PAR Technology Corporation

Good morning, everyone and thank you for joining us today. I like to welcome you to the PAR Technology fourth quarter and year end 2012 conference call.

Joining me is Ron Casciano, PAR’s Chief Financial Officer.

Before we begin, I wanted you to know that any statements made during the course of this call regarding product expectations, program opportunities, schedule and future financial results are forward-looking statements. Actual events or results could of course differ materially.

I refer you to the statement of risk factors in our annual report on the form 10-K for the year ended December 31st, 2011 and to our press release. These are documents that identify important factors that could cause such a variance.

During the course of this call we will take questions from participants. Under SEC rules, we cannot provide material information in subsequent private settings but we will continue this public call as needed to discuss and respond to appropriate questions.

After I provide my summary on the quarter and year-end performance, I will then turn it over to Ron for his comments. From there, we will answer any questions you might have.

Thank you for your continued interest in PAR Technology.

PAR Technology reported fourth quarter revenues of $66.4 million, a 10.5% increase over the $60.1 million reported in the fourth quarter of 2011. Non-GAAP net income from continuing operations was $1.2 million versus the $1.8 million reported a year ago, and non-GAAP earnings per diluted share from continuing operations were $0.08 versus the $0.12 per share reported in the same period in 2011.

We also recorded a $7.6 million charge in the quarter, the majority of which was noncash, which I will comment on in a few minutes.

For the year 2012, the company reported revenues of $245.2 million, a 7% increase over the $229 million reported in 2011 despite the fact that revenues were $18 million less from our largest customer. Non-GAAP net income from continuing operations was $3 million versus the $5.5 million reported for 2011 and non-GAAP earnings per diluted share from continuing operations were $0.20 versus the $0.36 per share reported last year in 2011.

Overall, Hospitality technology revenues for the fourth quarter were $45.9 million, a 14.7% increase over the same period in 2011 as our actions to back fill the revenue gap showed progress. As you have heard me say previously, in 2010 and 2011, our hardware products were deployed in more than half of the McDonald’s restaurants in the US.

We knew going into last year that that equipment would not need to be refreshed, so we embarked upon a mission to make up as much of that as possible. We continue to have an excellent relationship with our largest customer.

Hardware revenue increased 26% for the quarter compared to last year and 22% sequentially. International business revenues increased 32%.

Revenue to YUM! Brands increased 23% and SUBWAY also grew 23%.

Unfortunately, our higher peripheral to terminal mix for profitability.

PAR was selected by CKE Restaurants to install our EverServ 7700 platform in their network of approximately 900 corporate stores. We began that deployment in the fourth quarter and we will complete the initiative in the first half of 2013.

In the second half of last year, we announced our new hardware platform portfolio and a little more than a week ago we announced a newest addition to that the EverServ 500 for global distribution through our channel partners.

Software revenue increase 32% for the quarter, year-over-year, as well as 64% sequentially. 4,300 Wal-Mart stores are up and running on SureCheck and we completed in January 620 Sam’s Clubs.

We have signed on additional individual property ATRIO customers in the past quarter and are negotiating other deals as well. We signed 5 additional customer properties for our heritage Host Property Management software product and it included 2 of Mandarin Oriental’s new hotels in China and 3 additional five star properties in the US.

We also signed 11 new clients for PAR’s stand-alone SpaSoft software package. These included several five star properties in Mexico, China, Panama, in the U.S.

with Marriot, Harrah’s [ph], Valley, Western [ph] and Mandarin Oriental.

Higher development expenses and too many priorities were some of the reasons we have taken some of the actions we have taken.

Our government segment again grew revenues in the quarter but at a more modest rate than in the previous quarter of 2012. Revenue increased through 2012 but only 2.1% in the fourth quarter over the same period in 2011.

Business continues to be driven by contracts to support the U.S. Army and U.S.

Air Force with Intelligence Surveillance and Reconnaissance technologies and services, Eagle Intel-X. To date, we have seen consistent funding of programs and we are focused on Intelligence, Surveillance and Reconnaissance programs.

But as we were in 2012, we remain cautious as market conditions continue to make the timing of new contract awards difficult to predict. New contract wins in the quarter came from a new U.S.

Navy facility operation contract in Africa, the Defense Contract Management Agency support contract for $11.4 million, and a new contract with the Air Force Research Laboratory. Contract margins were 8.9% in the fourth quarter, above our historical range of 5% to 6%.

This spike in margins can be attributed to a license sale of the company’s full motion video product, which happened last year as well. Our government business ended the quarter with a healthy backlog of $140 million, which gives us a buffer going forward.

As part of our continuing effort to align resources and streamline our products and service offerings, we took a charge this quarter of $7.6 million. The majority of that charge $5.4 million was noncash and associated with the ESQSR restaurant software product.

The balance of the charge is for legal cost related to the intellectual property and patent matter that has since been settled.

Over the past few months, we have done a deep dive into where we are with our portfolio of businesses and products and made some tough choices. As I said above, we have refreshed our hardware portfolio and made some inroads into areas of growth.

We have had to go and to do things to improve our mix of profitability but it will take some time. We have a government unit that continues to grow nicely and make money, and we have our SureCheck product with a marquee launch partner Wal-Mart and on top of that we have ATRIO that we have great faith in.

Given the potential that we see with these products, we will continue to invest more in the short term than we would deliver to the bottom line. Our Host software product is running in many of the greatest resorts around the world.

We are a leader in SpaSoft software. Our PixelPoint and other restaurant software products are running in tens of thousands of restaurants today.

Today’s announcement does not change any of that.

As I have said previously, our strategy has been to create a compelling solution, find a marquee launch partner, and then productize it for larger scale deployments. With SureCheck, we have the solution and we are continuing to grow with our launch customer Wal-Mart.

Mid-year 2013, we will complete its transition from a solution to a product, making it much more easily to replicable, make it much more replicable to more clients. In the meantime, we are piloting it in new accounts and we have a great prospect list.

With ATRIO, we have advanced the product’s feature functionality and completed necessary multi-tenancy enhancements. By this, I mean the ability to run a single instance of software on a server, serving multiple client organizations.

This is important as it enables a product -- for a single product to scale to a chain. This was to blame [ph] our ability to economically replicate and create multiple additions of our application but we are now back on track.

We are not the only company who has had this issue. As we have done with SureCheck, we will identify in time a major launch partner.

Property management systems running hotel chains to date are archaic and every brand is going to have to figure out sooner or later how they introduced a new two-way interface between their customer and the property. As time goes by, the hotel chains will have to deal with this issue.

Our solution is not slide ware, it is running properties today and we have added multi-tenancy capability enabling individual property functionality to be replicated across multiple properties.

Software technology initiatives of the magnitude of ATRIO and SureCheck take time, they are difficult, and they hit unexpected bumps because they represent the sea change in technology. There are probably some characteristics of which are similar to venture-based endeavors.

Over the past couple of months, we completed an analysis that had characteristics of noted strategist Michael Porter’s work looking at our portfolio. We looked at it in a disciplined way at all of its economics.

What we found was is that where we were investing did not always match where the market is today and where we anticipate where we will be in the future. As a result, we have made some tough choices, one of which is to cease new development on and to reduce the net book value of our ESQSR restaurant software product, reducing some headcount and redirecting others.

We have also looked at our hardware mix and taken actions to alter our compensation plans to sell more terminals, to lower our overhead, focusing more on profitability. We have shifted resources in development sales and to support to where demand is.

A company in the size of PAR has to prioritize its investments. We will work to balance the short-term need for profit with a medium- to longer-term need to extend our competitive advantage and grow profits.

As we regularly do, we will continue evaluate actions to adjust our cost structure with an emphasis on optimization and efficiency improvements. Doing this we believe we will deliver what our customers want as well as what our shareholders want.

I would now like to turn the call over to Ron for his remarks on our financials.

Thank you, Paul and good morning, everyone. Just a quicker guide on the fourth quarter details.

First, product revenue for the quarter was $27.9 million, an increase of 26% compared to 2011. This growth was due to sales to YUM!

brands, CKE and to international McDonald’s. The company also increased its sales through its worldwide dealer channel.

Service revenue for the quarter was $18 million, basically unchanged from the $17.9 million in the fourth quarter of 2011. Contract revenue was $20.5 million for the quarter, an increase of 2% from 2011.

The company continues to benefit from its ISR integration contracts.

Product margins for the quarter were 8.1% versus 32.2% last year. This reflects the charge in the current quarter for the capitalized restaurant software asset in our Hospitality segment.

Margins were also impacted by product mix as the company sold more peripheral equipment in the quarter. Service margins for the quarter 32.7% in 2012 compared to 29.8% last year.

This was due to a favorable mix in service offerings. Contract margins were 8.9% compared to 7.8% last year.

Both periods achieved higher than normal historical range of 5% to 6% due to license sales of the company’s Gv2F Full Motion Video product.

SG&A for the quarter was $11.6 million compared to $8 million in 2011. The primary reason for this increase was the expense related to the litigation and settlement cost associated with a non-practicing entity patent claim.

The company is also continuing to invest in sales and marketing in its Hospitality business and its government video technology. R&D expenses were $3.7 million, a small increase from the $3.4 million a year ago.

PAR’s financial condition remained strong. We have over $19 million of cash on the balance sheet.

The company’s debt level is at $1.3 million. Cash flow from continuing operations was $2.1 million for the quarter and $15.8 million for the year.

The company expects to continue to fund future working capital requirements from cash flow through operations.

I’m pleased to report that DSOs for our hospitality business worth 49 days and DSOs for our Government business worth 43 days. Depreciation and amortization for the quarter, excluding the capitalized software charge was $800,000.

Capital expenditures for equipment was $200,000 and capitalized software in the quarter was $900,000. This concludes my remarks and I would now like to open up the call for questions.

So you had a lot of things going on in the fourth quarter and it became a real nice quarter on the top line and bottom line, even though there was a restructuring or a resulting software, deletion for prior software in other years. But I want to find out is, can you give us a little bit of flavor for the McDonald’s U.S.

business in 2013 and the international business that you can see right now.

I think we see the, more of the opportunities based on the discussions we have, more outside the U.S. than we do inside the house.

We continue to have an active business in the U.S. but it is mostly replacement business in new franchise location business in the U.S.

In the U.S., we see services being a great opportunity for us, and we’ve reaped the benefit of some of those and internationally there are opportunities that we are actively engaged in that hopefully will change that down that we had this year in 2012 from our largest customer. As I said earlier in my comments Sam, I think we have a very good relationship with them and that hasn’t changed by virtue of the decrease.

And in terms of other restaurant customers, you said CKE was shipped somewhat in the fourth quarter and will be finished towards the first half of the year. Do you have any beta sites that will become customers in the next 6 months similar to CKE?

Sam, this is Ron. Yes we have a few restaurant customers that we’re working on, unable to mention any names at this time.

We also have a growing pipeline for our SureCheck product, that will be later in the year. So, there has been a lot of activity going on and we hope and expect in 2013 you’ll see a few other names out there, besides McDonald’s and YUM!

What’s your expectations Ron for that, towards the bottom line with the extra sales and marketing that you plan to add on for the growth areas?

Well, for our restaurant business Sam, as I just mentioned we are focusing our sales efforts on new customers. And we’re also been focusing our efforts on growing our channel business.

We had a nice growth of percentage-wise in our worldwide channel business, primarily in the international markets, so we’re focusing our sales and marketing efforts there. Regarding our ATRIO product, we’ve been ramping up our organization there.

The pipeline and the interest is better than ever for our ATRIO product, so we expect to start seeing some returns in the future for those efforts.

I would add to what Ron said Sam that, the other part that I would say is that we have clearly rebalanced our teams. I mean, we were spending our time on some of the products that demand wasn’t as high as it was in other areas.

And we’ve redirected those resources to where we see the demand and we think that will pay dividends in 2013.

The last question I want to ask you is the comment made in 2012 first, actually it was the fourth quarter earnings report from 2011. And this is in regard to ATRIO, “given the compelling operating financial benefits of ATRIO, our prospect pipeline is expanding reflecting growing enthusiasm for its SAS model.”

But that was a year ago. I’m just wondering which, I realized the long cycle but a year longer seems to be much more than investors would expect.

Can you elaborate on that?

I think your comment is fair Sam. I don’t think there is anything -- I think what, as you recall it was the latter part of 2011 when we deployed our first instillation that was there.

And over the last year, we have continued to add functionality to the product and we have continued to add this multi tenancy, which gives us the ability to more easily and more economically replicate what the benefit that occurs at an individual property to achieve. And those 2 things took time and it took longer than what we had thought, but as I said in my opening remarks, and really throughout the press release, we remain, we believe in ATRIO.

The market believes in ATRIO and its juts a matter of us getting some of these things done and getting the deployment to occur. So again, I hesitate to put time frames on it, because I haven’t done a good job of that in the past.

But we believe it will have adoption to the product upcoming.

And the only other thing I want o ask on the ATRIO regarding revenue in the recurring revenue, the SAS model is a very slow model for revenue growth, yes there is some great margins on the software side and to the bottom line, but isn’t that going to take a number of years to really make a difference on the top line and also on the bottom line, if it remains a SAS model?

You’re right, it does take time. It certainly, but it also, if you think about it this way, we are a hardware company who has to go every year-end and identify new cut… [ph] -- hardware customers.

So, what we are trying to is to build a recurring base and you can see some success in that in 2012 in that area, to build a recurring base so that as we go into the new years, we already have that in our backlogs, so it becomes a little like, part of my analogy, a little like bricks on the wall that we continue to add. So as our volume increases on our hardware, and we continue to have a backbone of recurring revenue, given the profitability of this company, it can make a material difference.

But your point is well taken that it’s not the same as an enterprise license, which is bigger pops in there.

Should we expect some to be enterprise license versus SAS models, or going forward you expect when ATRIO does head, it’s going to be mostly SAS.

I think it will be mostly SAS. I think that’s what I would assume.

Obviously, we listen to our customers and we will continue to have discussions with them. But I think our business model is SAS.

Can you guys just elaborate a little more on the software charge that you had and what it means for the software side of your restaurant business. I understand the restaurant side of the businesses has been mostly the hardware businesses in the past but you had PixelPoint.

Did this take you even further towards the hardware owning [ph] aspect of that business?

Keith, no it doesn’t take us further towards the hardware part of our business. What it does is, it allows to focus on fewer software products that have the highest potential for future sales, and I think that, that will result in steady more predictable growth of our software business.

Okay, so the ESQ, I thought that you guys are taking a charge for and ceasing production, that’s totally separate and [ph] PixelPoint wasn’t a next generation or anything like that.

It was a totally separate product from our PixelPoint product and we found that it didn’t make economic sense to continue to invest in that particular product.

Okay, makes sense. And then you can speak to the environment, obviously we have questions from investors when it comes to this topic, but in the U.S.

companies about tablets and current hour activity, but what’s your thought on the tablets, your moving more into the hardware market and what may be your business down the road?

Well, I think we continue to evaluate that, I mean, there are certain properties and chains that are looking at tablet of type devices, typically they are in concept stores as opposed to doing sort of large deployments of them. But we continue to monitor that actively and we have some products coming out in the back gate for the year, that I think will help to enable our customers to more directly serve the needs of their customers in varying environments.

But I’m not prepared to make any kind of any announcement on that today.

Understand, understand, as you look at the current environment, how would you describe against the current RFP environment for restaurants and hospitality, now versus say where it was this time last year?

Keith, I think its picking up a little bit. We mentioned the CKE rollout that we began, as Paul mentioned in the answer to the question regarding the future of McDonald’s.

I think you will see there’s more opportunities with McDonald’s internationally and some hopefully in some countries that we’re currently not selling into. Paul mentioned service project opportunities domestically with McDonald’s and I had previously had mentioned that the pipeline and interest is growing with new customers both for restaurants and for our SureCheck product.

So I think we’ve seen a pickup in that area.

Paul, if my figures are correct about 25, a little bit better than 25% of the market cap is in the form of cash right now, what are your plans with the cash on the book?

Well we continue to do as Ron said, we continue to fund our own investments. We have not gone into the debt markets at all on this.

Our plans, we have no plans to at present to do a share buyback. We continue to evaluate that over time, but we continue to just fund our own resources and fund our own investments going forward.

Ron, do you want to add anything to that?

Just, we will continue Bill, throughout the year to look at if there is any opportunities from an investment standpoint that makes sense and this will give us a little more flexibility, by building up the cash reserves to be able to execute on those investments if we so choose to.

And we have a fairly large line of credit as well.

Okay, last question. Paul, how would you characterize this coming year or the current 2013, it looks like as you mentioned, you’ve communicated to us in the last 6 months that the ATRIO is, and for that matter SureCheck is there.

It’s a long sales process and so on and so forth, but going into this year are we still in a transition period? Are we going to see any meaningful, or do you think that there is a possibility of a meaningful increase in the bottom line?

Well, we don’t provide guidance, so my comments are general in nature, which is that. We have a large hardware business that is much larger than our SureCheck and ATRIO parts of our business today.

I believe we’ll make traction in that, but as I said in my prepared comments, when we look at the market in those 2 products, we see great opportunity and in 2012, largely the profits if you will that we got out of our SureCheck product, we reinvested back into the business, because we believe in its potential and its future. And I said in my earlier comments, I think we’ll have some signature wins.

Again, I am hesitant to put time frames on that. But I think that the company will continue to be more investment in 2013 than it will be in kind of reaping profits.

Okay. It’s just, and I know you understand this.

Sam alluded to it earlier that long-term shareholders are getting rather impatient. We are just looking for that inflection point and I am just wondering when it’s going to occur.

I was very optimistic about a year ago or year-and-a-half ago that things were turning up, but it looks like we have stalled out again. Just getting a little impatient.

That’s all. Thank you.

I appreciate your comment, thank you.

Getting back to the software question again, could you just explain what it was about ESQ that made it not viable in the marketplace? And now that ESQ is not going to be in your portfolio, the products that are left in restaurant, what are they?

Software products, I mean.

I mean, and this kind of goes to Bill’s question just a few minutes ago, the company has been making investments on a number of different fronts, and we are a company that has $220 million of revenue. And so, life becomes a series of choices.

And as I said in my preparatory comments, we have made some tough choices, and we have taken action to be able to match our investments to where we thought we would be able to get the greatest returns associated with it. So, by that scale and that measure, continuing to invest in EverServ QSR, when we were continuing to enhance our existing products and make major investments in SureCheck and in ATRIO, became uneconomic for us.

So, we still continue to have software products that are running names that you would now that are PixelPoint. We have a product called TSR, we have a product called Heritage InFusion, and they are running tens of thousands of restaurants.

But our foray into this other area didn’t meet our tough scale of investment going forward. So, we have made the decision that we did this quarter.

Just one question, on the hardware side, it sounds like CKE is pretty big, but it should fall off in the second half of the year. Is that pretty fair to say or should new initiatives like SureCheck and ATRIO pretty much offset the decline in revenue from that in the second half?

Well, you are correct. The CKE rollout will be completed in the first half of the year, but we expect to have replacement business with some newer accounts and some growth with existing accounts.

SUBWAY has been a very constant good account for us. It continues to grow.

We have international opportunities. So, we expect these opportunities will more than offset the completion of the CKE rollout.

Okay. And just one follow-up, on the margins with these newer customers, should they be higher than what the larger chains, the gross margins?

We are not going to comment on the difference in the margins by customer, but it’s a case-by-case basis, so.

Going back to the software write-down a little bit, obviously I like the fact you guys have gone through and taken a look at the portfolio in detail and starting to call some product lines, any sense of headcount reduction or R&D and SG&A cost savings from eliminating the product? And secondary to that, are you just going to recycle it into sort of growth categories?

There was a headcount reduction that occurred associated with that. I am not going to comment on the amount of that.

We have, as I said in my earlier comments, redeployed some of those folks on to other products. So, if you were to look at R&D spending, you would see R&D spending being rebalanced and going into that area.

But some of it will go to the bottom line. I guess I am not prepared to comment on how much, but some of it will go to the bottom line, and some of it will be invested in products that we think will have near-term demand.

Okay. And again, looking at the software portfolio, I think I would imagine there was this certain amount of nervousness around the delay in adoption of ATRIO, considering what happened to one of your publicly traded peers, which wrote off quite a substantial amount of invested work on a PMS system.

Can you sort of comment on why you think the fate of ATRIO will be much better than get 360 [ph]?

I won’t comment on what the others are doing, but I will comment that we are - our belief is, is that time is in our favor and our belief is, is that as we look at our competitors out there and we look at what’s occurring in the market with our customers, there are numerous articles. If you read the - if you are following that story that you followed as well, you will also have read many other articles that talk about the archaic systems that exist today in the hotel world and now, and all we have to do is think about as a user of those systems, how unfriendly they are if you would given some of the changes that are occurring in mobility in technology.

And with our user experience which we think is one of the key differentiators on the product and the economics and the technology platform, we think as I said in my earlier comments that going from having individual properties which are running the product today, that will lead us to our marquee customer, which is what we set out to go do, and that will put us in a much better position going forward, plus, that plus the work we are doing to productize it, to create, to turn the solution into something, which is more easily replicable. And that is a major effort that impacted our results in 2012, both in ATRIO and in SureCheck and we think will help us going forward.

Okay. And in terms of the feedback that you are getting from the installed customer service, it’s 100% clean, there is nothing that worries you in that?

In the beginning, we went through teething problems, like any deployment occurs, but we continue to have an active pipeline, and we continue to actively work with customers.

Okay. And then in terms of the software product portfolio, I guess what did this sort of Porter model assessment turn up, I mean where do you feel you are most competitively advantaged and obviously the write-off of ESQ is an example of where you weren’t, but I am just curious on where you feel you stack up relative to particularly some of the larger players and where you think you have the opportunity to really kind of drive this business forward?

Well, I don’t want to overstate it. We compete against billion-dollar companies, multiple billion-dollar companies that have much wider customer portfolios and have much larger customer bases.

So, what we did was we went back and looked at our products and our services, and the demand that we had, and we realized that we had the resources in the wrong places, and we had bottlenecks, because we had groups of people who were doing a great job, but the demand that was coming in was swamping the development that was there. You can imagine deploying 4,300 Wal-Mart stores in 2012.

That was an example of where there was demand, but just the sheer effort to complete that swamped the development area. And then there were other areas where we had people working on development efforts that there wasn’t that great of demand.

So, this effort is to align that more closely, so we can reap the benefits of the growth that we believe is there on some of these products and accelerate some of the development efforts.

Okay. My last question, I guess just given your comments around the net cash position on the balance sheet, and looking at opportunities.

I mean, is there, I guess the issue that we worry about it, you know, the equity is so inexpensive currently and obviously it’s a space that has generally high M&A multiples. Do you guys feel that you need to do a transaction to build out the product portfolio or to enhance something?

Given the R&D expense cumulatively over the last 5 years and the fact that basically every product in your portfolio is sort of refreshed or brand new, our initial thought is that you shouldn’t have to go and buy something. Can you kind of comment on that?

I think we continue to evaluate as we go forward, opportunities to increase value. I mean, that may come through partnership, it may come from acquiring bits of technology that we think will accelerate our position in the market.

I mean, on the ATRIO product, we have modules that were not created by PAR, that were not created by us, and those are part of our portfolio that we sell to our customers. So, we will continue to go through that process in 2013.

Paul, can you tell me what percentage of the SUBWAY business is completed this time?

It’s just been ongoing. It’s an ongoing deployment because as I said, it has continued to be a great customer for us.

We have continued to talk about them every quarter. Based on what I know right now, it’s going to continue in some present form.

Through this year and next year or just this year?

I don’t know the - for the foreseeable future, I think it will continue. I can’t give you - SUBWAY continues to grow, we continue to be a great partner of theirs and I know nothing that would preclude growth going forward.

Are you the only POS vendor they have?

No.

Okay, Derrick. Thank you very much, and again, thank you all for coming on the call.

Thank you for your continued interest in PAR Technology. Have a great day.