Good day, ladies and gentlemen, and welcome to the PAR Technology Corporation Fiscal Year 2015 Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. .

I would now like to introduce your host for today’s conference, Vice President of Business and Financial Relations, Chris Byrnes. Please go ahead, sir. .

Thank you, Mallory, and good afternoon, everyone. I’d like to welcome you to the call for PAR’s second quarter 2015 financial results review. I'd like to take this opportunity and 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 afternoon and will be available for playback. Also we are broadcasting the conference call via the World Wide Web. So please be advised, if you ask a question, it will be included in both our live conference today and any future use of the recording..

Participating on the call with me today is PAR CEO and President, Ron Casciano; and Matt Trinkaus, the company’s Chief Accounting Officer. .

Please note that today’s call may include 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 afternoon 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?.

Thank you, Chris. Good afternoon, everyone. As always, we appreciate your participation today. Today’s call will focus on our second quarter results. After my formal remarks on our performance in the quarter, Matt Trinkaus, our Chief Accounting Officer will discuss the details of our second quarter financials. .

Let me begin with the recently announced addition to PAR senior leadership team. Mike Bartusek joined the company as PAR’s CFO in mid-July. Mike is distinctly qualified to serve as our company's CFO, and we are looking forward to leveraging his experience for both the day-to-day financial operations of the company and long-term strategic planning.

Mike is with us on the call today as well..

Now let me start with our results for the second quarter. This afternoon we announced that the company reported second quarter revenues from operations of $63.3 million compared to $57.4 million in the second quarter last year, a 10.3% increase.

On a non-GAAP basis, PAR reported net income from operations of $553,000 or $0.04 earnings per diluted share in the quarter. This compares to a non-GAAP loss from operations of $336,000 and a $0.02 loss per share in Q2 last year.

We recorded GAAP net income from operations of $101,000 and earnings per diluted share of $0.01 in the quarter versus a GAAP loss from operations of $519,000 or a loss per share of $0.03 last year. The 2015 second quarter GAAP results include a $416,000 restructuring charge..

For the first 6 months of 2015, revenues from operations increased 7.9% to $122.9 million compared to $113.9 million in 2014. On a non-GAAP basis, net income from operations was $610,000 and $0.04 per diluted share compared to a net loss of $979,000 or $0.06 per share for the same period in 2014.

The company reported a GAAP loss from operations of $284,000 or $0.02 per share compared to a loss of $1.05 million and $0.10 loss per share for the first 6 months of 2014..

Our primary goal continues to focus on improved value for our shareholders by increasing our profitability. We are making steady progress in improving the performance of our company and strive to be more predictable in our results and provide most stability in our operations..

In reviewing our second quarter results, I'm pleased to report that our Hospitality segment produced another strong quarter and grew revenues 10.2% over 2014. Brink POS, our cloud data solution for restaurants, continues to perform above expectations.

PAR selection by Five Guys for their 1200 stores is our biggest customer win to date for Brink POS software. Five Guys noted the cloud-based architecture of Brink is the launchpad technology, allowing them to offer a complete solution for the Five Guys brand that will easily accommodate changing demands..

Five Guys will utilize the PAR Tablet solution and the PAR POS terminals in their restaurants for order entry and other management functions. Our new customers truly believe that the PAR Brink solution is a game changer for their restaurants and the industry as a whole. They feel they have found a true technology partner in PAR..

Building on the selection of Five Guys and ensuring we maintain our customer momentum, we're very pleased to announce earlier this week a solid win with Pita Pit, selecting PAR Brink cloud solution for their 250 U.S.-based stores. Once again, the robustness and flexibility of the Brink platform was noted as the deciding factor over the competition.

Pita Pit is a growing concept and a big win for PAR in the fast casual market. .

The Brink solution continues to receive great interest from prospective customers, and we have high confidence in the continued success of the software. And it has established itself to be the cornerstone of our product and services portfolio. .

Our company also saw strength in our Tier 1 customer base, in particular McDonald's in the quarter, as we realize accelerated demand for our hardware products and life cycle support services..

Regarding our SureCheck solution, we are on plan for the quarter and have begun the process of rolling out the solution with our major U.S.-based retail customer in China, Mexico, Central America, the United Kingdom and Canada.

We deployed three new pilots in the quarter, and our pipeline continues to expand as SureCheck garners significant interest with prospective customers. In the quarter, we released that PAR SureCheck Advantage, an all-in-one Android-based platform with immediate interest with current and prospective customers. .

Now looking at the hotel side of our Hospitality segment. This business continues to make progress and successfully deployed our ATRIO cloud solution to several new customers in the quarter. Today, we now have over 180 properties deployed or in backlog as market interest and new customer opportunities continue to grow. .

In the quarter, we also signed new customers for our feature-rich legacy spa and property management software products and services. .

As many of you know, PAR's hospitality business has recently experienced a significant transformation with adding software capability and realigning our infrastructure to ensure that our operations are streamlined and profitable. This transformation will continue as we further reorganize our operations while adding new products and capabilities..

Our strategy is addressing customer requirements for the management of business data, and our combined products provide a unique solution for the expansion of Internet of Things or IoT in restaurants and retail markets.

These capabilities will help our customers blend real world and digital data to provide them with new and valuable insights like security alerts, marketing campaigns, loyalty programs, all in real time. By doing so, we are creating fast, secure and scalable solutions that allow our customers to answer their most complex business questions today..

Now let me turn to our Government business. We continue to see strength in this segment, as contract revenues and contract margins grew 10% and 33%, respectively, in the quarter. And we increased our participation in the U.S. Army's ATEC program and received higher task orders surrounding the Eagle Intel-X initiative..

In the quarter, we signed a new technical services subcontract with U.S. Air Force at Wright-Patterson Air Force Base in Ohio, totaling $3.7 million. .

We are committed to growing our Government business by providing superior value compared to traditional defense contractors as we drive operational excellence, targeting improved margins, while extending our leading customer satisfaction.

We will advance our leadership by ensuring that we have talented people in the right places to scale our business and achieve our goals..

I would now like to turn the call over to Matt Trinkaus to review our financials in further detail.

Matt?.

Thanks, Ron, and good afternoon, everyone. Product revenue in the quarter was $25.8 million, an increase of $2.8 million and 12.4% compared to the second quarter of 2014. During the quarter, the increase in revenue was driven by multiple sources, regions and product lines..

Highlights for the quarter include strong growth within the company's international markets, noting a 28.9% increase over 2014. The majority of the increase within PAR's international markets was driven by the company's largest global customers as they continue to upgrade their technology platforms.

Additionally, the growth in revenue from new customers contributed equally to the overall growth during the quarter..

Service revenue was higher during the quarter, generating $15.9 million versus $14.9 million in 2014, noting a 7% growth. The increase in revenue is primarily driven by sales of software-related services associated with the company's Brink, PixelPoint and ATRIO software solutions.

In addition, service revenue generated by the company's hardware repair center has increased compared to prior year driven by higher volume from the company's Tier 1 customers..

The company's recurring revenue base, which represents both hardware and software-related service contracts, grew 5% in the quarter. Overall, recurring revenue represents 25% or $10.4 million of total hospitality revenue during the quarter.

Contract revenue from our Government business was favorable year-over-year, increasing $2.1 million or 10.4% to $21.6 million from $19.5 million in the second quarter of 2014. The increase from Q2 2014 is mostly due to the activity within the company's ISR contracts..

Contract backlog continues to be strong, noting a total backlog of over $73 million as of June 30, 2015. Product margin was 29.6% in Q2 '15 versus 31.1% Q2 of '14. The decrease in product margin percentage primarily relates to an increase in volume of lower-margin product offerings compared to 2014. .

Service margin for the quarter was 34.7%, an increase of 730 basis points from the 27.4% reported in the second quarter of last year. Service margins have been favorably impacted by an increase in software-related services during the period, primarily driven by SaaS revenue and professional services related to software deployments..

Government contract margins increased 110 basis points to 6.4% as compared to 5.3% in the second quarter of 2014. This variance is a result of favorable contract mix with a high volume of revenue earned through higher-margin contracts. Non-GAAP SG&A was $8.9 million, a decrease of $300,000 from Q2 2014.

The company continues to monitor its cost structure to better position itself within the global markets and enhance shareholder value..

Research and development expense was $4.4 million, up from $3.8 million recorded during 2014. The majority of the increase is due to R&D associated with the company's acquisition of Brink and its POS cloud-based software portfolio and other investments within our various software platforms..

Now to provide information on the company's cash flow and balance sheet position. Cash used in operations during 6 months ended June 30 was $554,000, mostly due to changes in networking capital requirements offset by the add back of noncash charges.

Changes in net working capital are mostly due to decreases in accounts payable base and timing of payments to vendors for inventory purchases and the increases in accounts receivable based on volume of product sales and contract billings. This was offset by increases in customer deposits and deferred revenue. .

The company decreased its borrowings on its line of credit by $1.8 million during the quarter, capital expenditures including software costs were $2.4 million..

Inventory decreased from December 31, 2014, mostly related to the deployment of product for new customer rollouts. Additionally, accounts receivable compared to December 31 -- accounts receivable increased compared to December 31, primarily due to higher revenues associated with the Hospitality segment.

Days outstanding remained consistent with December 31, for Hospitality and Government, noting 53 and 43 days, respectively. This concludes my formal remarks. I'd like to turn it back over to Ron for his closing comments. .

Thank you, Matt. In summary, PAR has taken many steps forward in the last few months, generating improved results for the first half of 2015 and building positive momentum in our two business segments.

We are seeing increasing demand for our SaaS products, Brink, SureCheck and ATRIO, that will accelerate the growth of our recurring revenue in the future.

We are encouraged about the strength in our Government business as evidenced by the double-digit revenue growth and improved profitability this past quarter when compared to the second quarter in '14.

We have made progress against our key strategic initiatives, elevated our effectiveness in delivering innovative and impactful technical solutions to both existing and new customers within our target markets..

We will focus on executing against these important initiatives in the second half of this year, with a clear objective of accelerating growth, distinguishing PAR as a global technology solutions leader in enhancing shareholder value..

We appreciate your participation on today's call, and we look forward to providing updates throughout the coming quarters, as PAR continues its mission of building a strong technology company in the markets we serve.

And as always, I want to thank our employees for their dedication, focus and hard work as they strive to achieve our performance goals..

With that, we'll be pleased to take your questions. Thank you. .

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

Can you talk about the revenue of this quarter, the increase? Is there any particular rollout of new customer that accounted for a majority of that revenue increase?.

Sure. Sam. The revenue increase was aided in a couple areas, certainly McDonald's, as I mentioned in my remarks, was a big driver of the revenue increase, both domestically and internationally. A lot of our new customer wins in our Brink software and SureCheck accounted for smaller amounts of the revenue growth.

And as you know, under a SaaS model, it takes a little bit longer to build up. But that's generally the major reasons, the McDonald's demand, and our newer products and newer customers as a secondary reason. .

So could you tell us, on Five Guys, how many implementations you've had? How many stores in the 1200 stores you've already installed?.

Yes. Well, very, very few, Sam. We anticipate that the Five Guys rollout will start in Q3, and it'll continue over for probably the next 12 to 18 months. .

What kind of roll are you expecting on that in the third and fourth quarter?.

Well, maybe close to half in the second half of the year in total, Sam. We're still working the details, the specifics. .

So have you started any implementation at all?.

Yes, we've started. We had a couple in Q2, and we started the ramp-up in July. .

Okay. On the ATRIO side, I have not seen many announcements versus what we saw in the first quarter.

What's the pipeline look like on that?.

The pipeline is growing, we have -- we did win one account that we haven't been able to announce yet. The hotel count for their property now is anticipated between existing hotels today and their growth plans over the next 18 months could be a 40-hotel win for us, which should be our largest win to date.

The pipeline is increasing a little bit with the size of other hotel chains in that 20-plus areas. So things are picking up even though we haven't seen any announcements. I mentioned them in my remarks, Sam, we're up to 180 installed plus backlog as far as number of properties. So we are making progress. .

I know you are. I can see that. The other question I have is on defense or on your Government side. So the backlog seems to me that it's the lowest backlog in a long time.

Is there -- what's the pipeline look like there?.

Sam, you're right. It's -- this is the lowest it has been in several quarters. And however, I think it's a timing thing. And we have a very robust pipeline and are expecting some follow-on wins in the areas that we're working and especially in the ISR area. And hopefully, you'll see some announcements very soon that will grow that backlog significantly.

.

Do you have any software numbers for us at all in this quarter?.

The numbers we reported were in Matt's comments about software and software-related services and recurring revenue. .

But you have a net amount of software revenue?.

We don't report that the detail, Sam. I mean, we do have -- obviously, the software revenue we have is EULA plus SaaS. And at this time, we're not reporting that. We're reporting total software and software-related services. .

And are there plans to report that in the near future or not?.

We certainly are going to evaluate that option going forward, Sam. We are not ruling it out. .

[Operator Instructions] Our next question comes from the line of Anthony Hammill of Broadview Capital. .

Nice to see an acceleration on the top line there. .

Thanks, Anthony. .

In terms of the restructuring, and I think the original number was a cost of about $.5 million. It looks like you've spent pretty much that amount in Q2.

Can we read that as saying that you're essentially done with the restructuring? Or is this a first small step? Maybe you can just expand upon exactly what's happened to date and then what's likely to happen in the future as you look to further rightsize the cost structure of the business. .

Sure, Anthony. As we announced at the end of our first quarter, we had embarked on our initial phases of cost reductions, where we estimated $2 million savings on an annual basis. We're very confident that we've achieved at least that amount going forward. And we'll start to see the majority of the benefit of that in the second half of the year.

We are not done. We have other projects that we're about to begin. I think I alluded to that as well in the first quarter remarks that we're not done, and we expect to do more. I'm not at a point yet where I can try to quantify it, but certainly, we're going to shoot for large amounts. And they will really have an impact.

So -- and we will begin those right away, starting now. .

Okay. So longer term, if it's $2 million, that's still at the current level of profitability even if you were to sort of slash run rate $2 million of that cost, it's still not what I or like other analysts would deem an acceptable level of profitability.

If we're looking forward, what do you guys and management and the board think of as an acceptable level of profitability for, let's say, the Hospitality business? Because I understand the margins at the [indiscernible] sort of [indiscernible].

That's a question I'm not going to pinpoint an exact amount. But let me tell you, we're working at it both ways. As we just discussed, Anthony, we are going to make some more of what I consider significant reductions going forward.

But at the same time, we have to make sure that we have enough resources to achieve the revenue growth and continue the momentum we have with our software products. And that will certainly improve margins and accelerate the growth on the bottom line both.

So we're happy with the progress we've made up to this point, but we are certainly not done in trying to drive much higher operating margins on the bottom line. .

Okay. Moving to R&D, which is one of your largest cost. This year, you'll spend about a quarter of your market cap on R&D.

How should we look at that? Is there a portion of that, that is kind of onetime in nature as you're looking to finally build out ATRIO? Or is that just -- this very high level is just something we're going to have to live with and hope the revenue gets to a point where, as a percentage of sales, it doesn't look so out of whack?.

Yes. A couple of things about R&D, Anthony. First, the comparables are skewed because of the timing of the Brink acquisition, which was late in the third quarter last year. So that's impacting the comparability analysis. As far as the R&D... .

Yes, I think more just on the absolute like [indiscernible] you guys do spend a lot of money on R&D. And as far as I know the revenue growth was decent this quarter, and we have yet to see much of that translate into growth and profitability. And I'm just not talking about this quarter, I'm talking about overall and looking back over the last. .

Yes, 3 to 6 months were at 7% R&D spend as a percent of total company revenue. I think you'll see a slight uptick in the dollars as we have a couple of new projects planned for Q3. And then after that, it should level out somewhat. But as you know, we're never done with software. We're always looking to add features and functions.

And we have a pretty good team right now. We don't -- but we're constantly evaluating what investments will -- we need to make to continue to drive the revenue growth. .

Okay. And the board as it's composed now -- I congratulate you guys on finding what looks like a very capable team.

Can you let us -- from the outside, can you let us know about some of the maybe early findings or jobs that the board has passed the company with? Or anything that you can share with us in terms of what this seemingly very capable group has done and will do to help PAR become a better, more profitable company. .

Yes. Let me just say in general, Anthony. We're very pleased with the board. And they are advising us in the area of -- one of our key objectives is that is to grow software, grow recurring revenue. And they are helping us in that area, which is a key component to our future growth. And they, of course, want to see improvement on the bottom line as well.

So we're all aligned and synched. And we got a good team together, and we're working well together. .

Okay. And partially to echo one of Sam's points earlier. I think if the focus is on recurring revenue and software, it certainly would be helpful to be able to disclose how much the revenue is, because that's the revenue that's going to attract the high multiple and get people interested. .

That's a fair question, fair comment, and we'll certainly take a look at that as the number grows. .

Okay. And my last question, and I appreciate the time.

With the restructuring and improvement on the cost structure, and again, hopefully, that continues, and with this nice top line growth, and hopefully that accelerates as well, that the Hospitality business as a standalone should be at least breakeven and making some money from here on out or at least that should soon be the case.

With that, can you -- and in the context of that, can you once again explain to me why it makes sense to have both a Hospitality business and a Government business under one publically traded [ph] security.

Because I understand in the past, there was the cash flow that would come in from the Government business that you could rely on to fund the other business.

But if that rationale isn't there anymore -- is it -- what is the rationale for at least not exploring the separation of the two businesses?.

Anthony, the boards in the past and the new board as well, always looks -- continues to look at our strategic options for our different businesses. It's on the agenda at every board meeting.

And as you said, the Government business is doing very well, we have -- as I mentioned to Sam, we have a very big pipeline there, it's profitable, generating cash right now, restaurants is on -- and hotels are on the right track. But we're not talking about any major restructuring there or changes at this time. .

Okay, but it is something that when the board meets?.

Absolutely. .

Big picture. .

There's a lot of things, and it's a long list of very important things that we discuss, and it's our job to do that. And that looking at our different businesses and what options to grow them, then the end game is to maximize shareholder value. So that is discussed all the time. .

Okay. Well, again, I'll just restate or pleased to have made an opinion that it's our view and I'm sure that the two businesses would go a long way to maximizing shareholder value. .

Yes. .

The next question comes from the line of Arvind Ramnani with Gordon Haskett. .

I had kind of a broader level question.

As you kind of look at a business, are there some kind of secular drivers that's going to cause kind of accelerated growth in terms of new innovation when essentially the merging of like hardware and software, what kind of plan need to -- is that kind of like a -- any significant secular forces at place that could probably kind of accelerated growth over the next couple of years?.

Well, certainly, our strategy for diversifying the revenue, growing the SaaS software that we've been talking about combined with our new innovative hardware products we've come out within the last year, we've come out with a tablet offering. We've came out with this new SureCheck all-in-1 product.

So I think we're really on track to keep up with innovation that's going to drive growth, and keep up with the demands of our customers. And as we grow this recurring revenue, you'll see the accelerated growth in the bottom line. .

Great.

And -- can I specifically, like if you look at kind of far and you look, not so much further or the next 1 of 2 quarters, but if you take a longer term, whether it's 18 months or 2 or 3 years, can you paint like what would be like an upside scenario or even a little bit of realistic scenario as some of these things kind of come together?.

Well, I'm not going to get specific on size, but we certainly look to double the revenue of the whole company in the next several years, but it's going to come in steps, it's going to come as we continue to build up the software and recurring revenue. We continue to win new customers.

Our Brink acquisition, for example, is ahead of plan and is beating our expectation so far. So we're very optimistic about the future. .

Great, great.

And again, if you fast forward like 3 years from now, how large as a percentage of revenues would you expect your SaaS or software business to be versus the entire business?.

I'm not going to speculate on that at this time, but certainly it'll be a much larger percentage of the total revenue. Again, our focus is recurring revenue, and it starts slow, but we're making progress, we're ahead of our plans. And you'll continue to see the benefit of it as, hopefully, our success continues. .

Great. And just one last question.

You had quite a few big global wins, which you've discussed in press releases, but how many of those wins do you think -- even though they may have bought more of your kind of traditional offering, how many of those wins that you had were as a result of having Brink in the portfolio? So what I'm trying to understand is, was Brink one of the key factors that helped you win those some of those things, even though Brink may not be what's primarily being used by the big global customers?.

Yes. Certainly, software drives the sale, and it was the Brink software that was the start and key reason that we won Five Guys, that we won Pita Pit, that we won Sonny’s BBQ.

And we would not have been in the game if it wasn't for that product and PAR's ability to provide the total solutions to many of those customers, not only just the software, but hardware and services, life cycle support. .

Great.

And just quick follow-up in terms of pipeline, have you noticed a measured difference in pipeline, pre- and post-Brink?.

I'm sorry, that was pipeline, you asked?.

Yes, I mean, I'm asking is the size of your pipeline -- how much is the wins? I mean, the wins are the wins, we kind of see that.

But as the pipeline increases as a result, are you being wider, do more and more deals because of Brink?.

Absolutely, without a doubt. When we acquired the Brink product, Five Guys was not in the forecast. And to win an account of that size with that product is a tremendous accomplishment, and it's going to get a lot of attention of a lot of bigger, bigger sized customers. We certainly hope so. .

Our next question comes from the line of Bill Lauber with Sterling Capital. .

Ron, good quarter, it looks like maybe our patience is going to be rewarded. .

Thank you, Bill. .

We've noticed and heard and had some anecdotal evidence that -- in this slow-growth economy, a couple of sweet spots in this economy are the hotel and the restaurant business.

Are you finding that's true? And is that helping -- are you finding that these two sectors of the economy are possibly willing -- more confident, more willing to be spending money on software and hardware?.

Yes. We certainly are, Bill, finding. The CapEx budgets are stable and growing in some areas, and we're certainly seeing that in our day-to-day sales activity. So we're pretty bullish on the pipeline that we're building in our technology products, so -- but in both restaurants and hotels. So we're seeing some good uptick.

We're seeing some accelerated replacement opportunities. So we just got to keep at it. .

You mentioned that your McDonald's contributed significantly to the uptick in revenue. Do you anticipate that continuing throughout the year? Or is that... .

McDonald's will be a solid contributor throughout the balance of the year. The growth rate may slow a little bit as we come to the end of certain demands, or fulfill certain demands in different parts of the world.

So -- but we certainly are counting on our new wins here that we've announced with the -- with out non-major customers that are going to more than offset that slowdown. .

There has been no mention of Yum!, what's going on there?.

Yum!, we're sort of in-between cycles with them. We're still delivering to them throughout the world.

And our relationship is as strong as it's ever been, but there are in-between major cycles although we are -- started this year to deliver to one of their largest franchisees in the United States, who has been a long time customer of ours, and they're going through a replacement cycle now. But it will return the growth in the future for sure. .

Okay. One last question concerning ATRIO.

I know in the past, if I understood this correctly, that one of the concerns on the part of these hotel, especially the larger chains, was the fact that the security with the cloud is -- is that correct? And is that -- does that concern still persists? And is there anything that you are doing or can do to alleviate that concern?.

We think security in the clouds are getting a lot better than it was, Bill. I'm not sure that's a major obstacle anymore, and certainly, it is to some point, but we are making headways into the smaller independents and collections.

I think the big guys, I don't believe there's been a lot of big decisions to change out at this point in time, that will come in the future. So we're not surprised by a lot of reluctance. I think we've mentioned before that the adoption rate in the early part of the ATRIO release was slower than we had anticipated, but it's starting to pick up. .

Thank you very much. I'm showing no further questions at this time. I would now like to turn the call back to Ron Casciano for any further remarks. .

Well, again, I want to thank you all for your participation and your questions, and, everybody, have a good evening. Thank you. .

Ladies and gentlemen, this does conclude the program, and you may all disconnect. Everyone, have a great day..