Good day, ladies and gentlemen, and welcome to the Q1 2014 PAR Technology Results Conference Call. My name is Perita and I’ll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes..

I would like to turn the call over to Mr. Christopher Byrnes, the Vice President for Business and Financial Relations. Please proceed, sir. .

Thank you, Perita, and good morning everyone. I would like to take this opportunity to welcome you to the call of PAR’s first quarter 2014 financial results review. And at this time, I’d like to take, if I can, go 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. 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, PAR’s Controller and 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 and 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?.

Thanks, Chris, and good morning, everyone, and thank you for joining us today. I would also like to welcome you to our first quarter call. During this call, I will review our results for the quarter, Steve Malone will give the financial details and then we’ll open the call for Q&A..

The company reported first quarter revenues of $56.5 million, a 15% decrease over the $66.7 million reported in the first quarter in 2013. For the quarter, the net loss from continuing operations on a non-GAAP basis was $644,000 or a $0.04 loss per share.

This compares to non-GAAP net income from continuing operations of $178,000 or $0.01 per diluted share reported a year ago..

Our goal continues to be creating value for our shareholders. To accomplish this, PAR strategy remains focused on diversifying its go-to-market activities toward a broader range of prospective customers. We believe this strategy will generate a higher mix of revenue from sales of software and solutions.

This diversification is a key component towards building our recurring and subscription-based business that will result in a more consistent financial performance for PAR..

Within the hospitality market, our strategy is being validated by an industry wide adoption of mobility, cloud-based software platforms and SaaS delivery models as market participants look to maximize the return of their IT investments.

The top strategic priorities for our hospitality business are to capitalize on these trends and expand the adoption of our ATRIO and SureCheck solutions to more customers..

Our industry leadership, along with the product investments we have made, position us well to execute on the growth opportunity within these markets. Overall, hospitality technology revenues for our first quarter were 58% of total revenues and were reported at $32.8 million, an 18% decrease from the same period in 2013..

This decrease can be attributed to lower year-over-year revenues associated with our largest restaurant customers and certain product deployments for these customers in the first quarter of 2013 were not duplicated in this most recent quarter..

We expect improving conditions with many of these accounts, as they have communicated their commitment to increase their number of stores, as well as execute upon technology upgrades within existing stores in 2014..

During the first quarter, we’ve been encouraged by the performance of our channel organization, which realized favorable revenue growth as compared to the first quarter of last year..

In the quarter, we released our latest version of our food safety and task management solution SureCheck. This release has many international features and now supports our initiatives in Europe, UK, China and Mexico..

Our SureCheck solution deployment to Wegmans Food Markets is progressing well, noting that we expect to have their entire network of stores online later this year. Also during the quarter we began deploying SureCheck to several stores for another large national grocery chain and we are currently active with several promising pilots..

On the hotel side of our hospitality segment, our cloud-based ATRIO guest experience management solution continues to make clear and steady progress. With ATRIO’s purpose-built cloud design, we leverage the benefits and dramatic cost reductions that have occurred in cloud computing over the last 4 years..

This design provides PAR with a competitive advantage when compared to on-premise, server-based property management solutions, as well as solutions that use remote data centers..

Other advantages to our true cloud computing design include inherent benefits ranging from automatic back-up and recovery, real time system health monitoring and rapid global deployments..

We’ve installed a number of new North American based ATRIO customers in this past quarter, and recently successfully deployed ATRIO to a new customer site, 100% remotely, without a site visit, proving the value of our innovative user experience that nearly eliminates the need for training..

With a high turnover in hotels, training and retraining represents a large cost and a major pain point in the industry. We also signed on new customers for our SpaSoft software to properties located in the U.S. and Middle East.

We are focusing on expanding our network of international channel partners and in this recent quarter we signed on new partners for Europe, Middle East and Africa..

And turning to our Government business, while this business performed well again this quarter, we continue to carefully monitor the federal contracting environment and the timing of task orders associated with certain contracts..

Our Government segment revenues declined 11% in the quarter from Q1 of 2013, as we continue to see volatility in the task orders associated with our large contract with U.S. Army’s Eagle Intel-X program.

However, profits in this segment increased by 22% over last year driven by favorable performance on fixed price program, increased fees and a one-time benefit due to favorable contract negotiations..

We announced a significant new award in the quarter with a 5-year, $7.9 million contract to provide operation and maintenance support services at the naval computer and telecommunications facility in LaMoure, North Dakota..

Our backlog remains strong in this segment and we continue to grow the pipeline available to our company in the area of Intelligence, Surveillance and Reconnaissance..

I would now like to turn the call over Steve Malone, our Controller and Chief Accounting Officer, for his financial report. .

Thanks, Ron, and good morning, everyone..

Product revenue in quarter was $18.6 million, a decrease of 22% compared to the first quarter of 2013. This decrease is due to the timing of system deployments primarily associated with Yum! and CKE Restaurants..

Although we may experience this revenue volatility giving the timing of rollouts with our major customers, we have been successful in growing revenue through our dealer channel, noting a 24% increase year-over-year..

Additionally, we have realized increased revenue from the sale of hardware associated with our SureCheck solution as we continue to expand our installed base of active SureCheck devices..

Service revenue declined 11% to $14.3 million compared to the first quarter of 2013. This decrease was driven mostly by the aforementioned decline in product revenue from deployments to major customers in 2013..

A focal point of our service business has been around generating significant recurring revenue, noting that 72% of service revenue from the first quarter was recurring. Contract revenue was $23.7 million, down from the $26.7 million from Q1 of last year..

The decrease is due to the timing of task orders on our ISR integration contracts, contracts that have historically contributed to revenue volatility due to the changing requirements of the U.S. Department of Defense.

Partially offsetting this decrease was an increase in revenue from various fixed price, technical service contract supporting the operation of military communication facilities worldwide. Our contract backlog as of March 31 was $90.6 million..

Product margin for the quarter was 30.6% versus 31.1% in the first quarter of 2013. This slight decrease is attributable to an unfavorable product mix of terminals as well from a less favorable absorption of fixed cost due to reduced volume..

Service margin for the quarter was 33%, an increase from the 27.9% reported in Q1 of 2013. During the quarter, we have continued to execute upon expense control initiatives, primarily relating to our field, repair and installation operations..

Contract margin was 6.9% in the quarter, an increase from the 4.7% reported during the first quarter of 2013. This improvement is due to additional margins realized on certain contracts that were modified during the quarter. Partially offsetting this increase were costs associated with business development initiatives..

Non-GAAP SG&A was $8.7 million, a reduction of approximately $700,000 from the $9.4 million recorded last year. We continue to implement cost control initiatives across each of our business segments..

R&D expense was $3.9 million, a slight decrease from the non-GAAP $4 million reported during the prior year. R&D expense is primarily associated with our hospitality product lines as we continue to invest in the feature expansion of our innovative hardware and software product offering..

Moving on to the balance sheet and statement of cash flows. At the end of the first quarter, working capital was approximately $31.3 million with a current ratio of almost 2:1. Total debt was $1 million. Day sales outstanding for Hospitality and Government businesses were 57 days and 53 days, respectively..

The company generated $1.9 million of operating cash flow. Depreciation and amortization were $830,000. Capital expenditures and capitalized software were $591,000 and $994,000, respectively..

This concludes my formal remarks. I’d like to turn it back to Ron for his closing comments. .

Thanks, Steve..

In summary, our first quarter results were in line with our expectations, as we had forecasted a slower start to the year. We see improving conditions in the back-half of this year as new product initiatives continue to gain traction in their respective markets and additional deployments with our major customers are scheduled..

In 2014, we will continue our investment in new products and we remain confident in our strategy, which will allow us to annuitize our revenues and enhance long-term revenue growth with higher margin product offerings..

This concludes our remarks, and I would now like to open the call to questions. Thank you. .

[Operator Instructions] Your first question comes from the line of Sam Bergman from Bayberry Asset Management. .

In the press release, you mentioned about sometimes like volatile quarters in hospitality and quick serve.

Can you tell us if any order or orders got pushed into this next quarter, or was it basically pushed into different quarters of this year?.

It was primarily Sam, the timing of the requirements of our major customers. So there was no -- not a lot of slippage into other quarters. We just anticipated there wasn’t going to be as much volume of activity in Q1 as we had in the past. And we expect that volume to pick up later in the year. .

Can you give us any idea when later in the year? Are we looking at third quarter, are we looking at fourth quarter, or a combination of all 3 quarters, second, third and fourth?.

It will be mostly in the second half, Sam, which is typically our trends. If you look over our history, the first half of the year is usually slower than the second half of the year. We did have some smaller business that we had hoped for Q1 that’s pushing out, but for the most part the timing of the needs of our major customers. .

Okay.

The deferred revenue line jumped 25% on the press release, is this a purchase order of unannounced customers or an existing customer? And part two, is it hardware and software or just hardware?.

I’ll let Steve answer that one, Sam. .

Yes, Sam that increase is really due to the timing of our software maintenance agreements. There is some increase in some of our hardware maintenance as well, but the largest contributing factor would be our software maintenance service agreement. .

Okay.

And what investors conferences, Ron, are you going in the next 60 days?.

We’re scheduled to be in New York in May at the Sidoti conference, and we have a couple of others on our radar for later in the year. .

And the last question is, as PAR is selling at book value and has some great new products coming out which give it sustainable long-term growth, I feel it’s important, as a larger shareholder, to communicate with other competitors in the space that I also hold shares to see if there is an interest in acquiring PAR.

I've had several discussions recently.

Will the board, lacking 3 members, could they listen and accept any offers?.

Sam, we’re always have our ears open to opportunities that may come our way, and let me just leave it at that. .

[Operator Instructions]. Your next question comes from the line of Stan Berenshteyn from Sidoti & Co. .

Filling in for Matthew Paul.

My first question is regarding R&D spending, what’s your target spend rate going forward?.

As I said in our fourth quarter call several weeks ago, we anticipate our R&D spend rate to trend up from what we’ve spending in the first quarter as we’re accelerating investments in some of our new initiatives. So we expect it to trend up as the year goes forward. .

Okay.

And as a percent of revenue, is the first quarter SG&A run rate an appropriate measure moving forward?.

I think it is. You always have little fluctuations, if there is a major marketing effort going on in a quarter, but I think as a percent of revenue hopefully it will trend down a little bit. .

Okay.

And is the lower product shipments in Q1 something that we can look to be shifted towards Q2?.

I think you’ll see a more dramatic shift in the second half of the year as opposed to the second quarter. .

Your next question comes from line of Sam Bergman from Bayberry Asset Management. .

Just another question in terms of -- can you give us any idea or talk about any ATRIO beta sites?.

Well, I can tell you, Sam, that we’ve increased a number of actual installations in the quarter. The momentum is increasing. We’re in a discussion with a lot of potential customers. And I believe you had asked the question before about international opportunities.

We’re certainly in some final discussions with a few opportunities overseas, as well as a very large pipeline overseas. So we expect, later this year is to increase our installed base as we go forward, and the interest is as high as ever. .

We have no question at this time. .

Well, thank you for participating in the call. And Chris and I will be available if there is any follow-up questions. Thanks and have a good day. .

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and thank you for joining..