRIO our cloud-based property management product suit we signed additional customers in the quarter and our pipeline of new business is growing. Technology has never been more important in hotels and for hotel management companies but persistent economic headwinds force many customer segments to remain conservative with their investments. However the ATRIO value proposition reduces hotel property IT expenses and overhead it is reliable, affordable option for hotel organizations we want to focus on operations and revenue not technology. We continue to add feature and functionality to the ATRIO solution and have recently introduced ATRIO POS a recent high-tech show the premier hotel technology show in the industry. And in the third quarter we will be installing a beta test of this module at an Embassy Suites Hotel in Washington DC. During the quarter we partnered with a mobile application technology company to enhance the mobile and (LED) platform of all our hotel technology products and principally ATRIO. We have also begun development of a cloud version of our standalone SpaSoft product and have solidified an ongoing relationship with our largest spa software customer. We are encouraged by the progress we are making and this past quarter PAR was awarded Network Product Guide’s Gold and Bronze Distinctions for ATRIO at the 8th Annual Hot Companies and Best Products Awards Ceremony. We were awarded gold for Innovative Company of the year and bronze for Best New Information Technology Software Company of the year for ATRIO. The cloud remains the platform of choice for new hospitality technology applications and the ATRIO software platform represents PAR’s strategic growth engine for our hotel business. Now reviewing our Government segment. In the quarter we reported revenues of $21.9 million a decline of 15.4% from Q2 last year. This decline in revenue was primarily attributable to the timing of requirements and task orders associated with our Eagle Intel-X ISR integration contract. Although revenue declined, our profits in this segment increased from last year due to some favorable contract modifications. Business continues to be driven across all three military branches with the DoD and – with the DoD and IT Operational Services and within ISR Technology Space. In addition this quarter we announced a $9.5 million subcontract award with BAE Systems involving critical functions throughout the Pacific theater with a primarily, primary objective to support daily operations and strategic military installations in Hawaii. We continue to monitor the impact of sequestration on this segment as a length and procurement cycle is making the timing of new contract awards somewhat difficult to predict. We are confident that this is just a timing issue and as there continues to be funding programs focused upon ISR. I would now like to turn the call over Steve Malone our Chief Accounting Officer for further details on our financial performance. Steve?

[Steve Malone:]

Thanks Ron and good morning everyone. Product revenues in the quarter were $22.3 million an increase of 11% compared to the second quarter of 2012. This growth was primarily due to domestic increases to Yum! brands and CKE Restaurants as well as increases in international sales to McDonald’s and Yum! knowing that total international product revenue grew 48% in the quarter on a year-over-year basis. Furthermore we’ve experienced improved performance in our worldwide channel which has increased 8% compared to the second quarter of 2012. Service revenues declined 4% year-over-year to $15.3 million for the quarter partially driven by installation services for certain contracts that did not recur in 2013. Contract revenues decreased 15.4% to $21.9 million which was the result of the timing of services rendered on our ISR integration contracts. This decrease was partially offset by increases in technical services contracts with the Department of Defense. We ended the quarter with a backlog of $114 million facilitated with our government business. Product margins for the quarter were 33.3% versus 30.3% in the second quarter of last year. Improved efficiency through the execution of profit initiative as well as higher product revenue contributed to the 300 basis point increase. Service margins for the quarter were 28.8% an improvement from the 28.4% reported in 2012. The contract margins were 7.4% in the quarter up from the 5.2% reported last year and also higher than our historical range of 5% to 6%. This higher margin is due to benefits realized on certain contracts which were modified during the quarter. SG&A was $9.5 million up slightly from the $9.3 million reported in the second quarter of 2012 the slight increase was mostly attributable to investments made within the company’s international hospitality operations. R&D expenses were $3.7 million, an increase from the $3.1 million from 2012. We continue to invest in next generation hardware and software products for our hospitality businesses. Our company’s financial condition remains strong with over $43 million in working capital and minimal debt. Days sales outstanding for Hospitality and Government businesses were 50 days and 45 days respectively. Depreciation and amortization was $706,000 for the quarter, capital expenditures were $292,000 and capitalized software was $961,000. This concludes my formal remarks and I’d like to turn it back to Ron for his closing comments.

[Ron Casciano:]

Thanks Steve. Our efforts to make PAR stronger and better positioned are well underway as we have healthy market positions in all of the segments we operate in and have long term growth opportunities. PAR is leading that technologies along with excellent service offerings and all of our businesses are developing annuity style predictable revenues which will be profitable. We recognize there is further more to do to improve our operations efficiencies and margin enhancement and that is something we have not lost focus on. I’m confident we have a strong foundation on which to build upon. That ends my formal remarks. And I now like to open up the call for questions. Thank you.

[Operator:]

(Operator Instructions). And your first question comes from the line of Mr. (Mathew Paul). Please proceed.

[Unidentified Analyst:]

Good morning guys. Thanks for taking my question. I was wondering if you could go back and comment a little further on the increase to the margin regarding your contract business.

[Ron Casciano:]

Sure Mathew. Usually our margins in our contract business average 5% to 6% over the long-term. In this particular quarter we had some better performance we had a – some favorable contract marts that do happen from time to time those are the good thing and we had that occur in the second quarter and that was driving the higher margins in the quarter.

[Unidentified Analyst:]

Okay. And in relevance to (inaudible) you’re saying you expect you said that issue is causing the timing to be thrown off a little bit. Do we expect just a push back to these contracts further maybe the second half 2013 or further into 2014?

[Ron Casciano:]

I think we’re in sell position with our existing contracts. I think the funding will continue at a good rate on our ISR work that we’re doing. There may be some delays in some new starts and new awards but that’s all up in the future.

[Unidentified Analyst:]

Okay. That’s it from me. Thank you.

[Ron Casciano:]

Thank you very much.

[Operator:]

And your next question comes from the line of Sam Bergman from Bayberry Asset Management. Please proceed.

[Sam Bergman:]

Hi, good morning Ron, Chris and Steve. How are you?

[Ron Casciano:]

Good morning Sam.

[Unidentified Company Speaker:]

Good morning.

[Sam Bergman:]

So a couple of questions, can you first of all talk about the remaining shares of ORBCOMM that you have and when do you expect to monetize that?

[Ron Casciano:]

Sam, we do not have any shares of ORBCOMM stock, we disposed them last year.

[Sam Bergman:]

So, they’re all completely gone?

[Ron Casciano:]

Yes.

[Sam Bergman:]

Okay. If you look at the recent high cut show, can you give us in the awards that were won can you give us your basic feeling of when the ATRIO software suite of products is going to finally make a difference in the PAR Technology bond line.

[Ron Casciano:]

Sure Sam. We had a very good show as evidenced by those awards in addition interest remains high, we’re attracting more leads every quarter. As I said last quarter we expect to sign a large partner sometime later this year that’s still our expectation. As you know the ATRIO products going to be sold as a SaaS model and that will take some time to build up a base of recurring revenue and therefore profits on that product will not be immediate but we’re focused on first things first and that is our initial large launch customer and our efforts are focused there.

[Sam Bergman:]

If you put aside the launch customer, what’s the opportunity for medium size hotels to buy this product and as that been happening on a one or what’s the (inaudible).

[Ron Casciano:]

Sure. We’ve been signing smaller properties every quarter and there is a growing pipeline for those as well. So certainly if a smaller or a medium size opportunity comes along we’ll be ready for that win as well. And so we are focused not only on the large customer but also on any smaller opportunities that we might have. So there is like two parallel initiatives going on.

[Sam Bergman:]

Do you have, do you feel you have the right people in place to execute on these ATRIO wins?

[Ron Casciano:]

Absolutely Sam, we have a very solid organization, they know the hotel business inside and out we’ve been in it for many, many years, we’re ready to go.

[Sam Bergman:]

So, what would you say is the basic problem with Paul, initially saying that we’re going to get some ATRIO contracts back a year ago and nothing is (inaudible) other than small contracts?

[Ron Casciano:]

Well, like any software development effort and this was certainly a very large development effort. There is delays and we’ve spoken about some of those delays in the past. We’re continuing to build out the product you’re never done with software and I think previous expectations were a little aggressive and I think we have a good level set now and also the economic conditions that were apparent in the last few years have lengthened the sales cycle that’s a reason as well. But we’re getting through all that and we hope by the end of the year we’ll have a nice announcement.

[Sam Bergman:]

In terms of R&D, where do you expect the R&D to be in the next two quarters, are you expect it to be higher than where it is right now, or do you expect it to level off?

[Ron Casciano:]

I think it’s going to level off in the second half of the year.

[Sam Bergman:]

Okay. Thank you very much.

[Ron Casciano:]

Thank you, Sam.

[Operator:]

(Operator Instructions). There are no questions at this time. I would like to turn the conference back over to Mr. Ron Casciano.

[Ron Casciano:]

Well, thank you operator. And thank you everyone for participating in our second quarter conference call. Have a good day.

[Operator:]

That concludes today’s conference. Thank you for your participation. You may now disconnect. You all have a great day.