PAR Technology Corporation
Q3 2013 Earnings Call Transcript

Published: 30 Oct 2013

[Operator:]

Good day, ladies and gentlemen and welcome to the Third Quarter 2013 PAR Technology Earnings Conference Call. My name is Celia and I’ll 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. Christopher Byrnes, Vice President for Business and Financial Relations. Please proceed, sir.

[Christopher R. Byrnes:]

Thank you, Celia and good morning everyone. I’d like to welcome everyone today to the call for PAR’s third quarter 2013 financial results review. At this time, I’d like to take this opportunity if I can to take care of certain 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. The information on 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?

[Ronald J. Casciano:]

Thanks, Chris. good morning, everyone, and thank you for joining us today. I’d also like to welcome you to our third quarter 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 up the call for Q&A. I’ll begin by summarizing our results from continuing operations. The company reported second quarter revenues of $55.5 million, a 9% decrease over the $61.1 million reported in the third quarter in 2012. Net income from continuing operations in the quarter was $445,000, as compared to $1.3 million reported a year ago. Diluted earnings per share from continuing operations was $0.03 versus $0.09 for the third quarter of 2012. And looking at our results let me first address our Hospitality business. Overall, this segment reported revenues of $37.4 million for the quarter, representing 67% of PAR’s total revenue. Hospitality revenues declined 4% from the same period in 2012. This was due to the domestic sales decline, primarily due to lower sales to Yum! Brands, as we completed large requirement with KFC and Taco Bell earlier this year. Partially offsetting this decrease was continued growth in our international restaurant technology business, because of that, international revenues increased 35% over last year and now represent approximately 30% of our total hospitality revenue. This growth is being driven by our global brand customers, as they accelerate their new store expansion overseas. Our international channel network also contributed to this growth. SUBWAY and CKE continued to be stronger counterpart in our ever served 7,700 platform is performing well and being well received by our customers. During the third quarter, we released the latest version of our EverServ PixelPoint software suite. This version includes several new features and enhancements, which provide greater flexibility and functionality desired by restaurant operators to simplify deployment, reduce cost and improve customer service. This version of our PixelPoint software is available either by perpetual license or as software-as-a-service option supporting the company’s strategy of growing its recurring revenue base. Also in the quarter, I’m pleased to report encouraging news regarding PAR’s EverServ SureCheck solution. We began the deployment of SureCheck to a large and prestigious regional grocery chain. These new customers select in our solution over various competitive products to satisfy their food safety and task management requirements. In addition to this deployment, we have an expanding sales pipeline with a growing number of field trial locations within restaurant and retail markets. This activity validates our position that SureCheck provides customers with a fully integrated food safety and task management solution providing a tool for its users to meet and exceed their food safety regulatory requirements and to mitigate the risk associated with spoilage. Now looking at the hotel side of our Hospitality segment. We continue to see healthy demand in our Heritage software solutions host in SpaSoft, as we say in new customer properties in the third quarter, including Ritz-Carlton in China along with additional customers in the U.S., Mexico, South America and the Middle East. As for ATRIO, our cloud-based property management product suite, this past quarter, we awarded two Stevie awards for tech innovation of the year and for the most tech innovative company of the year from the American Business Awards. We continue to be committed to our ATRIO strategy and the value proposition, our cloud-based technologies delivers to the hotel industry. Although we have seen improved hotel industry performance, over the last few quarters, our customers and prospects are being conservative with their current operational investments decisions. However, we believe, the continuing recovery will encourage the adoption of new cloud technology platforms, as hotel operators seek the operational efficiencies and total cost of ownership reductions that ATRIO will provide. Now to review our government segment. In the quarter, we reported revenues of $18.2 million, a decline of 17.4% from Q3 last year. This decline in revenue is primarily attributable to the timing of program requirements and task orders, associated with our Eagle Intel-X Intelligence, Surveillance & Reconnaissance or ISR integration contract. Although, revenue decline in the quarter, profits in this segment increased from last year due to favorable contract modification and cost controls on our fixed price contracts. Activity and funding within ISR technology remain strong, as evidenced by our recently announced $85 million contract award with the U.S. army. This contract award was the largest in PAR’s history and I congratulate our government team for a job well done. We continue to monitor the impact of sequestration on this segment and the associated delays in the procurement cycle, which is making the timing of new contract awards, somewhat difficult to predict. I would now like to turn the call over to Steve Malone for further details of our financial performance. Steve?

[Steven M. Malone:]

Thanks, Ron and good morning everyone. Product revenues in the quarter were $22.7 million, an increase of 2% compared to the third quarter of 2012. This growth was primarily due to increases in worldwide sales to McDonald’s, more specifically related to programs within China as well as sales growth within company’s worldwide channel. These increases were partially offset by a reduction in domestic sales to Yum! Brands due to the timing of customer requirements. Service revenues declined 12% compared to the third quarter of 2012 to $14.7 million, partially driven by installation services for certain contracts that did not recur in 2013. Of this total service revenue, approximately 69% is associated with recurring revenue on service contracts. This represents 27% of our total hospitality revenue. Contract revenues decreased $3.8 million to $18.2 million for the quarter, a decrease mostly driven by the timing of task orders on our ISR integration contracts. The nature of our ISR integration work is to provide a rapid response to the evolving requirements of the U.S. Department of Defense. Therefore we expect to see short-term volatility within this aspect of our government business. However, our technical services contracts provide a more predicable revenue and profit flow, which help in mitigating this ISR volatility. Our contract backlog was a $110.6 million at the end of the quarter. This backlog number does not include the impact of the recently awarded $85 million U.S. Army contract. Product margins for the quarter were 31.7% versus 34.3% in the third quarter of 2012. During the quarter, the company experienced an unfavorable product mix of terminals versus peripherals, which contributed to this decline. Service margin for the quarter was 24.9%, a decrease from the 29.6% reported last year. The decline in margin is associated with lower service revenue in the quarter combined with an unfavorable mix of service offerings. Contract margin was 8.4% in the quarter, up from 6.4% reported last year. This improvement is due to additional margin realized on certain contracts, which were modified during the year. Also our contract margins continue to benefit from the execution of project cost control and corporate expense reduction initiatives. SG&A was $8.6 million down from $9.4 million reported in 2012. The company continues to manage its expenses noting cost reductions implemented within its domestic Hospitality businesses. R&D expense was $3.7 million, an increase from the $3.3 million reported last year. The company continues to invest in its next generation software products noting this increase is primarily associated with its hotel, resort and spa software applications. PAR’s financial condition remains strong with over $44.2 million in working capital, a current ratio of over 2 to 1 and minimal debt. Days sales outstanding for our Hospitality and Government businesses were 54 days and 53 days respectively. The company generated $2.4 million of cash flow from continuing operations during the quarter. Depreciation and amortization was $749,000, capital expenditures and capitalized software were $285,000 and $1.6 million respectively. This concludes my formal remarks and I’d like to turn it back to Ron for his closing comments.

[Ron Casciano:]

Thanks, Steve. In summary, we continue to transition to our new technology product offerings, SureCheck and ATRIO. I believe in and I’m committed to our strategy to drive growth in our technology businesses for the long-term. It will take some time for these new technology solutions to translate into meaningful revenue, but I’m confident we are on the right track. We have more work to do and with our new management team in place, we are striving to position our company to achieve improved operating results. That concludes our remarks, and at this point, I’d like to open up the call for some Q&A. Thank you.

[Operator:]

(Operator Instructions) The first question comes from the line of Sam Bergman, Bayberry Asset Management. Please proceed.

[Sam Bergman:]

Good morning, Ron, Steve and Chris. How are you?

[Ronald J. Casciano:]

Good morning, Sam.

[Sam Bergman:]

I guess we’re all happy with the [indiscernible] right now except the New Yorkers.

[Ronald J. Casciano:]

Yes, we are.

[Sam Bergman:]

A couple of questions, first of all, in the Government sector, were there any slippage of orders that went into the fourth quarter in that division?

[Ronald J. Casciano:]

No, Sam. There wasn’t too much. We are seeing some minimal impact from the sequestrations. There have been some contracts that have been reduced in size, but if you take out the volatility of the large Intel-X contract, the remaining portion of our government business did grow in the quarter.

[Sam Bergman:]

So the backlog with the contract just won is about $190 million?

[Ronald J. Casciano:]

Well, Sam, the backlog, we’ll count the backlog on them as we receive the large orders under that contract. So it starts out really at zero until we get the first order and we’ll go from there.

[Sam Bergman:]

What does the pipeline look like right now in that division versus last year?

[Ronald J. Casciano:]

Well, obviously, with this large order, it’s still looking very strong.

[Sam Bergman:]

And if we go to the restaurant side or Quick Serve, are there any new either beta sites or actual implementations that have started with hardware and software or just hardware that you can talk about that has not been released?

[Ronald J. Casciano:]

Yes, there are several of those in play that include our full offering of restaurant solutions. So things are progressing and just not at a point of an announcement at this point.

[Sam Bergman:]

We’re looking for an announcement in 60 days, 90 days or less than that?

[Ronald J. Casciano:]

Sam, I really don’t want to predict, but that specific of timing of those events, but hopefully, in the near-term as opposed to the long-term.

[Sam Bergman:]

And are we talking software and hardware or just hardware?

[Ronald J. Casciano:]

Both.

[Sam Bergman:]

And on SureCheck, can you talk about the existing pipeline right now and how it’s better than it was? Can you talk about any beta sites or any – or can you dig down any deeper on that?

[Ronald J. Casciano:]

Well, as I said in our remarks, we are seeing an increase in interest. We have increased the number of beta sites as you say from the last time we spoke in both restaurants and retail. So we’re very pleased with the announcement of this large retail grocery chain and we hope that it’s a good first step to continue the momentum of that product.

[Sam Bergman:]

What’s the competitive landscape on that?

[Ronald J. Casciano:]

Well, there’s various competitors. I think, obviously, we have the edge over them. This recently announced win was very competitive. It was over 10 other companies that were bidding on it and we were the clear winner. So we’re very pleased with that and it’s a good acknowledgment of the type of quality product that we have.

[Christopher R. Byrnes:]

Sam, I think…

[Ronald J. Casciano:]

Chris, just to hop in, just – I think the real competitive distinction is that the kind of integration between the temperature monitoring and capture and the task management really kind of puts us as a standalone solution and very competitive against when we line up with the other vendors.

[Sam Bergman:]

So was that contract won because of technology or was it technology and price?

[Ronald J. Casciano:]

It was technology, Sam.

[Sam Bergman:]

It was technology, very good. Last question on ATRIO and a mentioning on the last conference call about Embassy Suites beta site or/potential rollout on the POS product from ATRIO, can you update us on that?

[Ronald J. Casciano:]

The beta site is going well and we are pleased with the progress, Sam. So stay tuned for more news.

[Sam Bergman:]

Very good. Thank you.

[Ronald J. Casciano:]

Thank you, Sam.

[Operator:]

The next question comes from the line of Matthew Paul, Sidoti & Co. Please proceed.

[Matthew Paul:]

Hi, guys. Thanks for taking my question. I think Sam knocked a couple of them out, but I wanted to follow-up with ATRIO. Besides the awards you guys have noted, can you give any feedback from the initial sites you rolled the product outfield?

[Ronald J. Casciano:]

Matthew, we are continuing to see increased interest in the product. We have rolled out some additional sites, although, it is still slow at this time, and each quarter, coming up. We hope to – and are confident that the momentum will continue to build. So we are making progress, although it is slow at this time, but we are confident that over the next several quarters, we will see an accelerated pace and acceptance of that product.

[Matthew Paul:]

Okay. Thank you. And what does the implementation process look like on a timeframe basis?

[Ronald J. Casciano:]

ATRIO is very short implementation. Once the deal is signed and it’s very easy and the product was designed in part with that in mind.

[Matthew Paul:]

Okay, guys. Thank you.

[Ronald J. Casciano:]

Thank you.

[Operator:]

(Operator Instructions) The next question comes from the line of Keith Housum, Northcoast Research. Please proceed.

[Keith M. Housum:]

Thanks, gentlemen for taking my call. A question for you regarding RFPs in the market, I guess, as you’re looking at the market as where it’s today compared to last year, are you seeing like an increased desire by restaurants to drop for RFPs with their POS systems or is the market still pretty static?

[Ronald J. Casciano:]

No, we are seeing increased interest. As technology advances, there is more need for restaurants to upgrade their older systems. So we are seeing a pickup in that area and we hope to participate in that activity in a positive way.

[Keith M. Housum:]

Got it. Is the expiration of Windows XP, is that a driving factor at all in some of the discussions you guys are having now with the restaurants in terms of updating the systems?

[Ronald J. Casciano:]

Yes, it is.

[Keith M. Housum:]

Got it. And then, you guys have obviously been very concentrated with the large contracts being – generating a lot of your hardware and most of your hardware business. I guess, is there an effort to work more towards the independent restaurants and I guess get away from the large contracts, were you guys – obviously got to the large ups and downs that those things can have on the – on results?

[Ronald J. Casciano:]

Keith, our strategy for sometime now is to grow our channel network, which targets the smaller operators and we are seeing some steady business with that. We’ve had some nice growth each quarter in our total worldwide channel business and we’re continuing to invest in that area and that is part of our strategy to grow with the smaller guys.

[Keith M. Housum:]

Got you. Do you guys disclose how much your channel business is as a percentage of your [indiscernible] business?

[Ronald J. Casciano:]

No, we don’t, Keith.

[Keith M. Housum:]

Okay. All right. Thank you.

[Ronald J. Casciano:]

Thank you.

[Operator:]

The next question comes from the line of Sam Bergman, Bayberry Asset Management. Please proceed.

[Sam Bergman:]

Can you talk about the rollout if it started all with McDonald's in the United Kingdom and internationally what are the opportunities that you can talk about?

[Ronald J. Casciano:]

The initial order for McDonald's in the United Kingdom, and so somewhat of that order happened in the second quarter, Sam. I think for the third quarter and balance of this year, their requirements are pretty well satisfied. We do expect to see additional requirements as we go into 2014. As far as McDonald's in other countries, we are now one of the few approved worldwide suppliers, and as part of the our strategy to expand with that customer, we will be targeting new areas of business with McDonald's as we go on to test in different countries and we are in test with a few as we speak so.

[Sam Bergman:]

And the ScanSource sells your POS System, does it also include your software system or not?

[Ronald J. Casciano:]

Yes, it does, but a small amount, but that is a product that they offer – product of ours that they do offer for sale.

[Sam Bergman:]

Okay. Thank you.

[Ronald J. Casciano:]

Thank you, Sam.

[Operator:]

At this time, there are no further questions in queue.

[Ronald J. Casciano:]

Well, thank you for joining us and everyone have a good day. Good bye.

[Operator:]

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.