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Executives

Christopher Byrnes – Vice President-Business and Financial Relations

Ronald J. Casciano – President, Chief Executive Officer and Director

Steven M. Malone – Controller and Chief Accounting Officer

Analysts

Samuel Bergman – Bayberry Asset Management

Lee Matheson – Broadview Capital Management

PAR Technology Corporation (PAR) Q1 2013 Earnings Call May 1, 2013 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the Quarter One 2013 Par Technology Earnings Conference Call. My name is Patrick and I will be your facilitator for today. At this time, all participants are in listen-only mode. Later we will conduct the 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 Mr. Christopher Byrnes, Vice President of Business and Financial Relations. Please proceed Sir.

Christopher Byrnes

Thank you, Patrick and good afternoon to everyone. I’d like to welcome everyone today for the call for our first quarter 2013 financial results review. I’d like to take this opportunity right now, if I can to take care of certain bookkeeping issues in regards to the call today.

We will be recording the call this afternoon 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 few use the recording. Joining me on the call today is PAR’s newly appointed President and CEO, Ron Casciano; and Steve Malone, the company’s Controller and Chief Accounting Officer.

I’d like to now tell you that this conference call includes forward-looking statements that reflect managements 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 maybe relied upon in subject to the safe harbor statement included in our earnings release this afternoon.

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 and good afternoon everyone and thank you for joining us today. I’d like to welcome you to our call. During this call, I will discuss the organizational changes that have recently taken place. I will review our results for the first quarter, and lastly I will make some closing remarks about the outlook for the company.

As I begin with my remarks, I want to take this opportunity to express my gratitude to have been asked by the Board of Directors to lead Par Technology at this time. My experience with the company has provided me with valuable insight as to its operations and will help guide my decisions that will positively impact the future of Par.

I'm confident in the underlying strength of Par, our technology innovations and the employees that produce and deliver that innovation to our customers through our worldwide infrastructure. These core strengths are what will sustain our company as we strive for excellence in delivering the financial performance that our shareholders deserve.

In addition, I am very pleased to have added two new members to my leadership team, Bob Jerabeck, as Chief Operating Officer; and Karen Sammon, as President of our restaurant technology business. Bob and Karen have outstanding skills and experience that are valuable to our company and to our customers. They are highly respected in their field and I'm confident their expertise can help us further expand our high-quality products and services and improve our operational performance.

Now look at the first-quarter results. The company reported first quarter revenues of $66.7 million, a 20% increase over the $55.6 million reported in the first quarter in 2012. Net income from continuing operations on a non-GAAP basis was $178,000 versus $1 million reported a year ago. Diluted earnings per share from continuing operations were $0.01, on a non-GAAP basis, versus $0.07 for the first quarter of 2012.

Overall revenues from our hospitality segment for the first-quarter was 60% of total revenues and were reported at $39.9 million, that’s a 12.3% increase from the same period last year.

Highlights in the quarter include a strong market acceptance of our EverServ family of products demonstrated by our ongoing deployment of the EverServ 7700 platform to C.K corporate restaurants and network of approximately 900 stores. We began that deployment in the fourth quarter and we will complete the initiative later this year.

In the quarter we also realized stronger revenues with Yum! Brands and McDonald’s compared to the prior years first quarter. We continue to affirm our leadership position as technology provider within the Subway account. And in addition, our worldwide channel revenues grew by 37% compared to last year’s first quarter.

I’m also pleased to report that revenues in our international markets grew 20% as we continued to make steady progress. This is attributable to our continued success with McDonald’s and Yum! Brands as well as a growing list of channel partners in the leverage of our international infrastructure.

Let me now update you on a SureCheck opportunities. Last year we completed the initial Walmart deployment of SureCheck and we are up and running successfully in their domestic network of nearly 5000 stores.

In this quarter we have also completed the deployment to Walmarts, Sam’s Club stores. We are pleased to have Walmart as a five star reference account and we currently have several encouraging opportunities regarding food, safety, technology and task manager. These opportunities include Big Box Retailers, Grocery chains and other companies in the food production chain.

SureCheck is not only an operational benefit to the businesses, but it’s fast becoming a requirement with the ongoing evolution of attention that food safety is receiving in the media as a result of government regulation.

On the hotel side, our hospitality segment progressed continues with our ATRIO cloud-based solution for the hotel. We released the ATL which includes multi-tenancy capability.

Cloud computing has been embraced in hospitality, specifically in hotels and we continue to receive encouraging market response to ATRIO, with particular focus around the user experience and purpose built for the cloud design.

In addition, guest line is more controlled over the hotel experience which means the growing use of mobile technologies in the month ahead. ATRIO adjusts these issues. We signed on additional ATRIO customers in this past quarter and are pursuing many other deals as well.

In Q1 we also signed new customers with our host and SpaSoft products that included a well-known game reserve in South Africa and several five star hotel, resort properties in the U.S. and China.

Our government segment had another solid quarter with revenue growing 33% compared to Q1 of last year, as we continue to navigate adeptly through federal budgets issues. Our business continues to be driven by contracts to support the US Army, Navy and Air Force with intelligence, surveillance and reconnaissance, technologies and services.

In regards to the federal sequestration, we are starting to see our federal government customers becoming more cautious with contract awards and spending and we expect this behavior to continue until these funding uncertainties are resolved. Our government business ended the quarter with a very healthy backlog of over $150 million.

I would now like to turn the call over to Steve Malone, our Controller and Chief Accounting Officer for further details of our financial performance. Steve?

Steven M. Malone

Thanks Ron and good afternoon everyone. Product revenues in the quarter were $23.9 million, an increase of 19% compared to the Q1 2012. This growth was due to domestic increases to CKE Restaurants, worldwide sales to Yum! Bands, and international sales to McDonald's.

Overall international product revenues grew 26% and our worldwide channel business grew 37%, as Ron previously indicated. Service revenue in the quarter was $16 million, a 4.2% increase from the prior year resulting from an increase in hardware deployments in the quarter. Contract revenues increased 33% to $26.7 million as the company continues to benefit from its ISR integration contracts.

Product margins for the quarter were 31.1% versus 45.6% in last year's first quarter. Last year's results included a significant amount of software revenue associated with our SureCheck deployment to Walmart.

Product margins have increased 390 basis points, from 27.2% on a sequential quarter basis. Service margins for the quarter were 28% down from the 31.3% reported last year due to an unfavorable mix of service offerings. Contract margins were 4.7% in the quarter, down from the 5.3% reported last year and also lower than our historical range of 5% to 6%. This lower margin is due to certain investments being made in our ISR technology.

SG&A for the quarter was $9.4 million on a non-GAAP basis, down from the $10.1 million reported in last year's first quarter. This decrease was due to reduced sales and marketing expenses associated with the company's hospitality businesses as it continues to execute upon expense management initiative.

R&D expenses were $4 million on a non-GAAP basis, an increase from the $3.5 million in Q1 2012. The company continued to invest in product innovation knowing that most of this increase is associated with the hospitality businesses. Moving on to the balance sheet, the company has over $14 million in cash and cash equivalents and working capital $43.3 million. DSO's were 50 days and 45 days for our hospitality and government businesses respectively. Depreciation and amortization was $550,000 for the quarter. Capital expenditures were $845,000 the majority of which related to capitalized software.

That concludes my remarks, and I give the call back to Ron.

Ronald J. Casciano

Thanks Steve. In summary, we are encouraged by the number of opportunities we have across our business segments, while recognize we have a lot to accomplish. Our new product launches and additional DOD contracts where drivers in our revenue growth for the quarter. We remain focused on future opportunities on investing in the right places and maintaining financial discipline.

As we routinely do, we will continue to evaluate actions to adjust our cost structure with an emphasis on optimization and efficiency improvement.

That concludes my remarks and we now like to open the call up for questions.

Question-and-Answer Session

Operator

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

Samuel Bergman – Bayberry Asset Management

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

Ronald J. Casciano

Good Sam, good afternoon to you.

Samuel Bergman – Bayberry Asset Management

A few questions, I have, can you give me an idea or color, the ATRIO products from the first of this year until now, what’s been the progress that you’ve made in terms of software upgrades, client increases, our [funnel]increases versus the prior year. I know you did mention a couple of wins on the ATRIO side, but without mentioning names they had to be real smart?

Ronald J. Casciano

Yes. Sam, the progress we’ve made in the ATRIO products by far and away the most significant accomplish was the completion and release of the multi-tenancy feature within the product. And as you know with software we're always continuing to enhance it, to add features and functions, but multi-tenancy was the most significant. We did win some additional accounts in the quarter. They are small at this time, but our pipeline continues to build and the interest remains very high.

Samuel Bergman – Bayberry Asset Management

Can you still talk to us about a launch partner which hasn't happened yet? Do you expect it to happen in any particular quarter? Can you give us a little color on that?

Ronald J. Casciano

Sam, we’re talking to several good size partners, that all would be candidates for a launch partner. We certainly expect it to happen, but I'm not going to predict which quarter.

Samuel Bergman – Bayberry Asset Management

But you still feel it will happen this year?

Ronald J. Casciano

Yes.

Samuel Bergman – Bayberry Asset Management

And in SureCheck do you have a much larger funnel than when you started the first year as of today?

Ronald J. Casciano

Most probably Sam, things are moving along well with the SureCheck funnel and we certainly expect to have some new customer announcements later this year as well.

Samuel Bergman – Bayberry Asset Management

So I feel that bottom line is tampered for the last couple of years without having much software content in your sales. And I know you are spending more money – you spent half a million dollars more this quarter in R&D. It doesn't seem that the hardware, even though it’s EverServ, I don’t know if the pricing is wrong or if it doesn’t have enough accounts, but (inaudible) is ours and revenue on the POS side, I’m just wondering at what point can we see profitability?

Ronald J. Casciano

Sam, there is lot of questions there. Certainly we are very focused on improving our margins and as you mentioned Sam, as the software content increases which we expect it will throughout the course of the year, you’ll see improvements in our margins. The other thing we need to do is, we need to continue to expand our customer base. We’ve made some good progress with that this year and last year. I’ll give you a couple of examples, last year our channel organization grew by 15% and so far this year in the first quarter grew by 37%. We need to do more of that get more customers increase the volume and that will also help the margin dollars as well.

Samuel Bergman – Bayberry Asset Management

One last question Ron, is there any of your channel partners this quarter pick up any of your software components?

Ronald J. Casciano

Yes, we’ve been selling software through our channel for quite sometime now.

Samuel Bergman – Bayberry Asset Management

Do you have a software dollar amount for us at all?

Ronald J. Casciano

No, Sam. We are not disclosing that at this time.

Samuel Bergman – Bayberry Asset Management

Thank you.

Ronald J. Casciano

Thank you, Sam.

Operator

(Operator Instructions) Your next question comes from the line of Lee Matheson with Broadview Capital. Please proceed.

Lee Matheson – Broadview Capital Management

Hi guys.

Ronald J. Casciano

Hello Lee.

Lee Matheson – Broadview Capital Management

Well, congratulations Ron.

Ronald J. Casciano

Thank you very much.

Lee Matheson – Broadview Capital Management

I guess can you just give us sort of high level what your – how your priorities for running PAR differ from your predecessor?

Ronald J. Casciano

Well, certainly I can tell you what my priorities are going to be. As it's no secret my priority is to improve the bottom line performance and we’ve already talked about some of the ways we are focused on doing that, we have to start to close some of the software pipeline that we have talked about with all our products, and we're focused on doing that. I also mentioned in my previous answer, a little while ago, how we have to diversify our customer base, our main customers McDonald's and Yum!, we've been subjected in the past to some cyclical and volatile results since rollouts have been completed and have started. I think we are making some good progress there. McDonald's as a percentage of our revenue for this quarter is been tending downward. As everybody knows we completed the large roll out within a couple years ago, but we were still able to grow our overall hospitality revenue so that's a sign that our diversification and broadening of our customer base is starting to happen. And last we have to continue to be diligent about controlling expense and continuing our expense management.

Lee Matheson – Broadview Capital Management.

And where is your head and where is the Board's head around strategic moves including M&A activity?

Ronald J. Casciano

M&A activity is talked about all the time Lee and we are still discussing it. There is nothing to report at this time, but certainly there is something that’s on our radar screen all the time.

Lee Matheson – Broadview Capital Management

And is there a specific – I mean, would it be along the line that are trying to get bigger in hospitality software, and then the primary focus.

Ronald J. Casciano

I would say, there is a primary focus although not necessarily our only focus.

Lee Matheson – Broadview Capital Management

Well good luck and look forward to seeing the margin improvement.

Ronald J. Casciano

Thanks, Lee.

Operator

(Operator Instructions). We have the follow up question from the line of Sam Bergman with Bayberry Asset Management. Please proceed.

Samuel Bergman – Bayberry Asset Management

Mainly this question is for Steve. Can you tell me your payable sites, was it, there is some dollars prepaid. As I know there was a drop of $3 million probably $4million in the cash balance.

Steven M. Malone

Yes Sam that was really the timing of payments related to hardware deployments without inventory build on that in anticipation for the deployments, how they came due in the first quarter?

Samuel Bergman – Bayberry Asset Management

And Ron, can you give me an idea of where you expect R&D for the rest of the year?

Ronald J. Casciano

We think R&D will be –trending up a little bit over the course of the year as we continue to invest in our key products, Sam.

Samuel Bergman – Bayberry Asset Management

And are there other areas that you can take out some cost, that that would mitigate that or not?

Ronald J. Casciano

Certainly we are looking at all areas, and we always do as far as cost reductions, nothing specific to mention at this time, Sam.

Samuel Bergman – Bayberry Asset Management

And in terms of data sets or new accounts in the Quick Serve, is there anything you can talk about?

Ronald J. Casciano

We are in test with a couple of different accounts and not able to announce any at this time, but certainly we expect to as the year unfolds.

Samuel Bergman – Bayberry Asset Management

Are they new accounts or they are existing accountings, Ron?

Ronald J. Casciano

They are both, Sam.

Samuel Bergman – Bayberry Asset Management

Both.

Ronald J. Casciano

Resting accounts we are looking at an upgrade and as well as some new accounts.

Samuel Bergman – Bayberry Asset Management

And when is the next McDonald’s upgrade take place?

Ronald J. Casciano

Well there is nothing been announced, they just completed the domestic one not there long ago. I think our opportunity with McDonald’s is in the international arena. We are an improved worldwide provider of fewer systems than McDonald’s and there is lot of countries that we are not in right yet. And with McDonald’s and we’ve some real good opportunities. With that be able to broaden our worldwide reach with McDonald’s. Chris you want to add something?

Christopher Byrnes

Okay. Just kind of give you a metric on that. McDonald’s recently said they expect to open 1,600 stores in 2013. 1,300 of which will be outside the U.S., so I think there is an opportunity. Although domestically obviously coming off the large requirement, we are satisfied in 2010 and 2011. There is a large opportunity for us I think with international new store opening.

Samuel Bergman – Bayberry Asset Management

And on the Subway account can you give me an idea of what percentage is done at this point?

Ronald J. Casciano

Subway has continued to be strong every quarter and the run rate seems to be picking up. There is still lot more business to be done with Subway, Sam.

Samuel Bergman – Bayberry Asset Management

Do you have a dollar amount or percentage of sales for the Subway and…

Ronald J. Casciano

It’s still less than 10%, but it’s been growing.

Samuel Bergman – Bayberry Asset Management

Okay. Thank you.

Ronald J. Casciano

Thank you, Sam.

Operator

There are no remaining audio questions in queue at this time. I would now like to turn the call back over to Mr. Casciano for any closing remarks.

Ronald J. Casciano

Well, thank you all for attending our call and certainly if there is any follow-up questions, Chris and myself will be available. So thank you very much. Have a good afternoon.

Operator

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

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