PAR Technology Corporation (PAR) Earnings Call Transcript & Summary

Hello, and welcome to the PAR Technologies Corporation 2020 Annual Meeting. I now turn the call over to Savneet Singh, PAR Technology's CEO and President.

Good morning, and welcome to the 2020 Annual Meeting of PAR Technology Corporation stockholders. I am Savneet Singh, Chief Executive Officer and President of PAR Technology Corporation, and I will be presiding as Chair of this meeting. It is now 10:01 am, and I call the annual meeting to order. This is our first virtual annual meeting, and while we have read the circumstances that led our Board of Directors to determine to conduct this meeting virtually, we appreciate the opportunity to be more inclusive and reach a greater number of stockholders. I would now like to introduce Chris Byrnes, the company's Vice President of Investor Relations and Business Development, to provide you with information about the annual meeting process and to conduct the business of the meeting.

Thank you, Savneet. Before turning to the procedural matter this morning, I'd like to introduce members of the PAR Board in attendance today at today's virtual meeting. First, our Director and Founder, John Sammon, and Directors, James Stoffel, Douglas Rauch and Cynthia Russo. Also at the virtual meeting this morning are Bryan Menar, the company's Chief Financial Officer; [ Thomas Tin ] and Allen Lorenzato, representatives from Deloitte & Touche LLP, and they will be available during the question-and-answer session after the meeting to respond to appropriate questions. Also in attendance today is Cathy King, the company's Secretary and General Counsel. The Board of Directors has appointed Ms. King to act as inspector of elections, and she has previously taken her oath to serve in such capacity. Ms. King will also act as secretary of this meeting. We will begin by attending to the formal business of the meeting. After the formal meeting is adjourned, Savneet Singh, PAR's Chief Executive Officer and President; and Bryan Menar, the company's Chief Financial Officer, will provide brief presentations on our business. Following that, we will hold a question-and-answer session. Please enter any questions you may have to present to management via the portal on the meeting website. Stockholders of record as of April 8, 2020, attending the meeting this morning can vote their shares online from now through the closing of the polls by using the proxy ballot on the virtual shareholder meeting website. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed, and no further action is required. PAR's Board of Directors fixed April 8, 2020, as the record date for determining stockholders entitled to vote at this meeting. We are in receipt of an affidavit of mailing establishing that notice of this meeting was duly given on or about April 21, 2020, to all stockholders of record as of the record date and a copy of the notice of meeting together with the affidavit will be incorporated into the meeting -- into the minutes of this meeting. The stockholder list shows that as of the record date, there were 18,243,672 shares of common stock outstanding and entitled to vote at this meeting. The inspector of elections has confirmed that there are more than a majority of those shares represented in person or by proxy shares at this meeting. And since the presence at this meeting of at least a majority of our common stock outstanding, and entitled to vote on April 8, 2020, constitutes a quorum, the business of the meeting can proceed. There are 5 items of business before the meeting today. Number one, the election of 5 directors to serve until the 2021 annual meeting of stockholders and until their successors are elected and qualified. The director nominees are: Douglas G. Rauch, Cynthia A. Russo, John W. Sammon, Savneet Singh; and James C. Stoffel. Number two, a nonbinding advisory vote to approve the compensation of the company's named executive officers. Number three, an amendment to the company's certificate of incorporation to increase the number of authorized shares of common stock from 29 million to 58 million shares. Number four, an amendment to the company's amended and restated 2015 equity incentive plan to increase the number of shares of common stock issuable under the plan by 700,000. And lastly, number 5, ratification of the appointment of Deloitte & Touche LLP as the company's independent auditors for 2020. Because no further business is on the agenda this morning to come before the meeting, we will move on to voting. Again, as a reminder, stockholders of record as of April 8, 2020, attending the meeting this morning can vote their shares online from now through the closing of the polls by using the proxy ballot on the virtual meeting website. We will now wait a few minutes to allow you to conclude your voting. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is required. [Voting]

At this point, I now declare the polls closed at 10:07 am today, June 4, 2020, and ask the inspector of elections to report the results of the stockholder votes.

Thank you, Chris. 5 director nominees have been elected. The compensation of the company's named executive officers has been approved. The amendment to the company's certificate of incorporation has been approved. The amendment to the company's amended and restated 2015 equity incentive plan has been approved. The appointment of Deloitte & Touche LLP as the company's independent auditors for 2020 has been ratified. I turn the meeting back over to you, Savneet.

Thank you for attending today's meeting. The meeting is adjourned. Bryan Menar and I will now provide a brief presentation on the company's business, and following this, we'll provide a brief Q&A. Chris, if you could turn to Slide 7. I thought it makes sense for us to kick off to focus just a little bit on what we're seeing from the impact of COVID-19, somewhat continuous from what we reported on our earnings call a few weeks ago. As we discussed then, and now we continue to see that the QSR and Fast Casual markets have performed better than the broader restaurant industry and, specifically, the table service restaurant community. In fact, if I was to guess, I think the QSR and the Fast Casual market will take significant share during this time of the duress, given that they are restaurant chains that have been built for off-prem dining, are generally lower cost, which tends to do better in a recession, and have invested significantly in technology in the lead up to the pandemic. 2, as we talked about, Q2 revenue will absolutely be impacted due to the pause on roll out of temporary restaurant closures, but we see lots of signs of encouragement from our broad customer base as they get readjusted to a world that is now, hopefully, reopened. Our government segment continues to operate according to plan and has not yet felt the impact of the pandemic. As a result of the pandemic though, we took aggressive actions to stem some of the loss of revenue by adjusting on the operating cost side. We -- as we talked about on our call, have turned out about $10 million of cost reductions in our plants and reduced our headcount by over 20% of restaurant business. As our business comes back, we'll look to bring some of that back on. But until we see that sign -- those signs of those green shoots, we likely won't. Continuing on the next slide. PAR has seen really resistant revenue to our customers. After the initial spike down, our customers have responded aggressively. They have -- done a lot to take care of their guests. And we are encouraged how well they are performing. We think this is a leading indicator of likely their ability to invest in technology. If their business are recovered, we expect our business to, hopefully, be pulled alongside that. In addition, PAR itself has done a lot to help out our customers. We've helped a number of them coordinate the PPT process. We provided an immense amount of software, including our PARk it program. And we continue to see a strong direction towards a desire to move to a modern point-of-sale system to become more flexible. And switching over to our segment reviews, I'll flip over to Slide 13. We think PAR is just getting started. I thought this chart was useful to sort of understand the inherent growth in this business. We've historically continued to grow very nicely, 40%, 60%, 70% a year. But early, about a little over a year ago, we really decided to slow down growth and focus on product. And I think it's important to highlight that in 2019, very little of our focus was trying to accelerate sales, it was focused on product. And now after this sort of 9 months of work, we're starting to see the success of that product and the growth engine is ready to take off. If I flip to the next slide, here's a quick overview of our base today. Most of this is well known. But we continue to increase our site base, increase our ARPU and lower our churn, all leading indicators of the future. And Slide 15, I think, very much underestimates where we are. We've already made 1,000, but much close to 10,000 or 11,000 units are still in what we call white space. White space defined at PAR is a logo that we have signed, not fully penetrated. So if we signed a 100 store chain and have installed so far 10 of those stores, there's another 90 stores behind that. And so if PAR stops selling today, we think we'd be able to really capture 8,000, 9,000, 10,000 units that are still where we are approved on without having to find another customer. And so in many ways, I think we've got in, what I'd call an inherent backlog beyond our backlog that we feel very excited to be able to convert over a long period of time. Transitioning to product. This is something we've talked about many times over. Brink is investing aggressively into transition to an agile environment, and we have seen already the impact of change on not only our product but our culture. And I think that we can thoroughly say that we do not believe that engineering is the bottleneck for our future growth. In fact, we think it will be the key to our future growth. And I think the key part that makes us excited about this market is the TAM. We think in United States, there's something like 700,000 restaurants with a point of sale system. And we think those 700,000 restaurants also need a back-office product like Restaurant Magic. We think the TAM in and of itself is a multibillion dollar TAM, and we believe this TAM is going to grow over time. And if I take you to the next slide, you'll see why. Today, the average Brink customer spends something around $170 a month. Yet they spend $700, $800, $900 on other software in the restaurant, and we will take a larger and larger share of that restaurant. And we started with, obviously, back office with our acquisition of Restaurant Magic, but there will be more to come, whether we develop that product, acquire that product or partner with that product, this TAM increases. But not listed in this number is the fact that once a restaurant transitions its infrastructure to a modern product, whether -- call it the cloud or not, the need for innovation doesn't stop, it accelerates. And so the TAM today will be far smaller than TAM tomorrow because the needs of that restaurant are going to evolve well beyond what they needed. A great example of this is that 2 years ago, I don't think PAR would have had changed [ clearing ] as aggressively to have a third-party delivery solution. The idea that you would have DoorDash delivery become such an important part of your business wasn't -- was just starting and now it's a mandate. And so these are ways of innovation that will continue and continue because the modern software solution is allowing you to do that. If we look at just from a metrics perspective, I think we had numbers we were very proud of. In 2019, as I mentioned, we didn't focus on growth, yet we still grew very nicely year-over-year without great attention to sales and marketing because the focus has been on product. And I think that shows the quality of products. And I think our retention highlights that even more in the sense that our retention continues to get better and better and better. And so let's -- we'll continue to monitor this. But as we have built better products, as we have focused on the right customer, we've been able to continue to grow our business without an emphasis on sales and keep our existing customers happier. Slide 20 is a quick refresh of our numbers. And I think this has all been reported already. Slide 21 is the quick overview of Restaurant Magic. This is a business we feel incredibly excited about. It is a great complement to Brink. We service the exact same type of customer, enterprise restaurant chain. And we have been integrating for Restaurant Magic for a number of years, have almost never had a problem with the product. And I think we also like to say that there's very few things that are as sticky as a point-of-sale. Back office might be one of those. Their retention is in the very, very high 90s. And we think that the combined entity has a lot of momentum moving forward. And I think the early progress in our first quarter of ownership of the business, we've already transitioned 3 customers over to Restaurant Magic and are pilot with 2 large Brink customers. So there are signs that the synergies are going to happen a little bit faster than even we expected. COVID will absolutely impact this business. I don't think we will hit the growth numbers we would have internally expected because we lost, obviously, a quarter of the year but I think the long-term momentum behind this business is very powerful. The economics -- the whole of economics on the right side of the next slide. Our TAM in the restaurant -- our share of the restaurant we pitched to now has grown considerably. And I think this is just the beginning. Flipping -- skipping slide, flipping to Slide 24. We continue to operate our core business, the business that we've operated for over 40 years. We continue to occupy very high market share in very, very large brands. And we stay in these brands because I think they admire the quality of PAR products and most importantly, PAR service. We believe this is -- this is a community of customers that will continue to evolve their own technology and provides ample opportunity for us to sell Brink Restaurant Magic drive-thru and other products into. Flipping through to the 3M acquisition, Slide 26. We have transitioned 3M business now to PAR drive-thru. It has been a smooth transition. We feel very grateful at the timing of our acquisition. Drive-thru is, obviously, a high priority for every restaurant today. Even before COVID, we saw organizations like pizza chain and coffee shops moving quickly to drive-thru. With the impact of COVID-19, we've seen that now accelerate. And this product line is higher-margin and very hands-off for PAR. PAR does not assemble and manufacture this product. And so it's a high-margin product that we can leverage our existing distribution for and engineering capabilities to drive, and it helps diversify the historically very cyclical nature of our point-of-sale hardware businesses. Transitioning to our government segment. Our revenues decreased year-over-year from 2018, '19 by a small amount. But we ended with the highest backlog we had -- we probably had in a generation. And we -- that backlog has continued to grow. As we mentioned on the call, our Q1 was up 15%, and this business continues to perform in a really challenged broader global environment. We think it will continue to perform for the rest of the year, and we feel very happy where we are today. I'm going to pass the mic over to Bryan Menar to do a quick review of our financials before we open it to Q&A.

Great. Thanks, Savneet. Chris, if we can go to Slide 30, please. Just like to take a couple of minutes to provide a high-level recap for everyone for 2019. We finished the year with $187 million of revenue, weighted 66% in the restaurant retail operating segment and 34% with government. This mix was consistent with 2018. We continue to deploy restaurant retail hardware and services and provide government contracting services globally. Brink deployments are in North America at this time. Chris can go to Slide 31. A little bit more color around our revenue here. Total revenue was down 7% versus prior year, driven by the reduction in product revenue. That was led by contraction in our Tier 1 core customer, hardware product sales and also the correlated installation revenue that is reported in our service line. Although year-over-year consolidated revenue contracted, we continue to see growth in our Brink business line. Brink experienced a revenue increase of $16.5 million or 66% in 2018, 2019 and with total revenue of $41.5 million in 2019. Moving on to the next slide, Slide 32. As you look at it now from our margins, looking at the gross margin and EPS from a non-GAAP perspective, adjusted gross margin declined 3%, and that was as a result of the core business line and government operating segment contraction and partially offset by Brink's growth in margin. We experienced a $0.26 increase in adjusted loss per share. This is broken down by 8% for gross -- I'm sorry, $0.08 for gross margin, $0.09 as a result of an increase in operating expense, and that was driven by investments in our Brink R&D, and approximately $0.10 for nonoperating expenses driven by interest expense as a result of the issuance of the 2024 notes back in April of 2019. We move out to Slide 33, a little bit more color on the balance sheet, kind of showing you both -- end of 2019, end of Q1 also 2020. For most of 2019, the cash burn was approximately about $1 million per month. And in Q4, the burn increased with net working capital needs, and that was driven by accounts receivable. Inventory balance ended the year with turns of 4x, and we ended the year with cash of $28 million. In Q1 of 2020, there were a couple of large balance sheet movements just to note, notably the refinance of majority of the 2024 notes, with the issuance of the 2026 notes in February. Net cash proceeds from that transaction was $48 million, and we ended the quarter with just over $60 million in cash. The quarter saw higher than normal cash burn that was driven by some larger net working capital requirements which included our strategic procurement of additional inventory, that was in light of kind of potential supply chain limitations that we could see later in the year due to COVID-19. And we did not want that to impact our deployments of Brink as we have high attachment rates to those deployments in regards to hardware. Annual payments for variable -- other things that increased net working capital needs were annual payments for variable compensation in Q1 and also annual insurance premiums and also an increase in prepaid expenses. We do not expect the cash burn levels to be similar to Q1 rates for the remainder of the year. To go to the last slide here, just to provide -- summarize some of the main financial points that both Savneet and I discussed this morning. Right? So we have in Q1 2020, we executed the successful refinance and expansion of 2019 capital raise, with the issuance of the 2026 notes in February. The government business did contract by 4.8% year-over-year, but we did end the year with strong government contract backlog at $148 million. We continue to be focusing on ensuring core, our core business within the restaurant retail segment, stays profitable. We're doing that by rightsizing that business. We continue to see strong hardware pull-through in Brink sales at 70-plus-percent. And along with Brink's growth in sales, this has also provided relief for overhead absorption on the hardware side. Brink ARPU continues to increase and stands at $2,147 at the end of Q1. ARR run rate now totals $22.2 million at the end of Q1, this is a 54% increase from a year ago. And as Savneet was just saying, the Restaurant Magic and the drive-thru acquisitions are performing beyond expectations as they properly complement our current offerings and as you all know, as we continue to build out a full solution platform. So with this, this concludes our management presentation, and we can now move this on over to Q&A.

Thank you, Bryan, and thank you for participants who have already submitted questions through the portal. Please feel free if you have any additional questions to submit and we will do our best to answer them. The first question is a question about our cost savings. Questioner asked if we can elaborate on the layoffs made and savings and how you think that won't impact our ability to capitalize on certain competitors exiting the market?

Sure. So a few points there. So the first is, I think the quantity impact of our layoffs was far less impactful than competitors, booked at a percentage of the workforce, not where we cut. Second, we cut primarily, I would say, in back-office administration, sales and marketing. We did not touch product and R&D. And in fact, I think we continue to invest beyond that. And to your point, historically, our limiting factor has been our product and R&D. And so we were careful not to touch that area of the world. And I think we feel very confident that as our customers ramp up, we are ready for them and are in concert with them, particularly as it relates to installation.

And the second question is, you noted the following during the presentation that continued growth in Brink, but we're not yet at critical mass. At what unit count, ARPU, ARR metric, whatever you'd like to use as a measure, do you sense that we reach scale?

I guess I don't remember saying critical mass, but I think we're still probably a year away from true critical mass. I think Brink today is a little over -- when you -- $20 million-ish of revenue on a stand-still -- stand-alone basis and at Restaurant Magic, I think we're probably a year away from really being to what I think will be steady-state economics. As we have made the aggressive investment into R&D, the rebuild of the management team, we've almost had 100% turnover of the Brink management team. From a P&L perspective, I think we're less efficient than where we need to be. But within a year and less than a year, I think that fixes itself as we now, I think, completed the big surge of product work. I think we're moving to much more steady state. So I think we're less than a year away from getting there. And I think it's more tied to our R&D investment than it is sort of an objective number of x many stores or x million in ARR. And I think in many ways, there's just a lot of juice yet to squeeze in the Brink business, 10,000 stores of white space of existing design concepts, our payments business, we feel there's a ton of opportunity. And hence, we took the time to get the product right before we went after that opportunity.

Next question surrounds payment processing. Can you give us the shareholders an update on payment processing, what kind of pricing is PAR getting? What is the feedback from some of the larger chains and our potential in winning that business, not only in our existing installed base, but prospective customers going forward?

Sure. So I, obviously, can't share the exact pricing we're getting because it would be a huge competitive giveaway, but across our systems, we process an enormous amount of volume, double-digit billions of dollars. And so in finding partners, I think we were able to secure a very attractive rate that we hope to win business on. This business has absolutely been impacted by COVID, only in that our initial focus on this was in our table service launch and product line, which is impacted by the pandemic, which has slowed this rollout. But I think, inherently, we're more excited about it than we were when we started as it relates to the larger chains is the point of your question. I think we've been encouraged how larger chains look at combining payments and point-of-sale as actually value-add as opposed to, let me find the lowest cost provider. And I think that they feel that way because that the ability to sort of have 1 provider provides, maybe, call it, an all-encompassing solution, is valuable to the end customer. It makes their lives easier, makes the billing easier, but also provides them with data that they historically didn't have great access to. And we think that data layer is going to continue to grow. In addition, it gives us the opportunity to allow them to acquire hardware from PAR and not at the front that CapEx upfront. And so that's a very, very big value proposition to a lot of the chains that we work with. So shorter term, definitely impacted by COVID. Longer term, I think this business will be bigger than I expected.

Great. I'm not seeing any other additional questions in the queue. So I'll turn it back to Savneet for any concluding remarks and thank you, everyone, for participating today.

Thanks, everybody, for joining. We appreciate the support and look forward to an exciting year.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.