PAR Technology's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.14.14 | About: PAR Technology (PAR)

PAR Technology Corporation (NYSE:PAR)

Q4 2013 Results Earnings Conference Call

March 14, 2014 10:00 AM ET

Executives

Chris Byrnes - VP for Business & Financial Relations

Ron Casciano - President and CEO

Steve Malone - VP and Controller

Analysts

Matthew Paul - Sidoti

Sam Bergman - Bayberry Asset Management

Lee Matheson - Broadview

Operator

Very good day today ladies and gentlemen and welcome to the PAR Technology 2013 Fourth Quarter and End Year Financial Results Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. (Operator Instructions).

I would now like to turn the call over to the host today, Chris Byrnes. Over to you.

Chris Byrnes

Thank you Gary and good morning everyone. I'd like to take this opportunity to welcome you to the call for PAR's fourth quarter and year end 2013 financial results review. At this time, I’d like to also 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, Vice President and Controller.

At this time, I’d like to tell you that this conference call includes forward-looking statements that reflects 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?

Ron Casciano

Thanks, Chris. Good morning everyone and thank you for joining us today. I’d also like to welcome you to our fourth quarter and 2013 results conference call. During this call, I will review our fourth quarter results and full year results. Steve Malone will give the financial details and I will give concluding remarks and then open the call up for Q&A.

The company reported fourth quarter revenue of $59.7 million, a 10.2% decrease over the $66.4 million reported in the fourth quarter 2012. Net income from continuing operations in the quarter was $245,000 versus a net loss of $3.6 million reported a year ago. Earnings per diluted share from continuing operations were $0.02 versus a loss of $0.24 per share reported in the same period in 2012.

On a non-GAAP basis the company’s net income from continuing operations for the fourth quarter of 2012 was $1.2 million or $0.08 per diluted. These non-GAAP results exclude certain charges totaling $7.6 million primarily related to restructuring of the company’s hospitality product portfolio as well as specific legal costs.

For the full year 2013 the company reported $241.4 million of revenue, a 1.5% decrease over the $245.2 million reported in fiscal 2012. Net income from continuing operations was $569,000 or $0.04 per diluted share versus a net loss of $1.8 million or $0.12 per share reported in 2012.

On a non-GAAP basis, net income from continuing operations for 2013 was $1.1 million or $0.07 per diluted share compared to non-GAAP net income from continuing operations of $3 million or $0.20 per diluted share for fiscal year 2012.

Full year 2013 non-GAAP results exclude certain separation and legal expenses incurred in the first quarter as summarized within our earnings release. In reviewing our fourth quarter results I would like to begin with our hospitality business. Overall revenue in this business was $37.5 million a decline of 18% when compared to the prior year. This revenue decrease is due to timing of system deployment, primarily associated with two of our major global brands McDonald’s and Yum!.

Hospitality revenue represented 63% of the total company revenues. During the quarter we continued to build traction and grow our SureCheck pipeline, as announced in the fourth quarter PAR was selected by Wegmans Food Markets a premier network of grocery stores based in the Northeast to deploy our solution within their 83 stores.

Our cloud-based SureCheck solution provide Wegmans with food safety and check list management by monitoring and recording millions of temperature measurements performed within their stores each year. Our solution which includes hardware, software and data hosting will maximize information accuracy and operational efficiency for Wegmans.

We will continue to leverage our well known reference accounts to advance new opportunities and to grow our SureCheck pipeline which includes Big Box Retailers, large domestic grocery chains and restaurants all seeking the competitive advantage regarding food safety and task management efficiency.

We are please with the progression of our sales pipeline and noting that we have multiple opportunities current and pilot evaluations stage. With respect to the hotel market of our hospitality segment progress continues with our ATRIO cloud-based solution for hotels. Although challenged by the longer than anticipated sales cycle and slow early adoption, we continue to be encouraged with the performance of our current deployments. During the quarter we expanded our installed base and continue to gain momentum with ATRIO. The ATRIO products suite represents PAR strategic growth engine for our hotel technology business.

In the fourth quarter, we also signed several new customer properties with our host property management and POS software products. These new customers included five star properties in the U.S. and other countries such as Taiwan, Turkey, China, Italy and India and included brands such as the Mandarin Oriental, the Ritz Carlton and Millennia.

Now let’s review our government segment. We again hit a strong fourth quarter and concluded a record fiscal year 2013 for our government business. This segment continues to be driven by contracts to support the U.S. Army and U.S. Airforce within their intelligence, surveillance and reconnaissance or ISR programs. We continue to experience consistent funding for ISR programs and see growth opportunities in this particular area as evidenced by the record $85 million ISR contract with the U.S. Army. Additionally in the quarter we signed a new $5 million contract associated with a U.S. Navy facility operation in Puerto Rico.

Even with our strong performance in this segment, we continue to be cautious and proactive as marketing conditions dictate lengthened procurement cycles due to the softness in the federal budgets surrounding the DoD and in turn make the timing of new contract awards difficult to predict.

I would now like to turn the call over to Steve Malone for his detailed remarks on the financials. Steve?

Steve Malone

Thanks Ron and good morning everyone. Product revenue in the quarter was $22 million a decrease of 21% compared to the fourth quarter of 2012, this decrease is due to the timing of system deployments primarily associated with McDonald’s and Yum!.

For the year, successes with major deployments to CKE domestically, McDonald’s in China as well as consistent growth with our worldwide channel partners are accomplishments we executed well in 2013. In total international revenue grew 17% and channel revenue grew 9% year-over-year.

Service revenue declined 14% compared to the fourth quarter of 2012 to $15.5 million partially driven by installation services for certain contracts that did not recur in 2013. Although revenue is down for the quarter and for the year, we continue to focus on building our recurring revenue, knowing that 72% of our total fiscal year 2013 service revenue is recurring. We expect our recurring revenue to trend favorably as we deploy our software solutions within hospitality market.

Contract revenue was $22.2 million during the fourth quarter, an increase of 8% or $1.6 million when compared to 2012. This increase was driven primarily by the timing of task orders on our ISR integration contract. As we've discussed in the past, the nature of our ISR integration work is to provide a rapid response to the evolving requirements of the U.S. Department of Defense, which may create some level of short-term volatility within our government business.

Our contract backlog, as of December 31st was $95.6 million. It is important to note that this backlog includes less than $1 million associated with the $85 million U.S. Army contract we announced in late 2013. Backlog on that contract is created and task orders are issued against the contract.

Product margin for the quarter was 29.5% versus a non-GAAP 27.2% in the fourth quarter of 2012 which excluded accelerated amortization of capitalized software. Product margins are improved due to favorable product mix of terminals versus peripherals, as well as through improved operating cost control.

Service margin for the quarter was 34.4%, an increase from the 32% reported in Q4 of 2012. This improvement is primarily due to efficiencies with our third-party service partners.

Contract margin was 9.1% in the quarter, up slightly from the 8.9% reported last year. This improvement is due to additional margin realized on certain contracts that were modified during the year. Partially offsetting this increase were investments in business development initiatives incurred in the quarter.

SG&A was $9.6 million, flat with the fourth quarter of 2012 non-GAAP expense which excluded certain legal and severance costs. R&D expense was $4 million, an increase of 200,000 over last year. The company continued to invest in its innovated next generation software products noting this increase is primarily associated with its hotel, resort and spa software applications.

Now shifting to certain balance sheet and cash flow items; as of the year-end 2013, working capital was approximately $42 million with the current ratio of over 2:1. Total debt was $1.1 million. Day sales outstanding for our hospitality and government businesses were 51 days each during Q4. The company generated $1.8 million of cash flow from continuing operations during the quarter. Depreciation and amortization were $825,000; capital expenditures and cap software were $374,000 and $1.4 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. To summarize, we remain confident and committed to our strategies. Nonetheless, we’re navigating certain challenges in 2014 for both our business segments. In the Government segment, the armed forces are transitioning to a peace time spending level, which is putting pressure on the industry as a whole including Par's Government business. In the Hospitality segment, our software products continue to show tremendous market opportunity with both the ATRIO and SureCheck platforms gaining momentum during 2013.

This momentum has encouraged us to accelerate our 2014 investment in these innovative next generation platforms. However, due to their SaaS business model, it will take time to see the impact on earnings. We believe these actions will increase the probability for long-term success in 2015 and beyond.

In closing, I want to take this opportunity to address changes that will be made to our Board of Directors. After serving for nearly 30 years, Bill Ahn notified the company of his intention to retire from the Board effective at the 2014 Annual Shareholders’ Meeting. In addition to Bill’s retirement, long time directors, Jaime Simms and Kevin Jost informed the company they will not stand for reelection at this year’s Shareholder Meeting citing personal reasons.

PAR has benefited from their council, service and commitment over many years. And on behalf of our company, I personally thank each of them for their valuable contribution to PAR. We are presently conducting a national search to identify replacement candidates for our Board and we’ll recruit individuals for their requisite experience and knowledge to benefit our company.

With that, I will open up the call for Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen your Q&A session will now begin. (Operator Instructions) We have our first audio question coming from the line of Matthew Paul of Sidoti, over to you Matthew.

Matthew Paul - Sidoti

Hi guys, good morning. Thanks for taking my call. With regards to the two product launches in the year maybe we could talk about the SureCheck product. Could you address is there any more detail that you could provide -- the market, your sales pipeline maybe expansion within the Wal-Mart franchise maybe international expansion and anything else?

Ron Casciano

Sure, Matt. Regarding Wal-Mart our opportunities in the future to expand to their stores in North America and overseas. As I said in my remarks, our pipeline is growing in other retail concepts and other grocery chains and some restaurants. Because of the success with Wal-Mart and (inaudible), we have advance some of those opportunities to field test and hope to see some additional success in 2014 with some more wins.

Matthew Paul - Sidoti

Okay. In regard to ATRIO, could you address the current [temperature] within the hotel industry that you are looking at? And maybe if current operating performance is maybe delaying what the anticipated sales cycle might be for the product?

Steve Malone

I think the hotel industry; Matt is very excited about transitioning to this cloud technology that hasn’t changed. There is a little bit of a longer sales cycle as you know; many brands are being cautious. Again as I said in my remarks, we are seeing some increasing momentum is slow, but we have signed additional customers in the fourth quarter and the interest is growing in the product and it’s going to be a slow steady process, but we are confident that overtime adoption will be very good for this product.

Matthew Paul - Sidoti

Okay. Thank you, guys.

Ron Casciano

Thanks, Matt.

Operator

The next question is from the line of Sam Bergman.

Sam Bergman - Bayberry Asset Management

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

Ron Casciano

Good morning.

Steve Malone

Good morning, Sam.

Sam Bergman - Bayberry Asset Management

In the [Spa] segment, can you talk about or tell us who your largest customer is?

Steve Malone

Sure. Our largest customer in the Spa segment is the Marriott Company. We're deployed in virtually all their spas.

Sam Bergman - Bayberry Asset Management

Are you currently working with them in R&D to develop the next cloud upgrade or the next cloud product?

Steve Malone

Yes, we are Sam. We’ve been discussing that with them and we plan to move forward with our next generation product with them.

Sam Bergman - Bayberry Asset Management

Do you have any idea when that’s going to be released?

Steve Malone

Sam, we're going to go slow with this. We hope to possibly have a data test sometime late this year and we’ll go from there.

Sam Bergman - Bayberry Asset Management

Okay. In Quick Serve, I know it’s hard to release customer wins at times, but I can tell -- but I want to find out if you can tell us if there has been one or more substantial customers that have ordered hardware and software in the either in the fourth quarter or currently in the first quarter that has not been announced?

Steve Malone

Sam, we’ve had some smaller wins in the fourth quarter. We have various sizes of opportunities that we're chasing currently. When we get to a point of an announcement, we will do that. So we’ve disclosed all the significant events up to this time.

Sam Bergman - Bayberry Asset Management

So, are you saying there has not been any new wins in the first quarter that you have not announced in hardware or software?

Ron Casciano

No, I’m not saying that, I’m saying that at the appropriate time, we will make announcements for any significant wins, where an announcement is appropriate. I ask you to stay tuned and we’ll see how the balance of the quarter ends up. And certainly, we have some opportunities.

Sam Bergman - Bayberry Asset Management

And the last question, I want to ask you is SureCheck is great technology, it’s transformational; I’m just wondering since that has already been proven, Walmart has picked it up; I know Wegmans picked it up and the pipeline seems to be getting better with some field tests in beta sites, why the disconnect in the stock with such great technology?

Ron Casciano

Sam, the progress of SureCheck has been very good during this year. As you can, it’s still relatively new product and we’re now at a point where we are able to expand their reach, and the interest is building, as I said. And we’re on the right track. We’ve got some great momentum with it. And like I said, I’m hoping for some additional announcements on the product later this year.

Sam Bergman - Bayberry Asset Management

And on the SureCheck, has Wegmans installation started?

Ron Casciano

Yes, it has.

Sam Bergman - Bayberry Asset Management

When is it supposed to be complete?

Ron Casciano

I think later in Q2.

Sam Bergman - Bayberry Asset Management

Thank you very much.

Ron Casciano

Sure. Thanks Sam.

Operator

Thank you. (Operator Instructions). Thank you. And our next question comes from the line of (inaudible) Over to you.

Unidentified Analyst

Hi guys, good morning.

Ron Casciano

Good morning.

Unidentified Analyst

I just want to know, how many customers do you have in each software space today? And if also you could provide how many customers are in beta testing as well that’d be great.

Ron Casciano

So, that’s a pretty broad question, Chris. We have thousands of sites deployed between our products for software and we’re not going to disclose numbers of beta test. But I can tell you that it has been growing.

Unidentified Analyst

Okay, great. And then just generally speaking in software, are you seeing increased bidding on contracts specifically in SureCheck and ATRIO, and kind of what is your competitive advantage over these competitors in these products?

Ron Casciano

We are seeing an increase in activity. Certainly, we believe our competitive advantage is several things. With SureCheck we have a combination of temperature monitoring and test management, which gives us an advantage; with ATRIO’s leading edge cloud technology for hotel property management systems, and this is really a unique design. And we’re very confident that market acceptance is going to continue to grow.

Unidentified Analyst

Okay. Thanks guys.

Ron Casciano

Thank you.

Operator

Thank you. And our next question is from the line of Lee Matheson of Broadview. Over to you Lee.

Lee Matheson - Broadview

Hey, good morning guys.

Ron Casciano

Good morning Lee.

Lee Matheson - Broadview

So, a couple of things. One, it’s kind of surprise that the -- sort of SG&A trend, and I am wondering if you can comment on Jerabeck’s progress in bringing cost out of the organization; and is it an issue of, you’ve pulled some cost although they have been sort of currently reinvested, or is there -- we just haven’t seen it yet?

Ron Casciano

Lee, I think we have started to see the results of the new management team and Bob’s efforts. If you look at the fourth quarter, we’ve had improvement in product and service margins that’s all very key to our cost initiatives to improve things. On the SG&A line, was down year-over-year; in the fourth quarter we had some marketing expenses that were due to timing of events in the quarter. But all in all, we are well underway in our initiatives to continue and look at cost throughout the entire organization.

Lee Matheson - Broadview

Okay. And the changes to the Board, I mean I think we need a little bit of context on that. What -- I understand Bill moving on, he has been there long time, some of the other guys though have relevant experience, haven’t been there that long, what’s the frustration from their perspective; is it -- can you just give us some color?

Ron Casciano

Yes. Lee, as far as Jamie and Kevin go, they have both been on the Board for 10 plus years; they have personal commitments. And that was a reason that they decided at this time to step down from their duties and the PAR Board, and we certainly respect their decision and understand the personal commitments that they have.

Lee Matheson - Broadview

And where is the -- I mean, in terms of getting the share price to a level that reflects the intrinsic value of the IP and installed base and software and the government business. I mean, our view has always been that the government business is maybe superfluid but perhaps given the inability to execute on the hospitability side, maybe the opposite is true given, particularly given multiples being paid in the software business. I mean is the Board willing to take a broader approach to realizing value and perhaps engaging in the sale of -- part of the business at some point?

Ron Casciano

The Board always from time-to-time takes a look at key strategies like that. And I can tell you that it is discussed and address and there is nothing to announce at this time. And so, we are committed to staying with our strategy and we believe that as our new products gain momentum and success, the idea of recurring revenue model will be very attractive to shareholders in the future. And so that’s our strategy at this point in time.

We will continue to look at different options down the road for sure. We are looking forward to getting some new Board members with some good ideas, a different look at things. I think that will be a very good positive for the company. And so I’m excited about the opportunities too and deep grow the share price.

Lee Matheson - Broadview

And in terms of these new Board members, what skill sets are you looking to add specifically?

Ron Casciano

Well, I’m not going to get into the details Lee, but certainly people that can understand our business and help us grow our business.

Lee Matheson - Broadview

Okay. Thanks guys

Ron Casciano

Thank you very much, Lee.

Operator

(Operator Instructions). We have a next question from Sam Bergman. Over to you Sam.

Sam Bergman - Bayberry Asset Management

Just a follow-up question. In terms of Quick Serve, can you give us the opportunities internationally with the restaurant side; and has any of those opportunities started?

Ron Casciano

Yes. Sam, there has been a lot of good momentum internally in 2013. The leader was -- we’ve had great success in ‘13 with McDonald’s China. We’ve disclosed early in the year that we won McDonald’s UK and we have because of the announcement that we became one of the approved vendors for McDonald’s worldwide now, it’s going to be easier to compete in countries. McDonald’s, there is three worldwide approved vendors and McDonald’s countries, almost all require two vendors. So, we’re going to have an opportunity in many new countries. One new one that’s -- it’s a small number of stores now, but has great plans to expand is in Vietnam. So we just recently installed a system in that country.

As far as other customers, we are growing our channel organization overseas in many countries. And that’s -- even though the numbers are small, the rate of growth has been pretty good this year and we expect that to continue. And that’s for both our hardware and software product, Sam.

Sam Bergman - Bayberry Asset Management

So, it’s a combination of hardware and software versus what was hardware?

Ron Casciano

Yes. And also we have opportunities with Yum! in Australia, so another opportunity looking forward. So, that’s just a good recap of some of the major initiatives we have gone internationally.

Sam Bergman - Bayberry Asset Management

And the only other question I want to ask you is in terms of ATRIO, I know in the past you signed some I guess distribution with couple of Middle Eastern partners; what has gone on with them, is there any installations of beta sites, that you can talk about?

Ron Casciano

Those partners are very excited about the products, they are building their pipeline. At this time, there are no beta sites there, Sam. But certainly, we’re hoping to change that in the future.

Sam Bergman - Bayberry Asset Management

Okay. Thank you very much.

Ron Casciano

Thanks Sam.

Operator

Thank you. We have no further questions.

Ron Casciano

Okay. Well, thank you for joining our call. And have a good day. Chris and I will be available afterwards, if there is any additional questions. Thank you very much. Good bye.

Operator

Thank you very much. Ladies and gentlemen, that now concludes your conference call for today. You may now disconnect. Thank you.

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